UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 Form 10-K
  (Mark
One)
 þ
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the fiscal year ended June 30, 2009
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the transition period
from          to
  Commission
File Number 000-51869
  SOUTHPEAK
INTERACTIVE CORPORATION
 (Exact Name of Registrant as
Specified in Its Charter)
  Delaware
                
                20-3290391(State
      or Other Jurisdiction of
                
                (I.R.S.
      EmployerIncorporation
      or Organization)
                
                Identification
      No.)
  2900
Polo Parkway
 Midlothian,
Virginia 23113
 (804)
378-5100
 (Address including zip code, and
telephone number, including area code, of principal executive
offices)
  Securities registered pursuant to
Section 12(g) of the Act:
  None
  Securities registered pursuant to
Section 12(b) of the Act:
  Common
stock, par value $.0001 per share
 Class W
warrants, each to purchase one share of common stock
 Class Y
warrants, each to purchase one share of common stock
 Class Z
warrants, each to purchase one share of common stock
 (Title
of Class)
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o     No þ
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o     No þ
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.  Yes þ     No o
  Indicate
by check mark whether the registrant (1) has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of
Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).  Yes o     No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
  Large accelerated filer o
              
              Accelerated filer o
              
              Non-accelerated filer o
              
              Smaller reporting company þ
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes o   No þ
  The aggregate market value of the
common stock held by nonaffiliates of the registrant (4,068,439 shares) based on
the $.51closing price of the
registrant’s common stock as reported on the Over-the-Counter bulletin board on
September 30, 2009, was approximately $2,074,904. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed to be an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant.
  As of
September 30, 2009, there were 44,998,600 outstanding shares of the registrant’s
common stock.
  
  TABLE
OF CONTENTS
  PagePART
      I
                    
                    3Item
      1.  Business
                    
                    3Item
      1A.  Risk Factors
                    
                    8Item 1B.  Unresolved
      Staff Comments
                    
                    17Item 2.  
      Properties
                    
                    17Item 3.  
      Legal Proceedings
                    
                    18Item 4.  
      Submission of Matters to a Vote of Security Holders
                    
                    18PART
      II
                    
                    19Item
      5.   Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                    
                    19Item
      7.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                    
                    20Item
      7A.  Quantitative and Qualitative Disclosures about Market
      Risk
                    
                    28Item
      8.  Financial Statements and Supplementary Data
                    
                    28Item
      9.  Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                    
                    28Items
      9A(T).  Controls and Procedures
                    
                    28Item
      9B.  Other Information
                    
                    30PART
      III
                    
                    31Item
      10.  Directors, Executive Officers and Corporate
      Governance
                    
                    31Item
      11.  Executive Compensation
                    
                    34Item
      12.  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                    
                    40Item
      13.  Certain Relationships and Related Transactions, and
      Director Independence
                    
                    42Item
      14.  Principal Accounting Fees and Services
                    
                    43PART
      IV
                    
                    45Item
      15.  Exhibits and Financial Statement Schedules
                    
                    45
  1
  CAUTIONARY
NOTES REGARDING FORWARD-LOOKING STATEMENTS
  We
believe that some of the information contained in this report constitutes
forward-looking statements within the definition of the Private Securities
Litigation Reform Act of 1995. You can identify these statements by
forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,”
“believe,” “estimate,” “intend,” “plan,” and “continue” or similar words. You
should read statements that contain these words carefully because
they:
  ·
              discuss future
      expectations;
  ·
              contain projections of future
      results of operations or financial condition;
  or
  ·
              state other “forward-looking”
      information.
  We
believe it is important to communicate our expectations to our stockholders.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors and cautionary
language discussed in this report provide examples of risks, uncertainties and
events that may cause actual results to differ materially from the expectations
described by us in our forward-looking statements, including among other
things:
  ·
              our potential inability to
      compete with larger businesses in our
  industry;
  ·
              the limitations of our business
      model;
  ·
              our potential inability to
      anticipate and adapt to changing
  technology;
  ·
              the possibility that we may not
      be able to enter into publishing arrangements with some
      developers;
  ·
              our dependence on vendors to meet
      our commitments to
suppliers;
  ·
              our dependence on hardware
      manufacturers to publish new
videogames;
  ·
              our potential inability to recoup
      the up-front license fees paid to hardware
      manufacturers;
  ·
              our dependence on a limited
      number of customers;
  ·
              our potential dependence on the
      success of a few videogames;
  ·
              our dependence on developers to
      deliver their videogames on
time;
  ·
              the potential of
      litigation;
  ·
              interference with our business
      from the adoption of governmental regulations;
  and
  ·
              the inability to obtain
      additional financing to grow our
  business.
  You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Forward-looking statements involve
known and unknown risks and uncertainties that may cause our actual future
results to differ materially from those projected or contemplated in the
forward-looking statements.
  All
forward-looking statements included herein attributable to us or any person
acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. Except to the extent
required by applicable laws and regulations, we undertake no obligation to
update these forward-looking statements to reflect events or circumstances after
the date of this report or to reflect the occurrence of unanticipated events.
You should be aware that the occurrence of the events described in the “Risk
Factors” section and elsewhere in this report could have a material adverse
effect on us.
  2
  PART
I
  Item
1.  Business
  Overview
  We are an
independent developer and publisher of interactive entertainment software. We
utilize our network of independent studios and developers to create videogames
for all popular
videogame systems, including:
  ·
              home videogame consoles such as
      Microsoft Xbox360, NintendoWii,Sony PlayStation 3 and Sony
      PlayStation 2;
  ·
              handheld platforms such as
      Nintendo DS, Nintendo DSi, Sony PSP, Sony PSPgo, and Apple iPhone;
      and
  ·
              personal
      computers.
  Our
portfolio of games extends across a variety of consumer demographics, ranging
from adults to children and hard-core game enthusiasts to casual
gamers.
  We are an
“indie” videogame developer and publisher working with independent software
developers and videogame studios to create our videogames. We have cultivated
relationships globally with independent developers and studios that provide us
with innovative and compelling videogame concepts.
  We
have produced strong historical results with growing net revenues of
approximately $12.5 million, $40.2 million and $47.3 million for the fiscal
years ended June 30, 2007, 2008 and 2009, respectively. In fiscal
year 2009, however, we incurred a net loss primarily as a result of write offs
for sequels we acquired but have chosen not to pursue, increased sales and
marketing expenses and litigation and other expenses associated with the
acquisition of Gone Off Deep, LLC, doing business as Gamecock Media Group, or
Gamecock, an independent videogame publisher based in Austin,
Texas.  Despite the net loss incurred by us in fiscal year 2009,management expects its growth strategy will drive performance above
industry averages for 2010 and beyond. We plan to leverage our business model
and the expanding universe of independent developers and studios to accelerate
investment in new and creative videogames in order to serve a rapidly expanding
base of global consumers.
  In
October 2008, we acquired Gamecock through the acquisition of its membership
interests. We refer to the acquisition of Gamecock herein as the “Gamecock
Acquisition.” We operate Gamecock as a wholly-owned subsidiary and we have not
succeeded to its contracts or assumed its liability.
  We
incorporated in Delaware on August 10, 2005, under the name Global Services
Partners Acquisition Corp., to serve as a vehicle to effect an acquisition,
through a merger, capital stock exchange, asset acquisition or other similar
business combination with a then-unidentified operating business. On May 12,
2008, we acquired all of the outstanding membership interests of SouthPeak
Interactive L.L.C., or SouthPeak, pursuant to a Membership Interest Purchase
Agreement. SouthPeak was originally formed in 1996 as an independent business
unit of SAS Institute, Inc. We refer to the reverse acquisition of SouthPeak
herein as the “SouthPeak Acquisition.” We are headquartered in Midlothian,
Virginia, and have offices in Grapevine, Texas and Leichester,
England.
  Our
Industry
  We
operate in a growing industry with highly favorable industry dynamics. 2007
marked a year of transition and growth in videogame sales based on the
introduction of the next generation of videogame systems in 2005 and
2006.  Particularly, the introduction of Microsoft’s Xbox 360, Sony
PlayStation 3 and Nintendo’s Wii systems are driving demand for new videogames
with increasing sophistication and graphics, given the enhanced functionality of
the systems, including high-definition capability and the ability to access the
Internet. New handhelds, such as Nintendo DS and DSi, and Sony PSP, are also
expanding the market for new content.
  Expanding
gamer demographics have also driven demand for interactive entertainment
software in recent years, with videogames becoming a mainstream entertainment
choice for a maturing, sophisticated audience. According to the Entertainment
Software Association, U.S. computer and videogame software sales grew 22.9% in
2008 to $11.7 billion - more than quadrupling industry software sales since
1996. At least half of all Americans claim to play PC or console videogames,
with an estimated 65% of heads of households playing games. The average game
player is 35 years old and has been playing for nearly 12 years. The “Global Entertainment and Media
Outlook: 2008-2012” published by PricewaterhouseCoopers' Global
Entertainment and Media Practice estimates that the videogame industry is
expected to grow from $48.3 billion in global sales in 2008 to $68.3 billion in
2012, a compounded annual growth rate of approximately 10.3%. The largest
category is console games, which is expected to grow from $27.8 billion in 2008
to $34.7 billion in 2012, a compounded annual growth rate of approximately
6.9%.
  3
  Our
Strategy
  Our
strategy is to establish a portfolio of successful proprietary content for the
major videogame
systems, and to capitalize on the growth of the interactive entertainment
market. We currently work exclusively with independent software developers and
videogame studios to develop our videogames. This strategy enables us to source
and create highly innovative videogames while avoiding the high fixed costs and
risk of having a large internal development studio. Through outsourcing, we are
also able to access videogame concepts and content from emerging studios
globally, providing us with significant new product opportunities with reduced
initial financial outlay, compared to internally developed
videogames.
  Our
approach is to identify and secure new videogames and intellectual property
rights that focus on delivering profitable, high-quality videogames developed by
talented and reputable professionals. We approach each videogame concept with a
disciplined focus on delivering high contribution margin based on the
anticipated market opportunity.
  We
continue to strengthen our position as a leading “indie” videogame publisher and
attract additional independent developers and studios to develop videogames for
us. We are a unique channel for independent developers and studios to bring
their videogames to market and allow them the creative freedom to maximize the
gaming experience. We provide our developers substantial latitude in the
creative process, which has historically resulted in more innovative products.
We work collaboratively with these developers to evaluate emerging trends and
original videogame concepts in an effort to identify new and unique products
that meet continuously evolving consumer trends.
  Our
growth strategy is designed to capitalize on our fundamental business strengths
and growth characteristics of the videogame industry. Since fiscal year 2005, we
have grown our business in excess of 18% annually year-over-year and believe our
business model can sustain a very high growth rate in the future. Elements of
this growth strategy include:
  ·
              focusing on the most current and
      popular videogame systems;
  ·
              developing innovative and
      compelling content;
  ·
              developing sequels to successful
      titles;
  ·
              pursuing digital content
      opportunities; and
  ·
              expanding our international
      business.
  Our
Strengths
  Strong
relationships with all of the major videogame retailers and expertise in
understanding consumer demand
  Our
management team has significant experience in selling and marketing videogame
products to consumers through mass-market and specialty retailers. Our
management team understands customers’ needs, price points and shifting tastes,
allowing us to capitalize by developing videogames in specialized niches and
genres. Our management team has long-standing relationships with all of the
videogame retailers and distributors and has valuable insight into retail
distribution and a track record of successfully securing product placement and
shelf space. Specifically, Mr. Terry Phillips, our chairman, and Ms. Melanie
Mroz, our president and chief executive officer, worked for Phillips Sales as
sales agents for 17 and 11 years, respectively. In those positions they
represented numerous videogame publishers such as Sony, Take-Two, Midway,
Konami, Capcom and Eidos. They were involved in the sales launch of hundreds of
videogames, some of which included well-known franchises such as Grand Theft
Auto, Metal Gear Solid, Mortal Kombat, Gran Turismo and others. Their experience
also coincided with the launches of Sony PlayStation, PlayStation 2 and PSP. The
customer base with which they worked included GameStop, Wal-Mart, and
Blockbuster.
  Extensive
worldwide network of content developers
  We are
positioned as an “indie” videogame developer and publisher and are recognized by
many independent developers and studios as a good alternative to the major
videogame publishers. We have relationships with many independent developers and
studios globally who present us with compelling videogame publishing
opportunities. We maintain contacts with these developers to review new
videogame concepts and proposals, and are constantly initiating new
relationships with emerging creative talent.
  In
particular, our product development and production teams regularly participate
in videogaming conferences and conventions around the world and visit with
independent developers and studios to discuss videogame concepts and evaluate
their capabilities. Additionally, we actively share information with studios
regarding videogame market trends and the current buying preferences and
emerging tastes of our customers, positioning us as a valuable resource to
developers and studios in developing creative videogame concepts. We collaborate
with these developers and studios in identifying niche opportunities not yet
explored to develop and publish content.
  4
  Developer-friendly
mindset and vision providing the developer with creative freedom
  Our
business model allows us flexibility in negotiating with and structuring
development agreements with independent developers and studios. Our
developer-friendly approach fosters an environment that allows developers and
studios to exercise their creative freedom in conceptualizing and designing a
videogame experience. The flexibility afforded to developers is a key component
in attracting developers to work with us and enables us to continue the growth
in our pipeline of products.
  Our
Products
  We have
published videogames on many videogame systems and in a variety of
genres, including action/adventure, role playing, racing, puzzle strategy,
fighting and combat. The following titles were released during the fiscal years
ended June 30, 2009 and 2008:
  Fiscal
Year 2009
  Title
                        
                        Platform
                        
                        Date
      ReleasedMr.
      Slime
                        
                        NDS
                        
                        7/14/2008B-Boy
                        
                        PS2,
      PSP
                        
                        7/28/2008Monster
      Madness – Grave Danger
                        
                        PS3
                        
                        8/4/2008Two
      Worlds Epic
                        
                        PC
                        
                        8/19/2008Igor
                        
                        NDA,
      Wii, PC
                        
                        9/15/2008Ninjatown
                        
                        NDS
                        
                        10/16/2008Bella
      Sara
                        
                        NDS,
      PC
                        
                        10/21/2008My
      Baby Boy
                        
                        NDS
                        
                        10/21/2008My
      Baby Girl
                        
                        NDS
                        
                        10/21/2008Legendary
                        
                        X360,
      PS3, PC
                        
                        11/10/2008Rise
      of the Argonauts
                        
                        X360,
      PS3, PC
                        
                        12/12/2008Big
      Bang Mini
                        
                        NDS
                        
                        1/21/2009X-Blades
                        
                        PC,
      PS3, X360
                        
                        2/10/2009Penumbra
      Collection
                        
                        PC
                        
                        2/17/2009Velvet
      Assassin
                        
                        X360,
      PC
                        
                        4/20/2009Pirates
      vs. Ninjas Dodgeball
                        
                        Wii
                        
                        5/4/2009Roogoo:
      Twisted Towers
                        
                        Wii
                        
                        6/24/2009Roogoo:
      Attack!
                        
                        NDS
                        
                        6/25/2009
  Fiscal
Year 2008
  Title
                        
                        Platform
                        
                        Date
      ReleasedTwo
      Worlds
                        
                        X360,
      PC
                        
                        8/20/2007Pool
      Party
                        
                        Wii
                        
                        8/31/2007Iridium
      Runners
                        
                        PS2
                        
                        2/19/2008Imperium
      Romanum
                        
                        PC
                        
                        3/11/2008Dream
      Pinball 3D
                        
                        Wii,
      NDS, PC
                        
                        4/29/2008Grid
                        
                        PS3,
      X360, PC
                        
                        5/30/2008Overlord
                        
                        PS3
                        
                        6/19/2008Roogoo
                        
                        XBLA,
      PC
                        
                        6/30/2008
  Our
product pipeline is mostly focused on next generation videogame systems and
targets a broad consumer demographic. We currently have a pipeline of
approximately 26 titles in development, several of which are specifically
targeted to emerging videogamer demographics.
  Developing
Our Products
  We
develop our products exclusively by contracting with independent software
developers and videogame studios. We enter into comprehensive development
agreements with these parties that outline financial terms, development
milestones, completion dates and final product delivery dates. Our product
development and production teams carefully select developers and studios to
develop videogames based on their capabilities, suitability, availability and
cost. We usually have broad rights to commercially utilize products created by
the developers and studios with which we work. Development agreements are
structured to provide developers and studios with incentives to provide timely
and satisfactory performance by associating payments with the achievement of
substantive development milestones, and by providing for the payment of
royalties to them based on sales of the developed product after we recoup our
development costs. Our development agreements generally provide us with the
right to monitor development efforts and cease advance payments if specified
development milestones are not achieved.
  5
  The
development cycle for new videogames depends on the videogame system and the
complexity and scope of the videogame. The development cycle for console and PC
videogames ranges from 12 to 24 months and the development cycle for handheld
videogames ranges from six to 18 months.
  Upon
completion of development, each videogame is extensively play-tested to ensure
compatibility with the appropriate videogame system and to minimize the number
of bugs and other defects found in the product. If required, we also send the
videogame to the manufacturer for its review and approval. Although historically
we developed our titles for a single videogame system release, many of our new
title releases will be released simultaneously on multiple videogame
systems.
  Platform
License Agreements
  We have
entered into license agreements with Sony, Microsoft and Nintendo to develop and
publish software in North America, Europe and Australia for the Xbox 360, Wii,
PlayStation 3 and PlayStation 2 console systems and the Nintendo DS, Nintendo
GBA and Sony PSP hand-held devices. Each license allows us to create multiple
products for the applicable platform, subject to certain approval rights which
are reserved by each licensor. We are not required to obtain any licenses to
develop titles for the PC.
  Under the
terms of these respective license agreements, Microsoft, Sony and Nintendo
granted us the right and license to develop, market, publish and distribute
software titles for their videogame systems. The agreements require us to submit
products to Microsoft, Sony or Nintendo, as applicable, for approval and for us
to make royalty payments to Microsoft, Sony or Nintendo, as applicable, based on
the number of units manufactured. In addition, products for these platforms
are required to be manufactured by Microsoft, Sony or Nintendo, as applicable,
or other approved manufacturers.
  Manufacturing
Our Products
  Sony,
Nintendo and Microsoft either manufacture or control selection of approved
manufacturers of software products sold for use on their respective videogame
systems. We place a purchase order for the manufacture of our products with
Sony, Nintendo or Microsoft and then send software code and a prototype of the
product to the manufacturer, together with related artwork, user instructions,
warranty information, brochures and packaging designs for approval, defect
testing and manufacture. Games are generally shipped within two to three weeks
of receipt of our purchase order and all materials. We occasionally experience
difficulties or delays in the manufacture of our titles; however, such delays
have not significantly harmed our business to date.
  Production
of PC products is performed by third party vendors in accordance with our
specifications and includes CD-ROM pressing, assembly of components, printing of
packaging and user manuals and shipping of finished goods. We send software code
and a prototype of a title, together with related artwork, user instructions,
warranty information, brochures and packaging designs, to the manufacturers.
Games are generally shipped within two weeks of receipt of our manufacturing
order.
  We have
not experienced material delays due to manufacturing defects. Our videogame
titles typically carry a 90-day limited warranty. Our platform licenses requires
us to provide a standard defective product warranty on all of the products sold.
Generally, we are responsible for resolving, at our own expense, any warranty or
repair claims. We have not experienced any material warranty claims, but there
is no guarantee that we will not experience such claims in the
future.
  Sales
and Marketing
  Our
marketing and promotional efforts are intended to maximize exposure and broaden
distribution of our videogames, promote brand name recognition, assist retailers
and properly position, package and merchandise our videogames. We implement a
range of promotional sales and marketing activities to help increase awareness
among retailers, including public relations campaigns; demo distributions,
promotions and cross-promotional activities with third parties (through
trailers, demo discs, standees, posters, pre-sell giveaways at retail stores,
and videogame kiosks at sporting and outdoor events); and print, online,
television, radio, and outdoor advertisements. Additionally, we customize public
relations programs to create awareness with all relevant audiences, including
core gamers and mass entertainment consumers.
  We employ
various other marketing methods designed to promote consumer awareness,
including in-store promotions and point-of-purchase displays, direct mail,
co-operative advertising, as well as attendance at trade shows. We host media
events throughout the year at which print, broadcast and online journalists can
preview, review and evaluate our products prior to their release. In addition to
regular face-to-face meetings and communications with our sales force, we employ
extensive trade marketing efforts including: direct marketing to buyers and
store managers; trade shows; various store manager shows; and distribution and
sales incentive programs. We label and market our products in accordance with
the Entertainment Software Rating Board, or ESRB, principles and
guidelines.
  6
  We market
and sell our products in North America and internationally via sales offices in
Grapevine, Texas and Leichester, England, respectively.
  Our
Customers
  Our
products are available for sale or rental in thousands of retail outlets in
North America. In North America, our products are primarily sold directly to
mass merchandisers, consumer electronics stores, discount warehouses, national
retail chain stores and videogame specialty stores. Our products are also sold
to smaller, regional retailers, as well as distributors who, in turn, sell our
products to retailers that we do not service directly, such as grocery and drug
stores. Our North American customers include Best Buy, Blockbuster, GameStop,
Target, Toys R Us and Wal-Mart.
  We
utilize electronic data interchange with most of our major customers in order to
(i) efficiently receive, process, and ship customer product orders, and (ii)
accurately track and forecast sell-through of products to consumers in order to
determine whether to order additional products from the manufacturers. We
believe that the direct relationship model we use allows us to better manage
inventory, merchandise and communications. We ship all of our products to our
North American customers from a distribution center located in
Indiana.
  We
conduct our international activities via our office in Leichester, England. This
office manages sales, marketing and distribution operations for our European,
Asian and Australian customers. In the United Kingdom, we sell directly to
several key retail accounts, and work with a distributor partner to call on
other accounts. Throughout the rest of Europe and in Australia and Asia, our
products are sold through third-party distribution and licensing arrangements.
These parties are responsible for all marketing and consumer press within their
respective territories. We seek to maximize our worldwide revenues and profits
by continuing to expand the number of selling relationships we maintain in major
territories. We ship all of our products to our foreign customers from a
distribution center located in London.
  For
the fiscal year ended June 30, 2009, we generated approximately
89% of our net revenues in North America and 11% of our net revenues
internationally. On a worldwide basis, our largest customers, Wal-Mart and
GameStop, accounted for approximately 18% and 16%, respectively, of consolidated
gross revenues for the year ended June 30, 2009.
  Competition
  The
videogame industry is intensely competitive and new videogame products and
platforms are regularly introduced. Our competitors vary in size from small
companies with limited resources to large corporations with greater financial,
marketing, and product development resources than we have. Due to their
different focuses and allocations of resources, certain of our competitors spend
more money and time on developing and testing products, undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher fees to
licensors for desirable motion picture, television, sports and character
properties, and pay more to third-party software developers. In addition,
competitors with large product lines and popular titles typically have greater
leverage with retailers, distributors, and other customers who may be willing to
promote titles with less consumer appeal in return for access to such
competitor’s most popular titles. We believe that the main competitive factors
in the videogame industry include: product quality, features, innovation and
playability; brand name recognition; compatibility with popular platforms;
access to distribution channels; price; marketing; and customer
service.
  We
compete primarily with other publishers of videogames for consoles and PCs.
Significant third-party videogame competitors currently include, among others:
Activision Blizzard; Atari; Capcom; Eidos; Electronic Arts; Konami; LucasArts;
Namco-Bandai; Sega; Take-Two Interactive; THQ; Ubisoft; Viacom/MTV; Vivendi;
Warner Bros. Interactive; and Walt Disney. In addition, Sony, Nintendo, and
Microsoft compete directly with us in the development of software titles for
their respective platforms.
  Seasonality
  The
interactive entertainment software industry is highly seasonal, with sales
typically higher during the fourth calendar quarter, due primarily to increased
demand for videogames during the holiday buying season. The Christmas selling
season accounts for about half of the industry’s yearly sales of
videogames.
  Traditionally,
the majority of our sales for this key selling period ship in our fiscal first
and second quarters, which end on September 30 and December 31,
respectively.  Significant working capital is required to finance the
manufacturing of inventory of products that ship during these
quarters.
  7
  Intellectual
Property
  We have
obtained licenses for videogame software developed by third parties in
connection with our publishing business, and we regard these licenses, including
the trademarks, copyrights, patents and trade secrets related to such videogame
software, as proprietary intellectual property. The underlying trademarks,
copyrights, trade secrets and patents often are separately protected by the
third party developers of the software by enforcement of intellectual property
laws. To protect our proprietary licenses from unauthorized use and
infringement, we maintain employee or third-party nondisclosure and
confidentiality agreements, contractual restrictions on copying and
distribution, as well as “shrink-wrap” or “click-wrap” license agreements or
limitations-on-use of software included with our products.
  We obtain
rights to publish and distribute videogames developed by third parties. We
endeavor to protect our developers’ software and production techniques under
copyright, trademark and trade secret laws as well as through contractual
restrictions on disclosure, copying and distribution. Although we generally do
not hold any patents, we obtain trademark and copyright registrations for our
products.
  As the
number of videogames in the market increases, so too may the likelihood that
videogame publishers will become the subject of claims that their software
infringes the intellectual property rights of others. Although we believe that
the videogames and technologies of the developers and studios with whom we have
contractual relationships do not and will not infringe or violate proprietary
rights of others, it is possible that infringement of proprietary rights of
others may occur. Any claims of infringement, with or without merit, could be
time consuming, costly and difficult to defend.
  Employees
  As of
June 30, 2009, we employed approximately 75 people, of whom 7 were outside the
United States. We believe that our ability to attract and retain qualified
employees is a critical factor in the successful development of our products and
that our future success will depend, in large measure, on our ability to
continue to attract and retain qualified employees. None of our employees are
represented by a labor union or covered by a collective bargaining agreement and
we consider our relations with employees to be favorable.
  Executive
Officers and Key Employees
  Information
regarding our executive officers and key employees is set forth under the
heading “Directors, Executive Officers and Corporate Governance,” contained in
Part III, Item 10 of this report.
  Subsequent
Events
 
 On
August 26, 2009, we were notified that the SEC was conducting a non-public,
fact-finding investigation regarding certain matters underlying the amendment of
our Form 10-Q, and the restatement of our financial statements, for the period
ended March 31, 2009, and the termination of our former chief financial officer,
Andrea Jones.  We have provided the SEC with the documents requested and
intend to cooperate in all respects with the SEC’s
investigation.
  Available
Information
  We make
available free of charge on or through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. Our website
address is www.southpeakgames.com.
  Item
1A.Risk Factors
  We
operate in a rapidly changing environment that involves a number of risks, some
of which are beyond our control. This discussion highlights some of the risks
that may affect future operating results. These are the risks and uncertainties
we believe are most important for you to consider. Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or
businesses in general, may also impair our businesses operations. If any of the
following risks or uncertainties actually occur, our business, financial
condition and operating results would likely suffer.
  Risks
Related to our Business and Operations
 Our
ability to renew our line of credit on terms favorable to us, or at all,
and the availability of additional capital may be limited.
  Recent
disruptions in financial markets have resulted in a severe tightening of credit
availability in the United States. Liquidity in credit markets has contracted
significantly, making terms for certain financings less attractive. Ongoing
turmoil in the credit markets may make it difficult for us to obtain financing,
on acceptable terms or at all, for working capital, capital expenditures,
acquisitions and other investments. These difficulties could adversely affect
our operations and financial performance.
  Our
line of credit, which comes due on November 30, 2009 and is currently in the
process of being renewed, limits our ability to take various actions,
including incurring certain types of additional debt, paying dividends,
repurchasing shares and acquiring or disposing of assets or businesses.
Accordingly, we may be restricted from taking actions that management believes
would be desirable and in the best interests of us and our stockholders. Our
line of credit also requires us to satisfy specified financial and non-financial
covenants. A breach of any of the covenants contained in our line of credit
could result in an event of default under the agreement and allow our lenders to
pursue various remedies, including accelerating the repayment of any
indebtedness outstanding under the agreement.
  There
can be no assurances that our line of credit will be renewed on terms favorable
to us, or at all.  The Company is exploring several other alternatives
for financing and additional equity capital, but there can be no assurances that
our efforts will be successful.
  Stiff
competition within the videogame publishing industry, in particular, can
significantly reduce our market share, curtail potential revenue, and negatively
impact our long-term viability.
  We
compete for licenses to properties and the sale of our videogames with the
videogame system manufacturers such as Sony, Microsoft and Nintendo, each of
which also develops and markets software for its own platforms. Each of these
competitors can bundle their software with their hardware and reduce demand for
individual sales of our videogames. Additionally, these videogame system
manufacturers have better bargaining positions with respect to retail pricing,
shelf space and retailer accommodations than do any of their licensees,
including us. They also have the financial resources to withstand significant
price competition and to implement extensive advertising campaigns. These
videogame system manufacturers may also give priority to their own games or to
those of other publishers when manufacturing capacity is
insufficient.
  8
  We also
compete with domestic videogame publishers such as Activision Blizzard; Atari;
Capcom; Eidos; Electronic Arts; Konami; LucasArts; Namco-Bandai; Sega; Take-Two
Interactive; THQ; Ubisoft; Viacom/MTV; Vivendi; Warner Bros. Interactive; and
Walt Disney. Many of our competitors have blockbuster videogames (with greater
name recognition among consumers), a broader product line, or greater financial,
marketing and other resources than we do. Accordingly, these competitors may be
able to market their products more effectively or make larger offers or
guarantees to independent developers and studios in connection with the
acquisition of commercially desirable properties.
  We also
compete with a variety of independent publishers of videogame software. Because
platform licenses are non-exclusive, and many our competitors also have licenses
to develop and distribute videogame software for these systems, new entrants
could enter the market, including those with business models similar to
ours.
  Our
business model can limit our growth prospects and long-term
viability.
  We have
historically focused on publishing innovative videogames for underserved niches
that are generally sold at prices typical for big-budget videogames produced by
the leading videogame publishers. In doing so, we have relied on our
management’s industry experience to identify videogame concepts that can be
profitably produced, their ability to allocate our limited financial resources
among videogames under development and their ability to leverage low-cost
offshore videogame developers. There can be no assurance, however, that we will
be able to accurately assess the likelihood and volume of sales for future
videogames or to engage low-cost developers.
  If
we are unable to enter into attractive publishing arrangements with developers
of highly innovative and commercially appealing videogames, our competitiveness
and prospects for growth could be severely impacted.
  Our
success depends on our ability to timely identify and publish highly marketable
videogames. We rely on independent software developers and videogame studios for
the development of our videogames. We have entered into agreements with these
developers and studios that typically require us to make advance payments, pay
royalties and satisfy other conditions. Because videogame developers are in high
demand, our relatively limited resources, as compared to our competitors, puts
us at a competitive disadvantage when bidding to offer attractive compensation
packages, advance royalties or ample pre-development financing to desirable
developers. This competitive disadvantage may reduce our chances of winning the
right to publish highly innovative videogames and could severely impact our
competitiveness and prospects for growth.
  If
our contracted videogame developers fail to deliver their finished videogames on
time, or at all, we stand to incur significant losses that could severely
adversely affect our financial performance.
  We rely
upon our independent software developers and videogame studios to deliver our
videogames within anticipated release schedules and cost
projections.
  While
timetables for the development and delivery of videogames are set in advance,
videogame production schedules are difficult to predict and can be subject to
delays. Schedule slippage is common due to the uncertain schedules of software
development. Most publishers have suffered a “false launch,” in which the
development staff assures the publisher that videogame development will be
completed by a certain date, marketing is planned around that date, including
advertising commitments, and then after the advertising is paid for, the
development staff announces that the videogame will “slip” and will actually be
ready several months later than originally intended. When the videogame finally
appears, the excitement and “buzz” among consumers from the marketing launch and
the consumer’s intent to purchase the videogame have dissipated, and lackluster
interest leads to weak sales. These problems are compounded if the videogame is
supposed to ship for the holiday selling season, but actually slips into
the subsequent year.
  The
development cycle for new videogames can range from 12 to 24 months and can be
expected to increase in connection with the development of next-generation
software. After development of a videogame, it may take between nine to 12
additional months to develop the product for other videogame systems. Since we
have no direct control over the business, finances and operating practices of
our developers and studios, a delay or failure by them to complete the work
performed may result in delays in, or cancellations of, product releases that
may threaten our ability to obtain sufficient amounts of our product to sell to
our customers. In addition, customers may, under certain agreements, terminate
their agreements to purchase videogames resulting from concerns over work
quality and originality, or prolonged delay or significant revisions to the
videogames. Terminations by clients of their purchase commitments can
significantly dampen our revenue and cause our business to suffer
losses.
  Because
many independent developers and studios are small companies that are dependent
on a few key individuals for the completion of a project, this also exposes us
to the risk that these developers will lose a key employee, go out of business
before completing a project, or simply cease work on a project for which we have
hired them, and this occurrence could also be highly detrimental to our ability
to compete and to generate additional revenue.
  9
  Our
business is highly dependent on the success and availability of videogame
systems manufactured by third parties, as well as our ability to develop
commercially successful products for these systems.
  We derive
most of our revenue from the sale of products for play on videogame systems
manufactured by third parties, such as Microsoft Xbox 360, Nintendo Wii,
Nintendo DS, Nintendo DSi, Apple
iPhone, Sony PlayStation 3, Sony PlayStation 2, SonyPSP and Sony PSPgo.
The success of our business is driven in large part by the commercial success
and adequate supply of these videogame systems, our ability to accurately
predict which systems will be successful in the marketplace, and our ability to
develop commercially successful products for these systems. We must make product
development decisions and commit significant resources well in advance of
anticipated product ship dates. A videogame system for which we are developing
products may not succeed or may have a shorter life cycle than anticipated. If
consumer demand for the systems for which we are developing products is lower
than our expectations, our revenue will suffer, we may be unable to fully
recover the investments we have made in developing our products, and our
financial performance will be harmed. Alternatively, a system for which we have
not devoted significant resources could be more successful than we had initially
anticipated, causing us to miss out on meaningful revenue
opportunities.
  Our
industry is cyclical, driven by the periodic introduction of new videogame
systems. As we continue to move through the current cycle, our industry growth
may slow down and as a result, our operating results may be difficult to
predict.
  Videogame
systems have historically had a life cycle of four to six years, which causes
the videogame software market to be cyclical as well. The current cycle began
with Microsoft’s launch of the Xbox 360 in 2005, and continued in 2006 when Sony
and Nintendo launched their next-generation systems, the PlayStation 3 and the
Wii, respectively. Sales of software designed for these videogame systems
represent the majority of our revenue, so our growth and success are highly
correlated to sales of videogame systems. While there are indications that this
current cycle may be extended longer than prior cycles, in part, due to the
growth of online services and content and the greater graphic and processing
power of the current generation hardware, we expect growth in the installed base
of the current generation of videogame systems to slow as we enter the back half
of this cycle. This slow-down in sales of videogame systems, which may be
exacerbated by the current economic environment, may cause a corresponding
slow-down in the growth of sales of videogame software, which could
significantly affect our operating results. Consequently, the decline in
prior-generation product sales, particularly the PlayStation 2, may be greater
or faster than we anticipate, and sales of products for the new videogame
systems may be lower or increase more slowly than we anticipate. Moreover,
development costs for the current cycle of videogame systems continue to be
greater on a per-title basis than development costs for prior-generation
videogame systems. In addition, in light of the current economic environment and
where we stand in the current generation videogame system cycle, our industry
may experience slower growth than in recent years. As a result of these factors,
during the next several quarters and years, we expect our operating results to
be difficult to predict.
  The
videogame hardware manufacturers set the royalty rates and other fees that we
must pay to publish games for their platforms, and therefore have significant
influence on our costs. If one or more of these manufacturers change their fee
structure, our profitability will be materially impacted.
  In order
to publish products for a videogame system such as the Xbox 360, Sony
PlayStation 3 or Wii, we must take a license from Microsoft, Sony and Nintendo,
respectively, which gives these companies the opportunity to set the fee
structures that we must pay in order to publish games for that platform.
Similarly, these companies have retained the flexibility to change their fee
structures, or adopt different fee structures for new features for their
videogame systems. The control that hardware manufacturers have over the fee
structures for their videogame systems could adversely impact our costs,
profitability and margins.
  If our inventory
of videogames is not fully sold and we have paid upfront license fees and
manufacturing costs, our operating results may be materially adversely
affected.
  When
publishing for videogame systems, videogame publishers take on the burden of
inventory risk. All significant videogame system manufacturers since Nintendo
with its NES (1985) have monopolized the manufacture of every videogame made for
their videogame system, and have required all publishers to pay a license fee
for every videogame so manufactured. This license fee is generally due at the
time of manufacturing the videogame and is based upon the number of videogames
being manufactured. So, if a videogame publisher orders one million copies of
its videogame, but half of them do not sell, the publisher has already paid the
full videogame system manufacturer license fee on one million copies of the
videogame. Furthermore, non-moving inventory of videogames tend to decline
substantially in value over time or to become obsolete. If this situation
happens to us, and price concessions are not available for our unsold products,
we could incur significant losses, which could materially adversely affect our
profitability.
  10
  Our
business may be affected by issues in the economy that affect consumer
spending.
  Our
products involve discretionary spending on the part of consumers. We believe
that consumer spending is influenced by general economic conditions and the
availability of discretionary income. This makes our products particularly
sensitive to general economic conditions and economic cycles. Certain economic
conditions, such as United States or international general economic downturns,
including periods of increased inflation, unemployment levels, tax rates,
interest rates, gasoline and other energy prices or declining consumer
confidence could reduce consumer spending. Reduced consumer spending may result
in reduced demand for our products and may also require increased selling and
promotional expenses. A reduction or shift in domestic or international consumer
spending could negatively impact our business, results of operations and
financial condition. Consumers are generally more willing to make discretionary
purchases, including purchases of products like ours, during periods in which
favorable economic conditions prevail. If economic conditions worsen, our
business, financial condition and results of operations could be adversely
affected.
  Our
business is subject to risks generally associated with the entertainment
industry, any of which could significantly harm our operating
results.
  Our
business is subject to risks that are generally associated with the
entertainment industry, many of which are beyond our control. These risks could
negatively impact our operating results and include: the popularity, price and
timing of our videogames and the videogame systems on which they are played;
economic conditions that adversely affect discretionary consumer spending;
changes in consumer demographics; the availability and popularity of other forms
of entertainment; and critical reviews and public tastes and preferences, which
may change rapidly and cannot necessarily be predicted.
  We
may not be able to adequately adjust our cost structure in a timely fashion in
response to a sudden decrease in demand.
  A
significant portion of our sales and marketing and general and administrative
expenses are comprised of personnel and facilities. In the event of a
significant decline in revenues, we may not be able to exit facilities, reduce
personnel, or make other changes to our cost structure without disruption to our
operations or without significant termination and exit costs. Management may not
be able to implement such actions quickly enough, if at all, to offset an
immediate shortfall in revenues and profit. Moreover, reducing costs may impair
our ability to produce and develop videogames at sufficient levels in the
future. We are subject to the risk that our inventory values may decline and
protective terms under supplier arrangements may not adequately cover the
decline in values.
  We
rely on a primary distribution service provider for a significant portion of our
products and the failure of this service provider to perform as expected could
materially harm our results of operations.
  Ditan
Distribution LLC is responsible for the shipping, receiving, warehouse
management and related functions for our United States publishing and
distribution businesses. Our future performance will depend, in part, on Ditan’s
ability to successfully distribute our products. If Ditan does not perform
adequately, or if we lose Ditan as our distributor and are unable to obtain a
satisfactory replacement in a timely manner, our sales and results of operations
could suffer.
  We
are dependent upon a limited number of customers and the loss of any our key
customers could materially adversely affect our business.
  We are
dependent on a small number of large customers for a significant portion of our
sales, and the loss of one or more of these clients, or a significant decrease
in total revenues from any of these clients, could seriously hurt our business.
For example, we have two customers, Wal-Mart and GameStop that accounted for
approximately 18% and 16%, respectively, of consolidated gross revenues for the
year ended June 30, 2009, and approximately 15% and 17%, respectively, of
consolidated gross accounts receivable at June 30, 2009.
  Approximately
95% of our sales are made through purchase orders subject to agreements with our
customers, including GameStop and Wal-Mart, through which the customer may
reduce the videogames they purchase from us, renegotiate the terms on which they
purchase our videogames, or terminate their relationship with us at any time.
Certain of our customers may decline to carry products containing mature
content. A substantial reduction in orders, including as a result of a product
being rated “AO” (age 18 and over); difficulty in collecting receivables in
full, or within a reasonable time period, or within reserve levels; or
termination of our relationship with the customer as a result of a number of
factors (including their level of satisfaction with the support services they
receive from us, demand for or pricing of competing videogames, and their
ability to continue their operations) could adversely affect our operating
results and business viability.
  If
delays or disruptions occur in the delivery to our customers of newly published
videogames following their commercial release, our operating results could be
materially adversely affected.
  Certain
of our licensing and marketing agreements contain provisions that would impose
penalties in the event that we fail to meet agreed upon videogame release dates.
The life cycle of a videogame generally involves a relatively high level of
sales during the first few months after introduction, followed by a rapid
decline in sales. New products may not achieve significant market acceptance or
generate sufficient sales to permit us to recover development, manufacturing and
marketing costs associated with these products. Because revenues associated with
an initial product launch generally constitute a high percentage of the total
revenue associated with the life of a product, delays in product releases or
disruptions following the commercial release of one or more new videogames could
adversely affect the sales of such products and cause our operating results to
materially suffer and differ from expectations.
  11
  If
we incur unanticipated levels of returns of our videogames from customers, or
price concessions granted to them, our operating results could significantly
suffer.
  We are
exposed to the risk that customers will return our products, or seek to secure
price concessions for any bulk orders. Our distribution arrangements with our
customers generally do not give them the right to return videogames to us or to
cancel firm orders. However, when demand for our offerings falls below
expectations, we can sometimes accept product returns for stock balancing and
negotiate accommodations to customers in order to maintain healthy relationships
with them as well as continued access to their sales channels. These
accommodations include negotiation of price discounts and credits against future
orders, referred to as price concessions. The estimated reserve for returns and
price concessions is based on our management’s evaluation of expected sales,
potential markdown allowances based on historical experience, market acceptance
of products produced, retailer inventory levels, budgeted customer allowances
and the nature of the videogame and existing commitments to
customers.
  While we
believe that we can reliably estimate future returns and price concessions, we
cannot predict with certainty whether existing reserves will be sufficient to
offset any accommodations we will actually provide, nor can we predict the
amount or nature of accommodations that we will provide in the future.
Furthermore, the continued granting of substantial price protection and other
allowances may require us to raise additional funds for our operating
requirements, but there is no assurance that such funds will be available to us
on acceptable terms, if at all. In addition, the license fees we pay Sony,
Microsoft and Nintendo are non-refundable and cannot be recovered when
videogames are returned. Ultimately, if our return rates and price concessions
for published videogames materially exceed our reserves, our operating results
may be further adversely affected.
  If
our videogames suffer from grave defects, market acceptance of our product may
be adversely affected, our results of operations adversely affected, and our
reputation seriously harmed.
  Our
videogames can contain major defects, which could delay market acceptance of our
products; cause customers to either terminate relationships with us, or initiate
product liability suits against us, or both; or divert our engineering
resources, and consequently adversely impact our results of operations and our
reputation.
  If
we fail to maintain effective internal control over financial reporting and
disclosure controls and procedures in the future, we may not be able to
accurately report our financial results, which could have an adverse effect on
our business.
  If our
internal control over financial reporting and disclosure controls and procedures
are not effective, we may not be able to provide reliable financial information.
Subsequent to the filing of the Form 10-Q for the period ended March 31, 2009,
we determined that our condensed consolidated financial statements as of March
31, 2009 and for the three- and nine-month periods ended March 31, 2009, as
included in the Form 10-Q for the period ended March 31, 2009, should be
restated as they contained errors that resulted in misstatements of inventories,
accounts payable, accrued royalties, accrued expenses and other current
liabilities, due to shareholders, additional paid-in-capital, product costs,
royalties, sales and marketing and general and administrative expenses.
Accordingly, we restated our condensed consolidated financial statements as of
March 31, 2009 and for the three- and nine-month periods ended March 31, 2009.
In connection with this restatement, we determined that our internal control
over financial reporting during the period ended March 31, 2009 was not
effective due to the existence of material weaknesses in our internal control
over financial reporting relating to our quarter-end closing process, our
controls over related party transactions, our general and administrative expense
accruals and our reconciliation of inventory liability clearing accounts.
Although we have implemented additional procedures that we believe enable us to
properly prepare and review our condensed consolidated financial statements, we
cannot be certain that these measures will ensure that we maintain adequate
controls over our financial reporting process in the future. If we discover
additional deficiencies, we will make efforts to remediate these deficiencies;
however, there is no assurance that we will be successful either in identifying
deficiencies or in their remediation. Any failure to maintain effective controls
in the future could adversely affect our business or cause us to fail to meet
our reporting obligations. Such non-compliance could also result in an adverse
reaction in the financial marketplace due to a loss of investor confidence in
the reliability of our condensed consolidated financial statements. In addition,
perceptions of our business among customers, suppliers, rating agencies,
lenders, investors, securities analysts and others could be adversely
affected.
  If
we are unable to effectively manage and fund our expansion initiatives, we could
incur huge charges, which in turn could undermine our growth plans.
  We have
begun to expand our publishing operations, enlarge our work force, and increase
our investments in proprietary videogames created by independent software
developers and videogame studios. To manage this growth successfully, we must
constantly hire, train and manage an increasing number of management, technical,
marketing, and other personnel. Furthermore, we will require significant cash
resources to fuel our expansion activities, and may have to seek debt or equity
financing to fund related costs. There is no guarantee, however, that we could
obtain the additional financing required on acceptable terms or at all. The
issuance of new equity securities by us, moreover, would result in dilution to
the interests of our stockholders. Unless we are able to effectively manage our
growth activities, our business may be materially adversely
affected.
  12
  Growth
of our business will result in increased demands on our management and limited
human capital resources, which we may not be able to meet.
  Any
future growth in our business, whether organic or through acquisitions, will
result in increased responsibility for our management and increased demands on
our personnel. As our business grows, it will be required to retain qualified
personnel who can expand our customer base and ensure continued development and
delivery of highly innovative and technologically advanced videogames. We must
continue to enhance and expand our management, technical, selling and marketing
capabilities to accommodate this growth. To manage future growth, we will need
to:
  ·
              retain
      and hire competent senior management and marketing personnel to manage
      publishing and marketing
activities;
  ·
              maintain
      and expand our base of operating, financial and administrative personnel;
      and
  ·
              continue
      to train, motivate, and retain existing employees and attract and
      integrate new employees.
  If we are
unable to manage future expansion, our ability to provide and maintain superior
services to our vendors and customers can be compromised, which could in turn
damage our reputation and substantially harm the business.
  If
we fail to retain the services of senior management and our chairman, our
business and prospects could be materially adversely affected.
  Our
continued success will depend to a significant extent upon the performance and
contributions of our senior management and our chairman and upon our ability to
attract, motivate and retain highly qualified employees. We are dependent upon
key senior management and our chairman to effectively manage our business
in a highly competitive environment. If one or more of our key officers joins a
competitor or forms a competing company, we may experience material
interruptions in product development, delays in bringing products to market,
difficulties in our relationships with licensors, suppliers and customers, and
lose additional personnel, which could significantly harm our business,
financial condition and operating results. Additionally, failure to continue to
attract and retain qualified management personnel could adversely affect our
business and prospects.
  We do not
have “key person” life insurance policies covering any of our employees, nor are
we certain whether any such policies will be obtained or maintained in the
future. In particular, we will depend in large part on the abilities of Mr.
Terry Phillips and Ms. Melanie Mroz, who are our chairman, and president
and chief executive officer, respectively, to effectively execute future
strategies.
  If
we fail to hire and retain qualified personnel in an industry where competition
for qualified personnel is intense, our business could be seriously
harmed.
  Our
business, operating results and financial condition could be materially and
adversely affected if we lose the services of key technical, sales or marketing
employees, or if we fail to attract additional highly qualified employees. Our
employees are responsible for ensuring the timely publication, distribution and
continued improvement of proprietary videogames that our clients demand, for
promptly addressing client requirements through technical and operational
support services, and for identifying and developing opportunities to provide
additional products and/or services to existing clients. The loss of the
services of these employees, the inability to attract or retain qualified
personnel in the future, or delays in hiring qualified personnel could limit our
ability to generate revenues and to successfully operate our
business.
  Competition
for employees can be intense, and the process of locating key personnel with the
right combination of skills is often lengthy. We rely to a substantial extent on
the expertise, skills and knowledge of management, marketing, sales, technical
and technology personnel to formulate and implement our business plan, as well
as to identify, support, publish and market quality videogames. Although we have
granted incentives to some employees, we may not be able to continue to retain
these personnel at current compensation levels, or at all. The compensation
arrangements with such employees could result in increased expenses and have a
negative impact on our operating results. In addition, if one or more of these
individuals leave us, we may experience material delays in bringing products to
market, which could have a material adverse effect on our business and
prospects.
  13
  If
our licensed intellectual property is not adequately protected from unauthorized
use or access by others, our competitiveness could be significantly undermined
and our viability adversely affected.
  We have
obtained licenses for videogame software developed by independent developers and
studios, and we regard these licenses, including the trademarks, copyrights, and
trade secrets to such videogame software, as proprietary intellectual property.
The underlying trademarks, copyrights, and trade secrets often are separately
protected by the developers of the software by enforcement of intellectual
property laws. To protect our proprietary licenses from unauthorized use and
infringement, we maintain employee or third-party nondisclosure and
confidentiality agreements, contractual restrictions on copying and
distribution, as well as “shrink-wrap” or “click-wrap” license agreements or
limitations-on-use of software included with our products.
  Our
licenses, however, are vulnerable to misappropriation and infringement, which
could undermine our competitiveness and materially adversely affect our
business. It is difficult to effectively police unauthorized use of our licenses
and we cannot be certain that existing intellectual property laws will provide
adequate protection for our products. Despite our efforts to protect our
proprietary rights, unauthorized parties may try to copy our videogames, or to
reverse engineer the licensed software. Well-organized piracy operations that
have proliferated in recent years also have the ability to download pirated
copies of our published software over the Internet. In addition, the laws of
some foreign countries where our products are or may be distributed may not
protect our proprietary rights to as great an extent as United States law, or
are poorly enforced. If we are unable to protect our software against piracy, or
prevent the misappropriation and infringement of our licenses in any form, our
competitiveness and viability could be severely adversely affected.
  If
we infringe on the proprietary rights of others, unknowingly or not, we could
sustain major damages to our business.
  Although
we believe our software and technologies and the software and technologies of
the developers and studios with whom we have contractual relations do not and
will not infringe or violate proprietary rights of others, it is possible that
infringement of proprietary rights of others has occurred or may
occur.
  Any
claims of infringement, with or without merit, could be time consuming, costly
and difficult to defend. Parties making claims of infringement may be able to
obtain injunctive or other equitable relief that could require us to discontinue
the distribution of our videogame software, prevent us from obtaining a license
or redesigning our videogames, block us from publishing new materials, and
compel us to pay substantial damages. In the event of a successful claim of
infringement, we may need to obtain one or more licenses from third parties,
which may not be available at a reasonable cost, if at all; divert attention and
resources away from our daily business; impede or prevent delivery of our
published videogames; and require us to pay significant royalties, licensing
fees and damages. The defense of any lawsuit could result in time-consuming and
expensive litigation, regardless of the merits of such claims, and could also
result in damages, license fees, royalty payments and restrictions on our
ability to provide our services, any of which could harm our
business.
  We
are subject to the risks and uncertainties associated with international trade,
which could adversely affect our business.
  As we
expand our international operations, we are exposed to other risks, including:
different market dynamics and consumer preferences; unexpected changes in
international political, regulatory and economic developments; increased credit
risks, tariffs and duties; difficulties in coordinating foreign transactions and
operations; shipping delays; and possible impediments to the collection of
foreign accounts receivable. Moreover, all of our international sales are made
in local currencies, which could fluctuate against the dollar. While we may use
forward exchange contracts to a limited extent to seek to mitigate foreign
currency risk, our results of operations could be adversely affected by
unfavorable foreign currency fluctuations. These or other factors could have an
adverse effect on our business.
  14
  Failure
to collect our accounts receivable on a timely basis will negatively impact our
cash flow.
  Our
sales are typically made on credit. Under the terms of our line of credit, we
can borrow up to sixty-five percent of the value of eligible
receivables. We do not hold any collateral to secure payment from our
customers. As a result, we are subject to credit risks, particularly in the
event that a significant amount of our receivables represent sales to a limited
number of retailers or are concentrated in foreign markets. Although we
continually assess the creditworthiness of our customers, which are principally
large, national retailers, if we are unable to collect our accounts receivable
as they become due, our financial condition and cash flow could be adversely
affected. From time to time we may purchase from financial institutions
insurance on our receivables (with certain limits) to help protect us from loss
in the event of a customer’s bankruptcy or insolvency.
  Our
quarterly operating results may fluctuate significantly due to various factors
related to our operations, which could cause our stock price to decline and
could result in substantial losses to investors.
  Our
quarterly operating results have varied widely in the past and are likely to
vary in the future, due to numerous factors, several of which are not under our
control. These factors include the timing of our release of new videogames,
customer demand for our videogames, and quarterly working capital needs. Other
factors that cause fluctuations in our sales and operating results
include:
  ·
              the
      timing of release of our competitors
products;
  ·
              the
      popularity of both new videogames and videogames released in prior
      periods;
  ·
              the
      profit margins for videogames we
sell;
  ·
              competition
      in the industry for retail shelf
space;
  ·
              changing
      consumer demand for videogames for different videogame systems;
      and
  ·
              the
      timing of the introduction of new videogame systems and the accuracy of
      retailers forecasts of consumer
demand.
  The
uncertainties associated with videogame development, including varying
manufacturing lead times, production delays and the approval process for
products by videogame system manufacturers and other licensors also make it
difficult to predict the quarter in which our products will ship and therefore
may cause us to fail to meet financial expectations. In future quarters,
operating results may fall below the expectations of securities analysts and
investors and the price of our stock could decline significantly.
  The
videogame publishing industry is highly seasonal, with the holiday selling
season accounting for a substantial portion of the industry’s yearly sales of
videogames, leading to a concentrated glut of high-quality competition every
year in every videogame category during this seasonal period. Although
historically we have not been materially impacted by industry seasonality,
primarily because we have produced a limited volume of videogames that have been
absorbed by the market even in low volume periods of the year, we may be
impacted by industry seasonality in the future as we increase the volume of our
videogame production. Our failure or inability to introduce products on a timely
basis to meet seasonal fluctuations in demand could adversely affect our
business and operating results in the future.
  We
believe that quarter-to-quarter comparisons of our operating results will not be
a good indication of our future performance. In
addition, if we do become profitable, we may not be able to sustain or increase
our profitability.  Continued losses, or an inability to sustain
profitability, may have an adverse effect on our future operating prospects and
stock price. It is likely that, in some future quarter, our operating
results may be below the expectations of public market analysts and investors
and as a result of the above-mentioned factors, and other factors described
throughout this “Risk Factors” section, the price of our common stock may fall
or significantly fluctuate, and possibly bring about significant reductions to
stockholder value.
  Our
business and products are subject to potential legislation. The adoption of such
proposed legislation could limit the retail market for our
products.
  Several
proposals have been made for federal legislation to regulate our industry. Such
proposals seek to prohibit the sale of “M” rated, “AO” rated and “Rating
Pending” products to under-17 audiences (while the ESRB rating recommends an
appropriate age group, there is currently no legal prohibition on any game
sales). If any such proposals are enacted into law, it may limit the potential
market for our “M” rated products in the United States, and adversely affect our
operating results. Other countries, such as Germany, have adopted laws
regulating content both in packaged games and those transmitted over the
Internet that are stricter than current United States laws. In the United
States, proposals have also been made by numerous state legislators to regulate
the sale of “M” or “AO” rated products and prohibit the sale of interactive
entertainment software products containing certain types of violence or sexual
materials to under 17 or 18 audiences. While such legislation to date has been
enjoined by industry and retail groups, the adoption into law of such
legislation in federal and/or in state jurisdictions in which we do significant
business could severely limit the retail market for our “M” rated
titles.
  15
  Failure
to obtain a target rating for certain of our products, as well as videogame
re-rating, could negatively impact our sales.
  The ESRB
system uses a rating symbol that suggests the appropriate player age group, and
content descriptor information, such as graphic violence, profanity, or sexually
explicit material. The ESRB rating is printed on each videogame package and
retailers may use the rating to restrict sales to the recommended age groups.
Retail customers take the ESRB rating into consideration when deciding which
videogames they will purchase. If the ESRB or a manufacturer determines that any
of our videogames should have a rating directed to an older or more mature
consumer, we may be less successful in marketing and selling said
videogames.
  We claim
compliance with rating system requirements and the proper display of the
designated rating symbols and content descriptors. In some instances, however,
we may have to modify certain videogames in order to market them under the
expected rating, which could delay or disrupt the release of these videogames.
In the United States, we expect our videogames to receive ESRB ratings of “E”
(age 6 and older), “E10+” (age 10 and older), “T” (age 13 and over) or “M” (age
17 and over). In addition to these ratings, the ESRB may also rate a videogame
as “AO” (age 18 and over). A few of our published videogames have been rated “M”
by the ESRB. If we are unable to obtain “M” ratings as a result of changes in
the ESRB’s ratings standards or for other reasons, including the adoption of
legislation in this area, our business and prospects could be negatively
affected. In the event any of our videogames are re-rated by the ESRB, we may be
required to record a reserve for anticipated product returns and inventory
obsolescence which could expose us to additional litigation, administrative
fines and penalties and other potential liabilities, and could adversely affect
our operating results.
  Content
policies adopted by retailers, consumer opposition and litigation could
negatively impact sales of our products.
  Retailers
may decline to sell videogame software containing what they judge to be graphic
violence or sexually explicit material or other content that they deem
inappropriate for their businesses. If retailers decline to sell our products
based upon their opinion that they contain objectionable themes, graphic
violence or sexually explicit material or other generally objectionable content,
or if any of our previously “M” rated series products are rated “AO,” we might
be required to significantly change or discontinue particular titles or series,
which could seriously affect our business. Consumer advocacy groups have opposed
sales of videogame software containing objectionable themes,
violence, sexual material or other objectionable content by pressing for
legislation in these areas and by engaging in public demonstrations and media
campaigns.
  Our
Chairman is subject to an SEC cease and desist order.
  Our
Chairman, Mr. Terry Phillips, agreed, in May 2007, to a settlement with the
Securities and Exchange Commission, or SEC, in a proceeding arising from certain
actions in 2000 and 2001. Without admitting or denying the allegations, Mr.
Phillips agreed to consent to the entry of an order to cease and desist from
committing or causing any violations of Section 10(b) of the Securities Exchange
Act of 1934, or the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1 and
from causing any violations of Sections 13(a) and 13(b)(2)(A) of the Exchange
Act and Exchange Act Rules 12b-2, 13a-1 and 13a-13.
  This
proceeding arose from the involvement in 2000 and 2001 of Mr. Phillips, Capitol
Distributing, L.L.C., and another private company in which Mr. Phillips was a
principal, in certain actions of Take-Two Interactive Software, Inc., or
Take-Two, where Mr. Phillips was accused of taking receipt of merchandise from
Take-Two and later returning the merchandise to Take-Two without making an
effort to sell the merchandise. In his agreement to cease and desist, Mr.
Phillips paid a civil penalty of $50,000.
  Should
Mr. Phillips be found to have violated the terms of the SEC’s order in the
future, he may be subject to further enforcement action, including legal action
imposing injunctive relief and assessing fines or penalties, which could have a
material impact on our reputation and business.
  Risks
Relating to our Securities
  Because
we do not currently intend to pay dividends on our common stock, stockholders
will benefit from an investment in our common stock only if it appreciates in
value.
  We do not
currently anticipate paying any dividends on shares of our common stock. Any
determination to pay dividends in the future will be made by our board of
directors and will depend upon results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other
factors our board of directors deems relevant. Accordingly, realization of a
gain on stockholders' investments will depend on the appreciation of the price
of our common stock. There is no guarantee that our common stock will appreciate
in value or even maintain the price at which stockholders purchased their
shares.
  16
  The
concentration of our capital stock ownership will likely limit a stockholders'
ability to influence corporate matters, and could discourage a takeover that
stockholders may consider favorable and make it more difficult for a stockholder
to elect directors of its choosing.
  As of
September 30, 2009, our executive officers, directors and affiliates together
beneficially owned approximately 45.5% of our outstanding common stock. As a
result, these stockholders have the ability to exert significant control over
matters that require approval by all our stockholders, including the election of
directors and approval of significant corporate transactions. The interests of
these stockholders might conflict with the interests of the other holders of our
securities, and it may cause us to pursue transactions that, in their judgment,
could enhance their equity investments, even though such transactions may
involve significant risks to our other security holders. The large concentration
of ownership in a small group of stockholders might also have the effect of
delaying or preventing a change of control of our company that our other
stockholders may view as beneficial.
  It may be
difficult for you to resell shares of our common stock if an active
market for our common
stock does not develop.
  Our
common stock is not actively traded on a securities exchange and we currently do
not meet the initial listing criteria for any registered securities exchange,
including the Nasdaq Stock Market. Our securities are quoted on the less
recognized Over-the-Counter bulletin board. This factor may further impair our
stockholders' ability to sell their shares when they want and/or could depress
our stock price. As a result, stockholders may find it difficult to dispose of,
or to obtain accurate quotations of the price of, our securities because smaller
quantities of shares could be bought and sold, transactions could be delayed and
security analyst and news coverage of our company may be limited. These factors
could result in lower prices and larger spreads in the bid and ask prices for
our shares.
  We
seek to manage our business with a view to achieving long-term results, and this
could have a negative effect on short-term trading.
  Our focus
is on creation of stockholder value over time, and we intend to make decisions
that will be consistent with this long-term view. As a result, some of our
decisions, such as whether to make or discontinue operating investments, manage
our balance sheet and capital structure, or pursue or discontinue strategic
initiatives, may be in conflict with the objectives of short-term traders.
Further, this could adversely affect our quarterly or other short-term results
of operations.
  Our
warrants may have an adverse effect on the market price of our common
stock.
  We have
outstanding warrants to purchase 16,982,494 shares of common stock. There is
also an option to purchase 200,000 Class Z warrants and 260,000 Class W warrants
issued to the representative of the underwriters in our initial public offering.
The sale, or even the possibility of sale, of the shares underlying the warrants
and options could have an adverse effect on the market price for our securities
or on our ability to obtain future public financing. If and to the extent these
warrants are exercised, the common stockholders may experience dilution to their
holdings.
  Item 1B. Unresolved Staff
Comments
  None.
  Item
2.       Properties
  We lease
a 5,500 square-foot office suite for our corporate headquarters in Midlothian,
Virginia under an agreement that expires in December 2010 (See Item 13 "Certain
Relationships and Related Transactions"). We also lease a three-story office
suite in Leichester, England for our international operations under an agreement
that expires in November 2012. We own a 7,000 square-foot office building and a
3,746 square-foot office building in Grapevine, Texas, which house our North
American sales and marketing department and our product production and
development management departments. We believe our current facilities are
suitable and adequate to meet our current needs, and that suitable additional or
substitute space will be available as needed to accommodate expansion of our
operations. As we expand our business into new markets, we expect to lease
additional office facilities. See Note 11 to the notes to our consolidated
financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Commitments”
appearing elsewhere in this report for information regarding our lease
obligations.
  17
  Item
3.       Legal
Proceedings
  On
March 12, 2009, we, along with Gamecock, SouthPeak Interactive, Ltd.
and Gamecock Media Europe, Ltd., were served with a complaint by CDV Software
Entertainment A.G., or CDV, alleging various breach of contract and other claims
related to a publishing and distribution agreement, or the Distribution
Agreement, entered into between Gamecock Media Europe, Ltd. and CDV in January
2008. CDV is seeking the return of $4,590,000 in videogame development advances,
an injunction against us and our subsidiaries, approximately $650,000 in
specified damages, further damages to be assessed, and discretionary interest
and costs. Gamecock Media Europe, Ltd. filed a counterclaim against CDV for
$950,000 and discretionary interest and costs, resulting from videogame sales
and the achievement of a milestone under the Distribution Agreement. The hearing
for both CDV’s claims and Gamecock Media Europe’s counterclaim concluded on
July 22, 2009, and the court is expected to issue its ruling in the near
future.
  On October 27, 2008, Gamecock was served with a demand for arbitration by
Firefly Studios Limited, or Firefly, alleging various breaches of contract
related to a publishing agreement, or Publishing Agreement, entered into between
Gamecock and Firefly on December 12, 2007.  Firefly is seeking to
terminate the Publishing Agreement, obtain exclusive control of the subject
videogame, and compete and exploit the videogame on its own.  Gamecock
has responded stating that Firefly’s attempts to terminate the Publishing
Agreement constitute wrongful termination of the agreement.  Gamecock
has also filed a counterclaim against Firefly seeking the return of $5.09
million in advances in the event the Publishing Agreement is
terminated.
  Other
than the foregoing, we are not currently subject to any material legal
proceedings. From time to time, however, we are named as a defendant in legal
actions arising from our normal business activities. Although we cannot
accurately predict the amount of our liability, if any, that could arise with
respect to legal actions currently pending against us, we do not expect that any
such liability will have a material adverse effect on our consolidated financial
position, operating results or cash flows. We believe that we have obtained
adequate insurance coverage, rights to indemnification, or where appropriate,
have established reserves in connection with these legal
proceedings.
  Item
4.       Submission of
Matters to a Vote of Security Holders
  As
described in the information statement we filed with SEC on June 1, 2009 and
mailed to our stockholders on June 26, 2009, the holders of 61% of our
outstanding capital stock executed a written consent in lieu of annual meeting,
effecting the following actions:
  ·
              The
      election of Terry Phillips, Melanie Mroz, David Buckel and Louis M.
      Jannetty as our directors to serve for a one-year term expiring at the
      2010 annual meeting of stockholders or until each of their successors are
      duly elected and qualified or until each of their earlier resignation or
      removal; and
  ·
              The ratification of the
      appointment of Reznick Group, P.C. as our independent registered public
      accounting firm for the fiscal year ending June 30,
      2009.
  18
  PART
II
  Item 5.Market for the
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Market
Price for Equity Securities
  Following
our initial public offering in April 2006, our Series A units, Series B units,
common stock, Class B common stock, Class W warrants and Class Z warrants were
listed on the Over-the-Counter bulletin board under the symbols GSPAU, GSPBU,
GSPA, GSPAB, GSPAW and GSPAZ, respectively.
  Our Class
B common stock ceased trading on the Over-the-Counter bulletin board and was
automatically cancelled and converted into a right to receive $5.36 per share
from our trust fund on April 25, 2008. As a result of the cancellation of the
Class B common stock, our Series B units were mandatorily separated from their
associated Class W warrants and then cancelled on April 25, 2008.
  On July
31, 2009, our Series A units were mandatorily separated from their associated
shares of common stock and Class Z warrant and our Series A units ceased
trading. Thereafter, our Series A units were cancelled. On April 7, 2009, we
registered for resale our Class Y warrants. There is no established current
public market for our Class Y warrants.
  Our
common stock, Class W warrants and Class Z warrants now trade on the
Over-the-Counter bulletin board under the symbols SOPK, SOPKW and SOPKZ,
respectively. The following table sets forth, for the calendar quarter
indicated, the quarterly high and low closing sale prices of our securities as
reported on the Over-the-Counter bulletin board in US dollars. The quotations
listed below reflect interdealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
  Common Stock
                                                
                                                
                                                Class W
                                                  Warrants
                                                
                                                
                                                Class Z
                                                  Warrants
                                                
                                                
                                                Series A
                                                  UnitsHigh
                                                
                                                
                                                Low
                                                
                                                
                                                High
                                                
                                                
                                                Low
                                                
                                                
                                                High
                                                
                                                
                                                Low
                                                
                                                
                                                High
                                                
                                                
                                                Low2007Third
      Quarter
                                                
                                                3.00
                                                
                                                
                                                2.50
                                                
                                                
                                                0.38
                                                
                                                
                                                0.35
                                                
                                                
                                                0.52
                                                
                                                
                                                0.40
                                                
                                                
                                                9.70
                                                
                                                
                                                9.00Fourth
      Quarter
                                                
                                                1.74
                                                
                                                
                                                1.25
                                                
                                                
                                                0.20
                                                
                                                
                                                0.03
                                                
                                                
                                                0.33
                                                
                                                
                                                0.27
                                                
                                                
                                                6.25
                                                
                                                
                                                4.752008First
      Quarter
                                                
                                                1.75
                                                
                                                
                                                1.03
                                                
                                                
                                                0.26
                                                
                                                
                                                0.04
                                                
                                                
                                                0.32
                                                
                                                
                                                0.24
                                                
                                                
                                                6.70
                                                
                                                
                                                4.70Second
      Quarter
                                                
                                                3.00
                                                
                                                
                                                0.35
                                                
                                                
                                                0.38
                                                
                                                
                                                0.05
                                                
                                                
                                                0.48
                                                
                                                
                                                0.08
                                                
                                                
                                                11.00
                                                
                                                
                                                1.75Third
      Quarter
                                                
                                                2.65
                                                
                                                
                                                1.50
                                                
                                                
                                                0.74
                                                
                                                
                                                0.20
                                                
                                                
                                                0.73
                                                
                                                
                                                0.32
                                                
                                                
                                                11.75
                                                
                                                
                                                6.40Fourth
      Quarter
                                                
                                                2.35
                                                
                                                
                                                1.00
                                                
                                                
                                                0.30
                                                
                                                
                                                0.07
                                                
                                                
                                                0.30
                                                
                                                
                                                0.15
                                                
                                                
                                                6.40
                                                
                                                
                                                4.252009First
      Quarter
                                                
                                                1.20
                                                
                                                
                                                0.55
                                                
                                                
                                                0.12
                                                
                                                
                                                0.05
                                                
                                                
                                                0.15
                                                
                                                
                                                0.12
                                                
                                                
                                                4.25
                                                
                                                
                                                2.00Second
      Quarter
                                                
                                                0.98
                                                
                                                
                                                0.60
                                                
                                                
                                                0.06
                                                
                                                
                                                0.05
                                                
                                                
                                                0.12
                                                
                                                
                                                0.05
                                                
                                                
                                                2.00
                                                
                                                
                                                2.00
  As of
September 30, 2009, there were approximately 61 holders of record of our common
stock, 8 holders of record of our Class W warrants, 8 holders of record of our
Class Z warrants, and 60 holders of record of our Class Y warrants.
  Dividend
Policy
  We have
not paid any dividends on our common stock to date and do not anticipate paying
any dividends in the foreseeable future. We intend to retain future earnings, if
any, in the operation and expansion of our business. Any future determination to
pay cash dividends will be made at the discretion of our board of directors and
will depend on our financial condition, results of operations, capital
requirements and other factors that our board of directors deems relevant.
Investors should not purchase our common stock with the expectation of receiving
cash dividends.
  Securities
Authorized for Issuance under Equity Compensation Plans
  The
table setting forth this information is included in Part III-Item 12, “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.”
  19
  Item
7.         Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this report. In addition
to historical consolidated financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this report,
particularly in “Risk Factors” in Item 1A.
  Overview
  We are an
independent developer and publisher of interactive entertainment software. We
utilize our network of independent studios and developers to create videogames
for all popular
videogame systems, including:
  ·
              home videogame consoles such as
      Microsoft Xbox360, NintendoWii,Sony PlayStation 3 and Sony
      PlayStation 2;
  ·
              handheld platforms such as
      Nintendo DS, Nintendo DSi, Sony PSP, Sony PSPgo, and Apple iPhone;
      and
  ·
              personal
      computers.
  Our
portfolio of games extends across a variety of consumer demographics, ranging
from adults to children and hard-core game enthusiasts to casual
gamers.
  We are an
“indie” videogame developer and publisher working with independent software
developers and videogame studios to create our videogames. We have cultivated
relationships globally with independent developers and studios that provide us
with innovative and compelling videogame concepts.
  Our
strategy is to establish a portfolio of successful proprietary content for the
major videogame
systems, and to capitalize on the growth of the interactive entertainment
market. We currently work exclusively with independent software developers and
videogame studios to develop our videogames. This strategy enables us to source
and create highly innovative videogames while avoiding the high fixed costs and
risk of having a large internal development studio. Through outsourcing, we are
also able to access videogame concepts and content from emerging studios
globally, providing us with significant new product opportunities with limited
initial financial outlay.
  Sources
of Revenue
  Revenue
is primarily derived from the sale software titles developed on our behalf by
third parties and other content partnerships. Our unique business model of
sourcing and developing creative product allows us to better manage our fixed
costs relative to industry peers.
  Our
operating margins are dependent in part upon our ability to continually release
new products that perform according to our budgets and forecasts, and manage our
product development costs. Our product development costs include license
acquisition, videogame development, and third party royalties. Agreements with
third party developers generally give us exclusive publishing and marketing
rights and require us to make advance royalty payments, pay royalties based on
product sales and satisfy other conditions.
  Fiscal
Year 2009 Releases
  We
released the following videogames in fiscal year 2009:
  Title
                      
                      Platform
                      
                      Date
      ReleasedMr.
      Slime
                      
                      NDS
                      
                      7/14/2008B-Boy
                      
                      PS2,
      PSP
                      
                      7/28/2008Monster
      Madness – Grave Danger
                      
                      PS3
                      
                      8/4/2008Two
      Worlds Epic
                      
                      PC
                      
                      8/19/2008Igor
                      
                      NDA,
      Wii, PC
                      
                      9/15/2008Ninjatown
                      
                      NDS
                      
                      10/16/2008Bella
      Sara
                      
                      NDS,
      PC
                      
                      10/21/2008My
      Baby Boy
                      
                      NDS
                      
                      10/21/2008My
      Baby Girl
                      
                      NDS
                      
                      10/21/2008Legendary
                      
                      X360,
      PS3, PC
                      
                      11/10/2008Rise
      of the Argonauts
                      
                      X360,
      PS3, PC
                      
                      12/12/2008Big
      Bang Mini
                      
                      NDS
                      
                      1/21/2009X-Blades
                      
                      PC,
      PS3, X360
                      
                      2/10/2009Penumbra
      Collection
                      
                      PC
                      
                      2/17/2009Velvet
      Assassin
                      
                      X360,
      PC
                      
                      4/20/2009Pirates
      vs. Ninjas Dodgeball
                      
                      Wii
                      
                      5/4/2009Roogoo:
      Twisted Towers
                      
                      Wii
                      
                      6/24/2009Roogoo:
      Attack!
                      
                      NDS
                      
                      6/25/2009
  20
  Critical
Accounting Policies and Estimates
  Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Estimates were based on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ materially
from these estimates under different assumptions or conditions.
  We have
identified the policies below as critical to our business operations and the
understanding of our financial results. The impact and any associated risks
related to these policies on our business operations are discussed throughout
management’s discussion and analysis of financial condition and results of
operations where such policies affect our reported and expected financial
results.
  Allowances for Returns, Price
Protection and Other Allowances.We accept returns from, and
grant price concessions to, our customers under certain conditions. Following
reductions in the price of our videogames, we grant price concessions to permit
customers to take credits against amounts they owe us with respect to videogames
unsold by them. Our customers must satisfy certain conditions to entitle them to
return videogames or receive price concessions, including compliance with
applicable payment terms and confirmation of field inventory levels and
sell-through rates.
  We make
estimates of future videogame returns and price concessions related to current
period revenue. We estimate the amount of future returns and price concessions
for published titles based upon, among other factors, historical experience and
performance of the titles in similar genres, historical performance of the
videogame system, customer inventory levels, analysis of sell-through rates,
sales force and retail customer feedback, industry pricing, market conditions
and changes in demand and acceptance of our videogame by consumers.
  Significant
management judgments and estimates must be made and used in connection with
establishing the allowance for returns and price concessions in any accounting
period. We believe we can make reliable estimates of returns and price
concessions. However, actual results may differ from initial estimates as a
result of changes in circumstances, market conditions and assumptions.
Adjustments to estimates are recorded in the period in which they become
known.
  Inventories.Inventories are
stated at the lower of average cost or market. Management regularly reviews
inventory quantities on hand and in the retail channel and records a provision
for excess or obsolete inventory based on the future expected demand for our
games. Significant changes in demand for our games would impact management’s
estimates in establishing the inventory provision.
  Advances on Royalties.We
utilize independent software developers to develop our videogames and make
payments to the developers based upon certain contract milestones. We enter into
contracts with the developers once the videogame design has been approved by the
videogame system manufacturers and is technologically feasible. Accordingly, we
capitalize such payments to the developers during development of the videogames.
These payments are considered non-refundable royalty advances and are applied
against the royalty obligations owed to the developer from future sales of the
videogame. Any pre-release milestone payments that are not prepayments against
future royalties are expensed to “cost of goods sold - royalties” in the period
when the game is released. Capitalized royalty costs for those videogames that
are cancelled or abandoned are charged to “cost of goods sold - royalties” in
the period of cancellation.
  Beginning
upon the related videogame's release, capitalized royalty costs are amortized to
“cost of goods sold – royalties,” based on the ratio of current revenues to
total projected revenues for the specific videogame, generally resulting in an
amortization period of twelve months or less.
  21
  We
evaluate the future recoverability of capitalized royalty costs on a quarterly
basis. For videogames that have been released in prior periods, the primary
evaluation criterion is actual title performance. For videogames that are
scheduled to be released in future periods, recoverability is evaluated based on
the expected performance of the specific videogame to which the royalties
relate. Criteria used to evaluate expected game performance include: historical
performance of comparable videogames developed with comparable technology;
orders for the videogame prior to its release; and, for any videogame sequel,
estimated performance based on the performance of the videogame on which the
sequel is based.
  Significant
management judgments and estimates are utilized in the assessment of the
recoverability of capitalized royalty costs. In evaluating the recoverability of
capitalized royalty costs, the assessment of expected videogame performance
utilizes forecasted sales amounts and estimates of additional costs to be
incurred. If revised forecasted or actual videogame sales are less than, and/or
revised forecasted or actual costs are greater than, the original forecasted
amounts utilized in the initial recoverability analysis, the net realizable
value may be lower than originally estimated in any given quarter, which could
result in an impairment charge. Material differences may result in the amount
and timing of charges for any period if management makes different judgments or
utilizes different estimates in evaluating these qualitative
factors.
  Intellectual Property Licenses.Intellectual property license costs consist of fees paid by us to license
the use of trademarks, copyrights, and software used in the development of
videogames. Depending on the agreement, we may use acquired intellectual
property in multiple videogames over multiple years or for a single videogame.
When no significant performance remains with the licensor upon execution of the
license agreement, we record an asset and a liability at the contractual amount.
We believe that the contractual amount represents the fair value of the
liability. When significant performance remains with the licensor, we record the
payments as an asset when paid to the licensee and as a liability upon
achievement of certain contractual milestones rather than upon execution of the
agreement. We classify these obligations as current liabilities to the extent
they are contractually due within the next 12 months. Capitalized intellectual
property license costs for those videogames that are cancelled or abandoned are
charged to “cost of goods sold - intellectual property licenses” in the period
of cancellation.
  Beginning
upon the related video game's release, capitalized intellectual
property license costs are amortized to “cost of sales - intellectual property
licenses” based on the greater of: (1) the ratio of current revenues for the
specific videogame to total projected revenues for all videogames in which the
licensed property will be utilized or (2)
the straight-line amortization based on the useful lives of the asset. As
intellectual property license contracts may extend for multiple years, the
amortization of capitalized intellectual property license costs relating to such
contracts may extend beyond one year.
  We
evaluate the future recoverability of capitalized intellectual property license
costs on a quarterly basis. For videogames that have been released in prior
periods, the primary evaluation criterion is actual title performance. For
videogames that are scheduled to be released in future periods, recoverability
is evaluated based on the expected performance of the specific videogames to
which the costs relate or in which the licensed trademark or copyright is to be
used. Criteria used to evaluate expected game performance include: historical
performance of comparable videogames developed with comparable technology;
orders for the game prior to its release; and, for any videogame sequel,
estimated performance based on the performance of the videogame on which the
sequel is based. Further, as intellectual property licenses may extend for
multiple videogames over multiple years, we also assess the recoverability of
capitalized intellectual property license costs based on certain qualitative
factors, such as the success of other products and/or entertainment vehicles
utilizing the intellectual property and the holder’s right to continued
promotion and exploitation of the intellectual property.
  Significant
management judgments and estimates are utilized in the assessment of the
recoverability of capitalized intellectual property license costs. In evaluating
the recoverability of capitalized intellectual property license costs, the
assessment of expected game performance utilizes forecasted sales amounts and
estimates of additional costs to be incurred. If revised forecasted or actual
videogame sales are less than, and/or revised forecasted or actual costs are
greater than, the original forecasted amounts utilized in the initial
recoverability analysis, the net realizable value may be lower than originally
estimated in any given quarter, which could result in an impairment charge.
Material differences may result in the amount and timing of charges for any
period if management makes different judgments or utilizes different estimates
in evaluating these qualitative factors.
  Revenue
Recognition. We
recognize revenues from the sale of our video games upon the transfer of title
and risk of loss to the customer.  We apply the provisions of
Statement of Position 97-2, “Software Revenue Recognition,” in conjunction with
the applicable provisions of Staff Accounting Bulletin No. 104, “Revenue
Recognition.” Accordingly, we recognize revenues for software titles when (1)
there is persuasive evidence that an arrangement with the customer exists, which
is generally a purchase order, (2) the product is delivered, (3) the selling
price is fixed or determinable and (4) collection of the customer receivable is
deemed probable. Our payment arrangements with customers typically provide for
net 30 and 60 day terms. Advances received for licensing and exclusivity
arrangements are reported on the consolidated balance sheets as deferred
revenues until we meet our performance obligations, at which point the revenues
are recognized. Revenue is recognized after deducting estimated reserves for
returns, price protection and other allowances. In circumstances when we do not
have a reliable basis to estimate returns and price protection or is unable to
determine that collection of a receivable is probable, we defer the revenue
until such time as we can reliably estimate any related returns and allowances
and determine that collection of the receivable is probable.
 
 Some of
our video games provide limited online features at no additional cost to the
consumer. Generally, we consider such features to be incidental to the overall
product offering and an inconsequential deliverable. Accordingly, we recognize
revenue related to video games containing these limited online features upon the
transfer of title and risk of loss to our customer. In instances where online
features or additional functionality arc considered a substantive deliverable in
addition to the video game, we take this into account when applying our revenue
recognition policy. This evaluation is performed for each video game together
with any online transactions, such as electronic downloads or video game add-ons
when it is released. When we determine that a video game contains online
functionality that constitutes a more-than-inconsequential separate service
deliverable in addition to the video game, principally because of its importance
to game play, we consider that our performance obligations for this game extend
beyond the delivery of the game. Fair value does not exist for the online
functionality, as we do not separately charge for this component of the video
game. As a result, we recognize all of the revenue from the sale of the game
upon the delivery of the remaining online functionality. In addition, we defer
the costs of sales for this game and recognizes the costs upon delivery of the
remaining online functionality.
  22
  With
respect to online transactions, such as electronic downloads of games or add-ons
that do not include a more-than-inconsequential separate service deliverable,
revenue is recognized when the fee is paid by the online customer to purchase
online content and we are notified by the online retailer that the product has
been downloaded. In addition, persuasive evidence of an arrangement must exist,
collection of the related receivable must be probable and the fee must be fixed
and determinable.
 
 Third-party
licensees in Europe distribute Gamecock’s video games under license agreements
with Gamecock. The licensees paid certain minimum, non-refundable, guaranteed
royalties when entering into the licensing agreements. Upon receipt of the
advances, we defer their recognition and recognize the revenues in subsequent
periods as these advances are earned by us. As the licensees pay additional
royalties above and beyond those initially advanced, we recognize these
additional royalties as revenues when earned.
 
 With
respect to license agreements that provide customers the right to make multiple
copies in exchange for guaranteed amounts, revenue is recognized upon delivery
of a master copy. Per copy royalties on sales that exceed the guarantee are
recognized as earned. In addition, persuasive evidence of an arrangement must
exist, collection of the related receivable must be probable, and the fee must
be fixed and determinable.
  Stock-Based Compensation.We
account for stock-based compensation in accordance with SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires companies
to estimate the fair value of share-based payment awards on the measurement date
using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
periods in the consolidated statements of operations.
  Stock-based
compensation expense recognized in the consolidated statements of operations is
based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
  We account
for equity instruments issued to non-employees in accordance with SFAS No. 123R
and EITF No. 96-18, “Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services.”
  We
estimate the value of employee,
non-employee director and non-employee stock options on the date of grant
using the Black-Scholes option pricing model. Our determination of fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to; the expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors.
  Amortizable Intangible Assets.Intangible assets subject to amortization are carried at cost less
accumulated amortization. Amortizable intangible assets consist of game sequels,
non-compete agreements and distribution agreements. Intangible assets subject to
amortization are amortized over the estimated useful life in proportion to the
pattern in which the economic benefits are consumed, which for some intangibles
assets are approximated by using the straight-line method. Long-lived assets
including amortizable intangible assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”) whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset
and its eventual disposition. Measurement of any impairment loss for long-lived
assets and amortizable intangible assets is based on the amount by which the
carrying value exceeds the fair value of the asset.
  Business Combinations. We
estimate the fair value of assets acquired, and liabilities assumed in a
business combination. Our assessment of the estimated fair value of each of
these can have a material effect on our reported results as intangible assets
are amortized over various lives. Furthermore, a change in the estimated fair
value of an asset or liability often has a direct impact on the amount to
recognize as goodwill, an asset that is not amortized. Often determining the
fair value of these assets and liabilities assumed requires an assessment of
expected use of the asset, the expected future cash flows related to the asset,
and the expected cost to extinguish the liability. Such estimates are inherently
difficult and subjective and can have a material impact on our financial
statements.
  Assessment of Impairment of
Goodwill.SFAS No. 142, “Goodwill and Other Intangible Assets,” requires
a two-step approach to testing goodwill for impairment. SFAS No. 142 requires
that the impairment test be performed at least annually by applying a
fair-value-based test. The first step measures for impairment by applying
fair-value-based tests. The second step (if necessary) measures the amount of
impairment by applying fair-value-based tests to the individual assets and
liabilities.
  23
  To
determine the fair values of the reporting units used in the first step, we use
a combination of the market approach, which utilizes comparable companies’ data
and/or the income approach, or discounted cash flows. Each step requires us to
make judgments and involves the use of significant estimates and assumptions.
These estimates and assumptions include long-term growth rates and operating
margins used to calculate projected future cash flows, risk-adjusted discount
rates based on our weighted average cost of capital, future economic and market
conditions and determination of appropriate market comparables. These estimates
and assumptions have to be made for each reporting unit evaluated for
impairment. Our estimates for market growth, our market share and costs are
based on historical data, various internal estimates and certain external
sources, and are based on assumptions that are consistent with the plans and
estimates we are using to manage the underlying business. Our business consists
of publishing and distributing interactive entertainment software and content
using both established and emerging intellectual properties and our forecasts
for emerging intellectual properties are based upon internal estimates and
external sources rather than historical information and have an inherently
higher risk of accuracy. If future forecasts are revised, they may indicate or
require future impairment charges. We base our fair value estimates on
assumptions we believe to be reasonable but that are unpredictable and
inherently uncertain. Actual future results may differ from those
estimates.
  Costs
of Goods Sold and Operating Expenses
  Cost of Goods Sold. Cost of
goods sold consists of royalty payments to third party developers, license fees
to videogame manufacturers, intellectual property costs for items such as
trademarked characters and game engines, manufacturing costs of the videogame
discs, cartridges or similar media and the
write-off of acquired game sequel titles. Videogame system manufacturers
approve and manufacture each videogame for their videogame system. They charge
their license fee for each videogame based on the expected retail sales price of
the videogame. Such license fee is paid by us based on the number of videogames
manufactured. Should some of the videogames ultimately not be sold, or the sales
price to the retailer be reduced by us through price protection, no adjustment
is made by the videogame system manufacturer in the license fee originally
charged. Therefore, because of the terms of these license fees, we may have an
increase in the cost of goods as a percent of net revenue should we fail to sell
a number of copies of a videogame for which a license has been paid, or if the
price to the retailer is reduced.
  We
utilize third parties to develop our videogames on a royalty payment basis. We
enter into contracts with third party developers once the videogame design has
been approved by the videogame system manufacturer and is technologically
feasible. Specifically, payments to third party developers are made when certain
contract milestones are reached, and these payments are capitalized. These
payments are considered non-refundable royalty advances and are applied against
the royalty obligations owing to the third party developer from the sales of the
videogame. To the extent these prepaid royalties are sales performance related,
the royalties are expensed against projected sales revenue at the time a
videogame is released and charged to costs of goods sold. Any pre-release
milestone payments that are not prepayments against future royalties are
expensed when a videogame is released and then charged to costs of goods sold.
Capitalized costs for videogames that are cancelled or abandoned prior to
product release are charged to “cost of goods sold - royalties” in the period of
cancellation.
  Warehousing and Distribution
Expenses. Our warehousing and distribution expenses primarily consist of
costs associated with warehousing, order fulfillment, and shipping. Because we
use third-party warehousing and order fulfillment companies in the United States
and in Europe, the expansion of our product offerings and escalating sales will
increase our expenditures for warehousing and distribution in proportion to our
increased sales.
  Sales and Marketing Expenses.
Sales and marketing expenses consist of advertising, marketing and promotion
expenses, and commissions to external sales representatives. As the number of
newly published videogames increases, advertising, marketing and promotion
expenses are expected to rise accordingly. We recognize advertising, marketing
and promotion expenses as incurred, except for production costs associated with
media advertising, which are deferred and charged to expense when the related ad
is run for the first time. We also engage in cooperative marketing with some of
our retail channel partners. We accrue marketing and sales incentive costs when
revenue is recognized and such amounts are included in sales and marketing
expense when an identifiable benefit to us can be reasonably estimated;
otherwise, the incentives are recognized as a reduction to net revenues. Such
marketing is offered to our retail channel partners based on a single sales
transaction, as a credit on their accounts receivable balance, and would include
items such as contributing to newspaper circular ads and in store banners and
displays.
  General and Administrative
Expenses. General and administrative expenses primarily represent
personnel-related costs, including corporate executive and support staff,
general office expenses, consulting and professional fees, and various other
expenses. Personnel-related costs represent the largest component of general and
administrative expenses. We expect that our personnel costs will increase as the
business continues to grow. We expect to incur additional increased costs for
personnel and consultants as a result of becoming a publicly traded company
which requires compliance and adherence to new regulations for corporate
governance and accounting. Depreciation expense also is included in general and
administrative expenses.
  24
  Interest and Financing Costs.
Interest and financing costs are attributable to our line of credit and
financing arrangements that are used to fund development of videogames with
third parties, which often takes 12-24 months. Additionally, such costs are used
to finance the accounts receivables prior to payment by customers.
  Consolidated
Results of Operations
  The
following table sets forth our results of operations expressed as a percentage
of net revenues for fiscal years 2009 and 2008:
  For the year ended June 30,2009
                                                        
                                                        
                                                        2008Net
      revenues
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        100.0
                                                        %Cost
      of goods sold:Product
      costs
                                                        
                                                        
                                                        51.5
                                                        %
                                                        
                                                        
                                                        55.5
                                                        %Royalties
                                                        
                                                        
                                                        20.4
                                                        %
                                                        
                                                        
                                                        12.3
                                                        %Write-off
      of acquired game sequel titles
                                                        
                                                        
                                                        2.4
                                                        %
                                                        
                                                        
                                                        -Intellectual
      property licenses
                                                        
                                                        
                                                        1.0
                                                        %
                                                        
                                                        
                                                        -Total
      cost of goods sold
                                                        
                                                        
                                                        75.3
                                                        %
                                                        
                                                        
                                                        67.8
                                                        %Gross
      profit
                                                        
                                                        
                                                        24.7
                                                        %
                                                        
                                                        
                                                        32.2
                                                        %Operating
      expenses:Warehousing
      and distribution
                                                        
                                                        
                                                        2.7
                                                        %
                                                        
                                                        
                                                        1.2
                                                        %Sales
      and marketing
                                                        
                                                        
                                                        24.9
                                                        %
                                                        
                                                        
                                                        11.0
                                                        %Restructuring
      costs
                                                        
                                                        
                                                        1.4
                                                        %
                                                        
                                                        
                                                        -Transaction
      costs
                                                        
                                                        
                                                        0.1
                                                        %
                                                        
                                                        
                                                        3.9
                                                        %General
      and administrative
                                                        
                                                        
                                                        20.6
                                                        %
                                                        
                                                        
                                                        9.1
                                                        %Total
      operating expenses
                                                        
                                                        
                                                        49.6
                                                        %
                                                        
                                                        
                                                        25.2
                                                        %Operating
      (loss) income
                                                        
                                                        
                                                        (25.0
                                                        )%
                                                        
                                                        
                                                        7.0
                                                        %Interest
      expense, net
                                                        
                                                        
                                                        0.8
                                                        %
                                                        
                                                        
                                                        3.0
                                                        %(Loss)
      income before taxes
                                                        
                                                        
                                                        (25.8
                                                        )%
                                                        
                                                        
                                                        4.0
                                                        %Income
      tax expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (0.2
                                                        )%Net
      (loss) income
                                                        
                                                        
                                                        (25.8
                                                        )%
                                                        
                                                        
                                                        3.8
                                                        %Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
                                                        
                                                        
                                                        2.4
                                                        %
                                                        
                                                        
                                                        20.9
                                                        %Net
      loss attributable to common shareholders
                                                        
                                                        
                                                        (28.2
                                                        )%
                                                        
                                                        
                                                        (17.1
                                                        )%
  Years
ended June 30, 2009 and June 30, 2008
  Net Revenues. Net revenues
for fiscal year 2009 were $47,307,960, an increase of $7,154,866, or 18%, from
net revenues of $40,153,094 for fiscal year 2008. The increase in net revenues
was primarily driven by releasing an increased number of titles. For fiscal year
2009, the number of videogame units sold increased to approximately 2,418,000,
an increase of 1,190,000 units from the units sold in fiscal year 2008. Average
net revenue per videogame unit sold decreased 40%, from $32.70 to $19.56 for
fiscal years 2008 and 2009, respectively. This average decrease in price is
mainly due to selling more handheld units, which have a lower MSRP, in
fiscal year 2009 versus 2008.
  Cost of Goods Sold. Cost of
goods sold for fiscal year 2009 increased to $35,628,868, up $8,423,509, or 31%,
from $27,205,359 for fiscal year 2008. The cost of royalty expense for fiscal
year 2009 increased 96% from the cost of royalty expense for fiscal year 2008.
This increase is attributable to increased developer royalty agreements
associated with the increased number of titles released during the
period.
  Gross Profit. For fiscal
years 2009 and 2008, gross profit decreased to $11,679,092 from $12,947,735, or
10%, and gross profit margin decreased to approximately 25% from 32%. The
decrease in gross profit isattributed to royalties for an increased number of titles released in the
period, an increase in reserves to address current economic conditions, write
offs of acquired game sequels from the Gamecock Acquisition, a percentage
increase in handheld videogame sales (which have a lower gross margin) and the
amortization of intellectual property licenses.
  25
  Warehousing and Distribution
Expenses. For fiscal years 2009 and 2008, warehousing and distribution
expenses were $1,254,947 and $468,008, respectively, resulting in an increase of
168%. This increase is due primarily to the increase in the number of units
shipped from 1,228,000 in 2008 to 2,418,000 in 2009.
  Sales and Marketing Expenses.
For fiscal year 2009, sales and marketing expenses increased 166% to $11,778,958
from $4,434,894 for fiscal year 2008. This increase is primarily due to our
investment in several key brands, including My
Baby. Sales and marketing costs vary on a videogame by videogame basis
depending on market conditions and consumer demand, and do not necessarily
increase or decrease proportionate to sales volumes. For fiscal year 2009, we
incurred $3,800,000 in marketing costs that will benefit us in future
periods. Included in sales and marketing expenses for fiscal year 2009 is a
non-cash charge of $92,299 for stock options granted to vendor.
  General and Administrative
Expenses.For
fiscal year 2009, general and administrative expenses increased 167% to
$9,748,754 from $3,650,017 for fiscal year 2008. For
fiscal year 2009, general and administrative expenses increased 167% to
$9,748,754 from $3,650,017 for fiscal year 2008.  The increase in
general and administrative expenses was primarily due to wages of $3,589,687,
professional fees of $1,538,603 and a non-cash charge of $649,319 related to
employee stock options and restricted stock. Wages
increased from $1,193,883 for fiscal year 2008 to $3,589,687 for fiscal year
2009, an increase of 201%. On December 31, 2007, we terminated a consulting
agreement which paid for staff related expenses, occupancy costs, telephones and
communications expenses, and office supplies. The consulting fee totaled
$920,930 for fiscal year 2008 and $0 for fiscal year 2009. Professional fees
increased 744% from $182,359 for fiscal year 2008 to $1,538,603 for fiscal year
2009 as a result of litigation resulting from the Gamecock Acquisition,the current litigation
relating to CDV and other Gamecock related claims, and increased costs
associated with being a public company. Travel and entertainment expenses were
$429,413 for fiscal year 2008, as compared to $428,817 for fiscal year
2009. General and administrative expenses as a percentage of net revenues
increased, to approximately 21% for fiscal year 2009 from 9% for fiscal year
2008.
  Restructuring Costs: For
fiscal year 2009, we incurred $639,210 in restructuring costs related to the
Gamecock Acquisition. These primarily consist of salaries and severance for
Gamecock employees who separated from service after the Gamecock Acquisition as
part of restructuring Gamecock's operations and rent expense for the Gamecock
office space that is no longer in use.
  Transaction Costs. For fiscal
year 2009, we incurred $64,628 in costs related to the Gamecock Acquisition.
These costs included professional fees to accounting firms, law firms and
advisors and travel expenses related to the Gamecock Acquisition.
  Operating Loss/ Income. For
fiscal year 2009, our operating loss was $11,807,405, as compared to operating
income of $2,814,870 for fiscal year 2008.
  Interest and Financing Costs.
For fiscal year 2009, interest and financing costs decreased to $399,247 from
$1,191,014 for fiscal year 2008 due to a decrease in average borrowings as a
result of the increase in working capital provided by the sale of Series A
convertible preferred stock in 2008 and 2009. Also, the interest rate on our
line of credit decreased in 2009.
  Net Loss/Income. For fiscal
year 2009, our net loss was $12,206,652, as compared to net income of
$1,553,558 for fiscal year 2008.
  Quarterly
Operating Results Not Meaningful
  Our
quarterly net revenues and operating results have varied widely in the past and
can be expected to vary in the future, due to numerous factors, several of which
are not under our control. These factors include the timing of our release of
new titles, the popularity of both new titles and titles released in prior
periods, changes in the mix of titles with varying gross margins, the timing of
customer orders and fluctuations in consumer demand for gaming platforms.
Accordingly, our management believes that quarter-to-quarter comparisons of our
operating results are not meaningful.
  Liquidity
and Capital Resources
  Our
primary cash requirements have been to fund (i) the development, manufacturing
and marketing of our videogames, (ii) working capital and (iii) capital
expenditures. Historically, we have met our capital needs through our operating
activities, our line of credit and, prior to the acquisition of SouthPeak by us,
loans from related parties and our stockholders. Our cash and cash equivalents
were $648,311 and $4,095,036 at June 30, 2009 and 2008,
respectively.
  Line of Credit. We
have a line of credit with a financial institution, which comes due on
November 30, 2009 and is currently in the process of being renewed, with a
maximum outstanding amount of $7.5 million. The line of credit bears interest at
prime plus 1⁄2%, which was 3.75% at June 30, 2009. Availability under the line of
credit is restricted to 65% of our eligible accounts receivable from North
American operations. The line of credit is primarily secured by our accounts
receivable. The line of credit is further secured by the personal guarantees,
and pledge of personal securities and assets, of two of our shareholders and
certain of their affiliates. At June 30, 2009, we were in compliance with
all of the line of credit’s covenants and requirements.
  26
  At June
30, 2009 and 2008, the outstanding line of credit balance was $5,349,953 and
$4,851,819, respectively, and the remaining available under the line of credit
amounted to $-0- and $148,181, respectively.
  Account Receivable.
Generally, we have been able to collect our accounts receivable in the ordinary
course of business. We do not hold any collateral to secure payment from
customers. We are subject to credit risks, particularly if any of our accounts
receivable represent a limited number of customers. If we are unable to collect
our accounts receivable as they become due, it could adversely affect our
liquidity and working capital position.
  At June
30, 2009 and 2008, amounts due from our three largest customers comprised
approximately 52% and 56% of our gross accounts receivable balance,
respectively. We believe that the receivable balances from these largest
customers do not represent a significant credit risk based on past collection
experience, although we actively monitor each customer’s credit worthiness and
economic conditions that may impact our customers’ business and access to
capital. We are monitoring the current turmoil in the economy, the global
contraction of current credit and other factors as it relates to our customers
in order to manage the risk of uncollectible accounts receivable.
  Our
accounts payable for the fiscal years ended June 30, 2009 and 2008 increased
$5,427,913, or 38%, to $19,686,168.  This increase was mainly attributable
to liabilities incurred by Gamecock prior to the Gamecock Acquisition, along
with expenses incurred to support the release of new videogames for the quarter
ended September 30, 2009.  Our accrued expenses for the fiscal years ended
June 30, 2009 and 2008 increased $962,185, or 66%, to $2,419,100.  This
increase was primarily attributed to marketing expenses for videogames to be
shipped in subsequent periods and marketing investments made to develop "My
Baby" brand awareness which will benefit us in future periods as we ship
product sequels.  Several of our fiscal year-end accounts payable
associated with pre-acquisition obligations of Gamecock have been settled at
substantial discounts.  Other Gamecock payables along with SouthPeak
related obligations are subject to adjustments, which we anticipate will
materially reduce our accounts payable balance.  The revenue generated from
new videogame releases in the first quarter of our 2010 fiscal year along with
the anticipated revenue generated in the second quarter should enable us to
further reduce our accounts payable and accrued expense
balances.
  Preferred Stock. During the
fourth quarter of fiscal year 2008 and the first half of fiscal year 2009, we
sold 14,563,833 shares of preferred stock valued at $14,563,833, which provided
additional liquidity to fund our continued growth through investment in
videogame development.
  Although
there can be no assurance, we believe our current cash and cash equivalents and
projected cash flow from operations, along with availability under our line of
credit, will provide us with sufficient liquidity to satisfy our cash
requirements for working capital, capital expenditures and commitments through
at least the next 12 months. In addition, if we were unable to fully fund our
cash requirements through current cash and cash equivalents and projected cash
flow from operations, we would need to obtain additional financing through a
combination of equity and debt financings. If any such activities become
necessary, there can be no assurance that we would be successful in obtaining
additional financing, particularly in light of the general economic
downturn.
  Cash Flows. We expect that we
will make significant expenditures relating to advances on royalties to
third-party developers to fund our continued growth. Cash flows from operations
are affected by our ability to release successful titles. Though many of these
titles have substantial royalty advances and marketing expenditures, once a
title recovers these costs, incremental net revenues typically will directly and
positively impact cash flows.
  For
fiscal years 2009 and 2008, we had net cash used in operating activities of
$3,251,878 and $6,163,950, respectively. In addition to the $12,206,652 net loss
for the year ended June 30, 2009, other factors that led to our negative cash
flow from operations payments related to royalty advances, and the pay-off of
certain liabilities which Gamecock incurred prior to the Gamecock
acquisition.
  Cash used
in investing activities for fiscal years 2009 and 2008 was $1,853,431 and
$708,290, respectively. The cash used in investing activities for both years was
related to the purchase of office and computer equipment and the Gamecock
Acquisition.
  During
fiscal year 2009, financing activities resulted in net cash provided of
$1,869,864 and during fiscal year 2008, financing activities resulted in net
cash provided of $10,511,909.
  As our
gross profit margins increase, our operating cash flows are expected to
contribute more towards our capital needs in the future. The Gamecock
acquisition caused a short-term strain on our cash flows, as we needed to
fund the payment of certain liabilities Gamecock incurred prior to the Gamecock
acquisition. This short-term strain on cash flows limited our ability to fund
additional production of a successful videogame. As a result, our Chairman,
Terry Phillips, advanced $307,440 to us in order to fund the production of
additional cartridges for a particular videogame. The
advance was unsecured, payable on demand and non-interest bearing.  At
June 30, 2009, the amount due was $232,440.  Subsequent to June 30,
2009, the amount was repaid.
  International
Operations.Net
revenue earned outside of North America is principally generated by our
operations in Europe, Australia and Asia. For fiscal years 2009 and 2008,
approximately 11% and 14%, respectively, of our net revenue was earned outside
of the US. We are subject to risks inherent in foreign trade, including
increased credit risks, tariffs and duties, fluctuations in foreign currency
exchange rates, shipping delays and international political, regulatory and
economic developments, all of which can have a significant impact on our
operating results.
  27
  Item
7A. Quantitative and
Qualitative Disclosures about Market Risk
  We are
subject to market risks in the ordinary course of our business, primarily risks
associated with interest rate and foreign currency fluctuations.
  Interest Rate Risk. Our line
of credit bears interest at prime plus 1⁄2%, which was 3.75% at June 30, 2009. We
have two mortgages for facilities in Grapevine, Texas, which bear interest at
prime plus 1.0% (5.5% at June 30, 2009) and prime minus 1⁄4% (7.5% at June 30,
2009), respectively. Historically, fluctuations in interest rates have not had a
significant impact on our operating results, however, changes in market rates
may impact our future interest expense.
  Foreign Currency Risk. We
transact business in various foreign currencies and are exposed to financial
market risk resulting from fluctuations in foreign currency exchange rates,
particularly the British Pound and the Euro, which results in the recognition of
foreign currency transaction gains or losses. We monitor the volatility of the
British Pound, the Euro and all other applicable currencies frequently
throughout the year. While we have not engaged in foreign currency hedging, we
may in the future use hedging programs, currency forward contracts, currency
options and/or other derivative financial instruments commonly used to reduce
financial market risks if we determine that such hedging activities are
appropriate to reduce risk. We realized foreign currency transaction gains
(losses) of ($45,676) and ($237,699) in fiscal years 2009 and 2008,
respectively.
  Item
8. Financial Statements and
Supplementary Data
  Our
consolidated financial statements and related notes required by this item are
set forth as a separate section of this report. See Part IV, Item 15 of this
report.
  Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
  None.
  Item
9A(T). Controls and
Procedures
  Restatement
of Previously Issued Financial Statements
  In
connection with the filing of our Form 10-Q/A with the SEC on September 11,
2009, during the first fiscal quarter of 2010, management reevaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)). Based on that reevaluation, the Chief Executive Officer,
who is also serving as our interim Chief Financial Officer, and in consultation
with our Chairman, concluded that the our disclosure controls and procedures
were not effective as of March 31, 2009 as a result of the following material
weaknesses in our internal control over financial reporting.
  ·
              There
      were material operational deficiencies related to the preparation and
      review of financial information during our quarter end closing
      process.  These items resulted in more than a remote likelihood
      that a material misstatement or lack of disclosure within our interim
      financial statements would not be prevented or detected.  Our
      senior financial management lacked the necessary experience and we did not
      maintain a sufficient number of qualified personnel to support our
      financial reporting and close process. This reduced the likelihood that
      such individuals could detect a material adjustment to our books and
      records or anticipate, identify, and resolve accounting issues in the
      normal course of performing their assigned functions.  This
      material weakness resulted in adjustments to inventories, accounts
      payable, accrued royalties, accrued expenses and other current
      liabilities, due to shareholders, additional paid-in capital, product
      costs, royalties, sales and marketing and general and administrative
      expenses in our condensed consolidated financial statements for the three
      and nine month periods ended March 31,
2009.
  ·
              There
      were material operational deficiencies in our controls over related party
      transactions which resulted in a more than remote likelihood that a
      material misstatement or lack of disclosure in our interim financial
      statements would not be prevented or detected.  Management
      determined that established controls over related party transactions were
      not consistently applied to all related party transactions. This
      inconsistent application led to breakdowns in communication between
      management and our accounting department and resulted in an increased
      likelihood that the accounting department would not detect a significant
      transaction affecting us which would lead to a material adjustment to our
      books and records or a material change to the disclosure in the footnotes
      to our interim financial statements. This material weakness resulted in
      adjustments to inventories, due to shareholders, and product costs in our
      condensed consolidated financial statements for the three and nine month
      periods ended March 31, 2009.
  28
 ·
                There
      were material internal control and operational deficiencies related to the
      maintenance of our accruals and related expense accounts.  These
      items resulted in more than a remote likelihood that a material
      misstatement or lack of disclosure within our interim financial statements
      would not be prevented or detected.  Specifically, effective
      controls were not designed and in place to ensure the completeness,
      accuracy and timeliness of the recording of accruals for services provided
      and not billed at period end. This increased the likelihood that our
      accruals would be materially understated.  This material
      weakness resulted in adjustments to accounts payable, accrued royalties,
      accrued expenses and other current liabilities, product costs, royalties,
      sales and marketing and general and administrative expenses in our
      condensed consolidated financial statements for the three and nine month
      periods ended March 31, 2009.
  ·
                There
      were material internal control and operational deficiencies related to our
      reconciliation of inventory liability clearing accounts.  This
      item resulted in more than a remote likelihood that a material
      misstatement or lack of disclosure within our interim financial statements
      would not be prevented or detected.  Specifically, our account
      reconciliations, analyses and review procedures were ineffective as they
      lacked independent and timely review and separate review and approval of
      journal entries related to these accounts.  This material
      weakness resulted in adjustments to inventories in our condensed
      consolidated financial statements for the three and nine month periods
      ended March 31, 2009.
  Evaluation
of Disclosure Controls and Procedures
  An
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer, who is also serving as
our interim Chief Financial Officer, and in consultation with our Chairman and
our interim Chief Accounting Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, to ensure that the
information required to be disclosed by us in this annual report was recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and Form 10-K and that such information required to be disclosed was
accumulated and communicated to management, including our Chief Executive
Officer and our Chief Financial Officer, to allow timely decisions regarding
required disclosure.  Based upon this reevaluation, our Chief
Executive Officer, who is also serving as our interim Chief Financial Officer,
concluded that our disclosure controls and procedures were not effective as of
June 30, 2009 as a result of the previously identified material weaknesses in
our internal control over financial reporting.
  Management’s
Report on Internal Control over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the
participation of management, including our Chief Executive Officer, who is also
serving as our interim Chief Financial Officer, and in consultation with our
Chairman and our interim Chief Accounting Officer, we conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the
framework in “Internal Control — Integrated
Framework”issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in “Internal Control — Integrated
Framework”, our management concluded that our internal control over
financial reporting was not effective as of June 30, 2009 as a result of the
previously identified material weaknesses.
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.
  Changes
in Internal Control over Financial Reporting
  There
were no changes in our internal controls over financial reporting during the
quarter ended June 30, 2009 that have materially affected, or are reasonably
likely to affect, our internal control over financial reporting.
  Remediation
Steps to Address Material Weakness
  Beginning
in the first fiscal quarter of 2010, we began the process of remediating the
material weaknesses described above and enhancing our internal control over
financial reporting.  In connection with our remediation process, we
have taken the following remediation measures:
  ·
                we
      have hired an interim Chief Accounting Officer with the
      requisite experience in internal accounting in the videogame industry and
      made other related personnel
changes;
  ·
                we
      have provided training to our management and accounting personnel
      regarding established controls and procedures for related party
      transactions; and
  ·
                we
      have enhanced our computer software and internal procedures related to
      information technology in order to migrate from spreadsheet applications
      into automated functions within the accounting
  system.  29
  Additionally,
in connection with our remediation process we are implementing the following
remediation measures:
  ·
                we
      are developing additional training for our accounting personnel and
      reallocating duties of certain accounting
  personnel;
  ·
                we
      are enhancing procedures and documentation supporting our accruals;
      and
  ·
                we
      are incorporating more robust management review of our general and
      administrative expense accruals.
  Management
anticipates that the actions described above and the resulting improvements in
controls will strengthen its internal control over financial reporting relating
to the preparation of the condensed consolidated financial statements and will
remediate the material weakness identified by the end of our fiscal year
2010.  As we improve our internal control over financial reporting and
implement remediation measures, we may supplement or modify the remediation
measures described above.  Management is committed to implementing
effective control policies and procedures and will continually update our Audit
Committee as to the progress and status of our remediation efforts to ensure
that they are adequately implemented.
  Item 9B.Other
Information
  None.
  30
  PART III
  Item 10.Directors,
Executive Officers and Corporate Governance
  Our
executive officers, key employees and directors and their respective ages and
positions as of September 30, 2009 are as follows:
  Name
                      
                      Age
                      
                      PositionTerry
      Phillips*
                      
                      51
                      
                      ChairmanMelanie
      Mroz *
                      
                      46
                      
                      President,
      Chief Executive Officer, Interim Chief Financial Officer and
      DirectorReba
      L. McDermott*
                      
                      43
                      
                      Interim
      Chief Accounting OfficerDavid
      Buckel
                      
                      47
                      
                      DirectorLouis
      M. Jannetty
                      
                      56
                      
                      DirectorPaul
      Eibeler
                      
                      54
                      
                      Director
 
 *     Denotes an executive
officer
  Terry Phillips has served as
our chairman since May 2008. Prior to that, Mr. Phillips served as the managing
member of SouthPeak since 2000, when he purchased certain SouthPeak assets from
SAS Institute. Mr. Phillips is also the managing member of Phillips Sales, Inc.
(PSI), a company that he founded in 1991 that has become one of the largest
manufacturer representative agencies specializing in the videogame industry. PSI
represented many of the industry leading companies including, Sony Computer
Entertainment America, THQ, Take-Two, Midway, Capcom Namco and Konami. PSI was
awarded “manufacturer representative of the year” by Sony Computer Entertainment
America in 1998 and has generated over $2 billion in sales since inception. In
2003, substantially all of Phillips Sales was sold to an ESOP. From March
1999 to present, Mr. Phillips was the manager of Capitol Distributing,
L.L.C., a videogame distribution company. From 1987 to 1991, Mr. Phillips was
vice president of sales for Acclaim Entertainment, a videogame publisher. In an
administrative proceeding before the SEC, in May 2007, Mr. Phillips agreed to
cease and desist from committing or causing any violations of Section 10(b) of
the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1 and from causing any
violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange
Act Rules 12b-2, 13a-1 and 13a-13. This proceeding arose from the involvement in
2000 and 2001 of Mr. Phillips, Capital Distributing and another private
company in which he was a principal in certain actions of Take-Two Interactive
Software, Inc. Mr. Phillips holds a Bachelor of Science in Business
Administration from Elmira College in New York.
  Melanie Mroz has served as
our president, chief executive officer and director since May 2008. In August,
2009, Ms. Mroz assumed the duties of our interim chief financial
officer.  Ms. Mroz was a member of SouthPeak from 2000 until May 2008.
In 2005, she assumed responsibility for SouthPeak’s day-to-day operations.
 In 1996, Ms. Mroz joined Phillips Sales, Inc., one of the largest
manufacturer representative agencies in the videogame industry, to head its
representation of Sony Computer Entertainment America and thereafter assumed
other management duties. While at Phillips Sales, Inc., Ms. Mroz represented
some of the most successful videogame titles in the industry to major retailers,
including titles such as “Metal Gear Solid” from Konami America and “Grand Theft
Auto” from Take-Two Interactive Software, Inc. From January 1995 to December
1996, Ms. Mroz was the vice president of sales for Digital Pictures, Inc., a
private digital imaging, animation, and video products producer. From March 1992
to January 1995, Ms. Mroz was the national sales manager for Sony Imagesoft. Ms.
Mroz entered the interactive software industry in 1986 with entertainment and
educational software distributor SoftKat, then a division of W.R.Grace &
Co. Ms. Mroz began with SoftKat as a buyer in the purchasing
department and later became the director of purchasing. Ms. Mroz holds a
Bachelor of Science from Winona State University in Minnesota.
  Reba McDermott has served as
our interim chief accounting officer since August 2009.  Prior to joining
the Company, she served as the chief financial officer of OuterNet Management,
LP, an Austin, Texas-based data center services company providing network
security, software as a service, virtualization, hosted business applications
and private cloud architectures, from December 2008 until August
2009.  From June 2007 until November 2008, Ms. McDermott served
as the assistant plant controller and the plant controller at the Canton, New
York facility of Corning, Inc., a Fortune 500 specialty glass and ceramics
manufacturer.  Prior to joining Corning, Inc., from February 2005
until February 2007, Ms. McDermott served as assistant controller and corporate
controller for Aspyr Media, Inc., an Austin, Texas-based developer and
distributor of video games. From 2000 until 2005, Ms. McDermott served in
various capacities, including cost accounting manager and revenue analyst, for
Silicon Laboratories, Inc., a semiconductor manufacturer in Austin,
Texas.  Ms. McDermott received a Bachelor’s degree in Accounting from
Virginia Commonwealth University, a Bachelor’s degree in Marketing Management
from the University of Arkansas and a Master of Business Administration
from the University of Texas.
  31


David Buckel has served as
one of our directors since August 2008. Since March 2009, Mr. Buckel has served
as chief financial officer of Ryla, Inc., a call center solutions provider with
expertise in customer contact solutions and business process outsourcing.
Between January 2008 and February 2009, Mr. Buckel served as a senior executive
in operations and finance for Smarterville, Inc., a portfolio company of
Sterling Partners, which creates, manufactures, and sells educational products.
Prior to that, Mr. Buckel served as vice president and chief financial officer
of Internap Network Services Corporation (Nasdaq: INAP), managing the company’s
accounting, finance, purchasing, financial planning analysis, investor
relations, corporate development and other operating functions. Mr. Buckel was
with Internap from July 2003 until December 2007, and led the company through
its March 2004 public offering and subsequent leveraged financings. Mr. Buckel
was also senior vice president and chief financial officer of
Interland Corporation and Applied Theory Corporation, both NASDAQ listed
companies, where he managed numerous financial and operational groups. Mr.
Buckel also managed and led an IPO for Applied Theory in 1999. Mr. Buckel, a
Certified Management Accountant, holds a B.S. degree in Accounting from Canisius
College and a M.B.A. degree in Finance and Operations Management from Syracuse
University.
  Louis M. Jannetty has served
as one of our directors since August 2008. Since 1986, Mr. Jannetty has served
as the chief executive officer of Jansco Marketing Inc., a manufacturer
representative firm that specializes in the videogame industry and represents
major publishers such as Sony, Capcom, Eidos, Midway, Konami, Take Two, THQ, and
Namco Bandai. Since 2005, Mr. Jannetty has also been a principal in Janco
Development LLC, a real estate holding and development company. Mr. Jannetty
received his Bachelor of Arts degree from Fairfield University in
1974.
  Paul Eibeler has served as
one of our directors since July 2009.  Mr. Eibeler is currently the
chairman of the board of directors of both Cokem International, an interactive
games distribution company, for which he has served as a director since
September 2007, and Viking Productions, a licensed products company in the
Caribbean market, for which he has served as a director since January
2007.  Mr. Eibeler served as chief executive officer of Take-Two
Interactive Software, Inc., a global publisher, developer and distributor of
interactive entertainment software, hardware and accessories, from January 2005
until March 29, 2007 and as president and a director of Take-Two from April 2004
until March 29, 2007.  In addition, Mr. Eibeler served as president of
Take-Two from July 2000 until June 2003 and as a director from December 2000
until February 2003.  Prior to that time, Mr. Eibeler was a
consultant for Microsoft’s Xbox launch team. From July 2003 to
October 2003, Mr. Eibeler was president and chief operating officer of
Acclaim Entertainment’s North America Division, a company engaged in publishing
video games and, from 1998 to 1999, Mr. Eibeler served as Acclaim North
America’s executive vice president and general manager.  Acclaim filed
a petition under Chapter 7 of the federal Bankruptcy Code in
September 2004. Mr. Eibeler received a B.A. from Loyola
College.
  Information
Relating to Corporate Governance and the Board of Directors
  Our
bylaws authorize our board of directors to appoint among its members one or more
committees, each consisting of one or more directors. Our board of directors has
established two standing committees: an Audit Committee and a Compensation
Committee.
  Our Board
of Directors has adopted charters for the Audit and Compensation Committees
describing the authority and responsibilities delegated to each committee by the
board of directors. Our board of directors has also adopted Corporate Governance
Guidelines, a Code of Business Conduct and Ethics and a Whistleblower Policy. We
post on our website, at www.southpeakgames.com, the
charters of our Audit and Compensation Committees and our Code of Business
Conduct and Ethics. These documents are also available in print to any
stockholder requesting a copy in writing from our corporate secretary at the
address of our executive offices set forth in this report. We intend to disclose
any amendments to or waivers of a provision of our Code of Business Conduct and
Ethics made with respect to our directors or executive officers on our
website.
  Interested
parties may communicate with our board of directors or specific members of our
board of directors, including our independent directors and the members of our
various board committees, by submitting a letter addressed to the board of
directors of SouthPeak Interactive Corporation c/o any specified individual
director or directors at the address listed herein. Any such letters will be
sent to the indicated directors.
  The
Audit Committee
  The
purpose of the Audit Committee is (i) to oversee our accounting and
financial and reporting processes and the audits of our financial statements,
(ii) to provide assistance to our board of directors with respect to its
oversight of the integrity of our financial statements, our compliance with
legal and regulatory requirements, the independent registered public accounting
firm’s qualifications and independence, and the performance of our internal
audit function, if any, and independent registered public accounting firm, and
(iii) to prepare the report required by the rules promulgated by the SEC.
The primary responsibilities of the Audit Committee are set forth in its charter
and include various matters with respect to the oversight of our accounting and
financial reporting process and audits of our financial statements on behalf of
our board of directors. The Audit Committee also selects the independent auditor
to conduct the annual audit of our financial statements; reviews the proposed
scope of such audit; reviews our accounting and financial controls with the
independent auditor and our financial accounting staff; and, unless otherwise
delegated by our board of directors to another committee, reviews and approves
transactions between us and our directors, officers, and their
affiliates.
  32
  The Audit
Committee currently consists of Messrs. Buckel and Jannetty, each of whom
is an independent director under the Nasdaq Marketplace Rules and under rules
adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. The board of
directors previously determined that all members of the Audit Committee meet the
requirements for financial literacy and that Mr. Buckel qualifies as an
“audit committee financial expert” in accordance with applicable rules and
regulations of the SEC. Mr. Buckel serves as the Chairman of the Audit
Committee.
  The Compensation
Committee
  The
purpose of the Compensation Committee includes determining, or recommending to
our board of directors for determination, the compensation of our chairman,
chief executive officer and president and any other executive officer of ours
who reports directly to the board of directors, and the members of the board of
directors; determining, or recommending to the board of directors for
determination, the compensation of all of our other executive officers; and
discharging the responsibilities of our board of directors relating to our
compensation programs and compensation of our executives. In fulfilling its
responsibilities, the Compensation Committee shall also be entitled to delegate
any or all of its responsibilities to a subcommittee of the Compensation
Committee. Information regarding our processes and procedures for the
consideration and determination of executive and director compensation is
addressed in the Compensation Discussion and Analysis below. The Compensation
Committee currently consists of Messrs. Buckel and Jannetty.
Mr. Jannetty serves as the Chairman of the Compensation
Committee.
  Process
for Selecting Nominees to the Board of Directors
  The
board of directors has no standing nominating committee. It is the board of
directors’ view, given its relatively small size and independent directors, that
it is sufficient to select or recommend director nominees itself. Each director
has the opportunity to suggest any nominee and such suggestions are
comprehensively reviewed by the independent directors. The board of directors
does not have a charter for our nominating process. However, the qualities and
skills sought in prospective members of the board of directors generally require
that director candidates be qualified individuals who, if added to the board of
directors, would provide the mix of director characteristics, experience,
perspectives and skills appropriate for us. In accordance with the Corporate
Governance Guidelines adopted by the board of directors, criteria for selection
of candidates include, but are not limited to:
  ·
                diversity, age, background,
      skills and experience deemed appropriate by the independent directors in
      their discretion;
  ·
                possession of personal qualities,
      characteristics and accomplishments deemed appropriate by the independent
      directors in their
discretion;
  ·
                knowledge and contacts in the
      communities and industries in which we conduct
      business;
  ·
                ability and willingness to devote
      sufficient time to serve on the board of directors and its
      committees;
  ·
                knowledge and expertise in
      various activities deemed appropriate by the independent directors in
      their discretion; and
  ·
                fit of the individual’s skills,
      experience and personality with those of other directors in maintaining an
      effective, collegial and responsive board of
    directors.
  Such
persons should not have commitments that would conflict with the time
commitments of a director of the Company.
  The
board of directors does not have a specific policy for consideration of nominees
recommended by security holders due in part to the relatively small size of the
board of directors and the lack of turnover in board of directors’ membership to
date. However, security holders can recommend a prospective nominee for the
board of directors by writing to our corporate secretary at our corporate
headquarters and providing the information required by our bylaws, along with
any additional supporting materials the security holder considers appropriate.
There have been no recommended nominees from security holders for election at
the Annual Meeting. We do not pay fees to third parties for evaluating or
identifying potential nominees.
  33
 
 Board
and Committee Meetings
  Our board
of directors held a total of four meetings during the fiscal year ended June 30,
2009, in addition to taking action by unanimous written consent on four
occasions. The Audit and Compensation Committees of our board of directors held
four meetings during the fiscal year ended June 30, 2009. During the fiscal year
ended June 30, 2009, no director attended fewer than 75% of the aggregate of the
total number of meetings of our board of directors.
  Section
16(a) Beneficial; Ownership Reporting Compliance
  Section 16(a)
of the Exchange Act requires our directors, officers, and persons that own more
than 10% of a registered class of our equity securities to file reports of
ownership and changes in ownership with the SEC. Our officers, directors and 10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. We prepare Section 16(a) forms on
behalf of our directors and officers based on the information provided by
them.
  Based
solely on review of this information, we believe that, during the 2009 fiscal
year, no reporting person failed to file the forms required by
Section 16(a) of the Exchange Act on a timely basis, except for (i) a Form
4 for Mr. Louis Jannetty to report the acquisition of options that occurred on
July 1, 2008 that was reported on July 22, 2009, (ii) a Form 4 for Ms. Melanie
Mroz to report the gift of her shares that occurred on March 24, 2009 that was
reported on April 2, 2009, (iii) a Form 4 for Mr. Terry Phillips to report the
disposition of shares that occurred on January 9, 2009 that was reported on
January 14, 2009, and (iv) a Form 4 for Ms. Melanie Mroz to report the gift of
her shares that occurred on October 15, 2008 that was reported on December 12,
2008.
  Item 11.Executive
Compensation
  Compensation
Discussion and Analysis
  The
following Compensation Discussion and Analysis contains a discussion of the
material elements of compensation awarded to, earned by or paid to (i) each
person who served as our chief executive officer, (ii) each person who
served as our chief financial officer, and (iii) our chairman for the
fiscal years ended June 30, 2009 and 2008.  We have prepared the
Compensation Discussion and Analysis to provide you with information that we
believe is necessary to understand our executive compensation policies and
decisions as they relate to the compensation of Terry Phillips, our chairman,
Melanie Mroz, our president and chief executive officer, and Andrea Jones, our
chief financial officer and treasurer.  These three individuals are
referred to as our “named executive officers.”
 Executive
Compensation Program Objectives and Overview
  Objectives.  We
operate in a highly competitive and challenging environment. To attract, retain,
and motivate qualified executive officers, we aim to establish wages and
salaries that are competitive with those of executives employed by similar
firms.  Another objective of our compensation policies is to motivate
employees by aligning their interests with those of our stockholders through
equity incentives, thereby giving them a stake in our growth and prosperity and
encouraging the continuance of their services with us or our subsidiaries. Given
our relative size, we have determined to take a simple approach to compensating
our named executive officers and to avoid other forms of compensation, such as
awards under non-equity incentive plans, non-qualified defined benefit plans and
pension plans.
  Our
compensation program is designed to reward performance, both individual
performance and the performance of the company as a whole.  While base
salaries for our executives should reflect the marketplace for similar
positions, a significant portion of their compensation is earned based on our
financial performance and the financial performance of each executive’s area of
responsibility.  We strongly believe in measurement of quantifiable
results and this emanates from our belief that sustained strong financial
performance is an effective means of enhancing long-term stockholder
value.
  Compensation Program Administration
and Policies.  The Compensation Committee, which is comprised
exclusively of independent directors, has general responsibility for executive
compensation and benefits, including incentive compensation and equity-based
plans. Specific salary and bonus levels, as well as the amount and timing of
equity grants, are determined on a case-by-case basis and reflect our
overall compensation objectives. The Compensation Committee also serves as the
administrator of our 2008 Equity Incentive Compensation Plan, and is the entity
authorized to grant equity awards under that plan. Finally, the Compensation
Committee is responsible for the determination of the extent to which each
executive may be entitled to any bonus payments based upon
individual and/or Company performance, as contemplated by the terms of
such executive’s employment agreement.
  Pay Elements.  We
provide the following pay elements to our executive officers in varying
combinations to accomplish our compensation objectives:
  ·
                Base
      salary;
  34
  ·
                Annual
      incentives in the form of cash
bonuses;
  ·
                Equity-based
      compensation (stock options and restricted stock grants) pursuant to our
      2008 Equity Incentive Compensation Plan;
and
  ·
                Certain
      modest executive perquisites and
benefits.
  We fix
each executive’s base salary at a level we believe enables us to hire and retain
individuals in a competitive environment and to reward satisfactory individual
performance and a satisfactory level of contribution to our overall business
goals. We utilize cash bonuses to reward performance achievements within the
past fiscal year, and similarly, we utilize equity-based compensation under our
2008 Equity Incentive Compensation Plan to provide additional long-term rewards
for short-term performance achievements, which we believe encourages similar
performance over a longer term.
  Each
compensation element and its purpose are further described below.
  Base Salary.  Base
salary is intended to compensate the executive for the basic market value of the
position and the responsibilities of that position relative to other positions
in the Company. The base salary for each of our executives is initially
established through negotiation at the time of hire, based on such factors as
the duties and responsibilities of the position, the individual executive’s
experience and qualifications, the executive’s prior salary and competitive
salary information. Generally, the Chairman will recommend annual base salary
(and changes thereto) with respect to the other executives to the Compensation
Committee. The Compensation Committee will determine the Chairman’s base salary
by reference to the same criteria.
  We
annually review our base salaries, and may adjust them from time to time based
on market trends. We also review the applicable executive’s responsibilities,
performance and experience. We do not provide formulaic base salary increases to
our executives. If necessary, we will realign base salaries with market levels
for the same positions in companies of similar size to us represented in
compensation data we review, if we identify significant market changes in our
data analysis. Additionally, we intend to adjust base salaries as warranted
throughout the year for promotions or other changes in the scope or breadth of
an executive’s role or responsibilities.
  In
September 2009, the Compensation Committee recommended for approval by the full
board of directors base salaries for our executive officers. It was noted that
Mr. Phillips and Ms. Mroz have agreed to accept below-market base salaries until
the performance of the Company can support an increase.  The board of
directors established the 2010 base salaries for Mr. Phillips and Ms. Mroz at
$100,000 and $150,000, respectively.
  Annual Incentives (Cash
Bonuses).  We provide a cash bonus opportunity to all of our
executive officers. We pay bonuses for the previous fiscal year generally during
the month following the filing of our audited financials with the SEC.
Generally, bonuses are payable to the extent provided in the employment
agreements negotiated with individual executives as approved by the Compensation
Committee. Those employment agreements that provide for the payment of cash
bonuses contemplate that they are based upon an evaluation of both our
performance and the performance of the individual executive and/or at
the sole discretion of the board of directors. Individual performance is
measured based on the achievement of quantifiable performance objectives
established by the Compensation Committee at the beginning of our fiscal year.
We believe linking cash bonuses to both Company and individual performance will
motivate executives to focus on our annual revenue growth, profitability, cash
flow and liquidity, which we believe should improve long-term stockholder value
over time.
  Equity-Based
Compensation.  Our Compensation Committee believes that
granting shares of restricted stock and/or stock options on an annual
basis to existing executives provides an important incentive to retain
executives and rewards them for our short-term performance while also creating
long-term incentives to sustain that performance. Generally, grants of
restricted stock vest in one year and grants of stock options vest over three
years and no shares or options vest before the first day of the succeeding
fiscal year (the fiscal year following the fiscal year in which the options were
actually granted).
  Executive Perquisites and
Benefits.  Our philosophy is to provide executives with limited
perquisites. The value of the perquisites (if any) and benefits provided to our
named executive officers is set forth in the Summary Compensation Table below,
and their aggregate cost for all of our executives in the fiscal year ended June
30, 2009 was $19,803.
  Severance
and Other Benefits upon Termination of Employment
  The
employment agreements with Terry Phillips, our chairman, and Melanie Mroz, our
president and chief executive officer, contain certain terms and conditions
relating to payments and continuation of health benefits in the event of the
severance of their employment with us. The specific terms and conditions
relating to severance payments for Mr. Phillips and Ms. Mroz are summarized
below and graphically displayed in the section entitled “Potential Payments Upon
Termination.” There are no provisions with respect to severance payments in any
other employment agreement for our named executive officers. We are not and were
not a party to any other change in control agreements or other severance
arrangements.
  35
  In order
to support our compensation objective of attracting, retaining and motivating
qualified executives, we believe that, in certain cases, we may decide to
provide executives with severance protections upon certain types of termination.
These severance protections would be negotiated on an individual by individual
basis.
  Option
Grant Practices and Policies
  It is
intended to be the practice of the Compensation Committee to grant stock options
under the 2008 Equity Incentive Compensation Plan with an exercise price equal
to or greater than the closing price of our common stock on the date of
grant.
  Compensation
Committee Report on Executive Compensation
  The
Compensation Committee has certain duties and powers as described in its
charter. The Compensation Committee is currently composed of Louis M. Jannetty
and David Buckel, two of the non-employee directors named at the end of this
report, each of whom is independent as defined by Nasdaq Marketplace
Rules.
  The
Compensation Committee of the Company has reviewed and discussed with management
the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K of the Exchange Act and, based on such review and discussions,
the Compensation Committee has recommended to our board of directors that the
Compensation Discussion and Analysis section be included in this annual report
on Form 10-K, as filed with the SEC.
  By
      the Compensation Committee,Louis
      M. Jannetty, ChairmanDavid
      Buckel
 
 Compensation
Committee Interlocks and Insider Participation
  No member
of our Compensation Committee has served as one of our officers or employees at
any time. None of our executive officers serve as a member of the Compensation
Committee of any other company that has an executive officer serving as a member
of our board of directors. None of our executive officers serve as a member of
the board of directors of any other company that has an executive officer
serving as a member of our Compensation Committee.
  Summary
Compensation Table
  The
following table sets forth, for the fiscal years ended June 30, 2009 and
2008, compensation information for: (i) each person who served as our chief
executive officer at any time during the periods covered, (ii) each person
who served as our chief financial officer at any time during the periods
covered; and (iii) our chairman.
  Name
                                                    
                                                    Year
                                                    
                                                    Salary
                                                    
                                                    
                                                    Stock
                                                      Awards(1)
                                                    
                                                    
                                                    Option
                                                      Awards(1)
                                                    
                                                    
                                                    AllOther
                                                      Compensation
                                                    
                                                    
                                                    TotalTerry
      Phillips,
                                                    
                                                    2009
                                                    
                                                    $
                                                    100,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    8,909
                                                    (5)
                                                    
                                                    $
                                                    108,909Chairman
      (2)(3)
                                                    
                                                    2008
                                                    
                                                    $
                                                    50,000
                                                    (4)
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    9,904
                                                    (6)
                                                    
                                                    $
                                                    59,904Melanie
      Mroz,
                                                    
                                                    2009
                                                    
                                                    $
                                                    150,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    8,249
                                                    (9)
                                                    
                                                    $
                                                    158,249President,
      Chief Executive Officer and
                                                    
                                                    2008
                                                    
                                                    $
                                                    75,000
                                                    (8)
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    6,928
                                                    (10)
                                                    
                                                    $
                                                    81,928Director
      (2)(7)Andrea
      Gail Jones,
                                                    
                                                    2009
                                                    
                                                    $
                                                    105,000
                                                    
                                                    
                                                    $
                                                    12,650
                                                    
                                                    
                                                    $
                                                    60,000
                                                    
                                                    
                                                    $
                                                    3,749
                                                    (12)
                                                    
                                                    $
                                                    181,399Chief
      Financial Officer and Treasurer (2)(11)
                                                    
                                                    2008
                                                    
                                                    $
                                                    105,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    42,562
                                                    (13)
                                                    
                                                    $
                                                    147,562Rahul
      Prekash,
                                                    
                                                    2009
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Former
      Chairman and Chief Executive Officer (14)
                                                    
                                                    2008
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Avinash
      Vashistha
                                                    
                                                    2009
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Former
      Chief Financial Officer, Executive Vice
                                                    
                                                    2008
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -President
      and Director (15)Abhishek
      Jain,
                                                    
                                                    2009
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Former
      Chairman, Chief Executive Officer,
                                                    
                                                    2008
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -President,
      Secretary and Director (16)
 36
 (1)
                Amounts reported represent the
      compensation cost recognized by us for financial statement reporting
      purposes in accordance with SFAS No. 123R utilizing the
      assumptions discussed in Note 16 to our condensed consolidated
      financial statements.
 
 (2)
                Includes
      compensation paid by SouthPeak Interactive, L.L.C. prior to the
      Acquisition on May 12, 2008.
 
 (3)
                Prior to May 12, 2008, Mr.
      Phillips served as the managing member of SouthPeak Interactive, L.L.C.
      Mr. Phillips began as our Chairman on May 12,
  2008.
 
 (4)
                Amount reported includes $37,500
      in distributions paid by SouthPeak Interactive, L.L.C. to Mr. Phillips as
      member distributions between January and May
  2008.
 
 (5)
                Amount includes $3,381 for the
      employee portion of health, dental and long-term care insurance premiums
      paid by us on the individual’s behalf, $4,000 for a car allowance through
      May 2009, $1,160 for the use of a Company car beginning in June 2009, and
      $368 for life and accidental death insurance premium paid by us on the
      individual’s behalf.
 
 (6)
                Amount
      includes $9,854 for the employee portion of health, dental and long-term
      care insurance premiums paid by us on the individual’s behalf, and $50 for
      life and accidental death insurance premium paid by us on the individual’s
      behalf.
 
 (7)
                Prior to May 12, 2008, Ms. Mroz
      served as Chief Executive Officer of SouthPeak Interactive, L.L.C. Ms.
      Mroz began as our President, Chief Executive Officer and Director on May
      12, 2008.  On August 14, 2009, Ms. Mroz was appointed as our
      interim Chief Financial
Officer.
 
 (8)
                Amount includes $56,250 in
      distributions paid by SouthPeak Interactive, L.L.C. to Ms. Mroz as member
      distributions between January and May
  2008.
 
 (9)
                Amount includes $3,381 for the
      employee portion of health, dental and long-term care insurance premiums
      paid by us on the individual’s behalf, $4,500 for a car allowance, and
      $368 for life and accidental death insurance premium paid by us on the
      individual’s behalf.
 
 (10)
                Amount represents the employee
      portion of health and dental insurance premiums paid by us on the
      individual’s behalf.
 
 (11)
                Prior to May 12, 2008, Ms. Jones
      served as the Chief Financial Officer of SouthPeak Interactive,
      L.L.C.  Ms. Jones began as our Chief Financial Officer and
      Treasurer on May 12, 2008. On August 14, 2009, Ms. Jones was terminated as
      our Chief Financial Officer and
  Treasurer.
 
 (12)
                Amount includes $3,381 for the
      employee portion of health, dental and long-term care insurance premiums
      paid by us on the individual’s behalf and $368 for life and accidental
      death insurance premium paid by us on the individual’s
      behalf.
 
 (13)
                Amount includes $31,855 of
      additional compensation paid for work related to the preparation of
      financial reports and securities filings and $10,707 for the employee
      portion of health insurance premiums paid by us on the individual’s
      behalf.
 
 (14)
                Mr. Prekash served as our
      Chairman and Chief Executive Officer from our formation until April 28,
      2008, but received no compensation from us in connection with his service
      as an executive or Chairman. Mr. Prekash resigned as our Chairman and
      Chief Executive Officer effective April 28,
  2008.
 
 (15)
                Mr. Vashistha served as our
      Chief Financial Officer, Executive Vice President and Director from our
      formation until April 28, 2008, but received no compensation from us in
      connection with his service as an executive or Director. Mr. Vashistha
      resigned as our Chairman and Chief Executive Officer effective May 12,
      2008.
 
 (16)
                Mr. Jain served as our
      President and Secretary from our formation until May 12, 2008, our
      Chairman and Chief Executive Officer from April 28, 2008 until May 12,
      2008 and one of our Directors from our formation until August 8, 2008, but
      received no compensation from us in connection with his service as an
      executive or Director. Mr. Jain resigned as our Chairman, Chief
      Executive Officer, President and Secretary effective May 12, 2008, and he
      resigned as one of our Directors effective August 8,
      2008.
  37
  Grants
of Plan-Based Awards
 The
following table sets forth, for the fiscal year ended June 30, 2009, certain
information regarding restricted stock and stock option awards granted to our
named executive officers pursuant to our 2008 Equity Incentive Compensation
Plan:
  Name
                                  
                                  Grant
                                    Date
                                  
                                  All Other
                                    Stock Awards:
                                    Number of
                                    Shares of
                                    Stock
                                  
                                  
                                  All Other
                                    Stock Awards:
                                    Number of
                                    Securities
                                    Underlying
                                    Options
                                  
                                  
                                  Exercise
                                    or Base
                                    Price of
                                    Option
                                    Awards (1)
                                  
                                  
                                  Grant Date Fair
                                    Value of Stock and
                                    Option Awards (2)Andrea
      Gail Jones
                                  
                                  7/1/2008
                                  
                                  
                                  5,500(3)7/1/2008
                                  
                                  
                                  
                                  
                                  
                                  
                                  40,000(4)
                                  
                                  
                                  $
                                  2.30
                                  
                                  
                                  $
                                  52,80012/31/2008
                                  
                                  
                                  
                                  
                                  
                                  
                                  10,000(3)
                                  
                                  
                                  $
                                  1.20
                                  
                                  
                                  $
                                  7,200
 
 (1)
                The
      exercise price of stock options awards is equal to the closing price of
      our common stock on the day prior to the applicable grant date, as
      reported on the Over-The-Counter Bulletin
Board.
 
 (2)
                Amounts
      reported represent the compensation cost recognized by us for financial
      statement reporting purposes in accordance with SFAS No. 123R
      utilizing the assumptions discussed in Note 16 to our condensed
      consolidated financial statements.
 
 (3)
                The
      restricted stock award vested on July 1,
2009.
 
 (4)
                The
      stock option award vests in three equal annual installments commencing on
      July 1, 2009.  As a result of Ms. Jones’s
      termination on August 14, 2009, the stock option award was
      forfeited.
 
 (5)
                The
      stock option award vests in three equal annual installments commencing on
      January 1, 2010.  As a result of Ms. Jones’s termination on
      August 14, 2009, the stock option award was
  forfeited.
 
 Outstanding
Equity Awards at Fiscal Year End
 The
following table sets forth certain information concerning outstanding equity
awards held by our named executive officers at June 30, 2009:
  Option AwardsNumber of Securities
                                              
                                              
                                              Number of Securities
                                              
                                              
                                              Option
                                              
                                              OptionUnderlying Unexercised
                                              
                                              
                                              Underlying Unexercised
                                              
                                              
                                              Exercise
                                              
                                              ExpirationName
                                              
                                              Options — Exercisable
                                              
                                              
                                              Options — Unexercisable
                                              
                                              
                                              Price
                                              
                                              DateAndrea
      Gail Jones
                                              
                                              
                                              -
                                              
                                              
                                              
                                              40,000(1)
                                              
                                              
                                              $
                                              2.30
                                              
                                              7/1/2018-
                                              
                                              
                                              
                                              10,000(2)
                                              
                                              
                                              $
                                              1.20
                                              
                                              12/31/2018
 (1)
                The
      stock option award vests in three equal annual installments commencing on
      July 1, 2009.  As a result of Ms. Jones’s termination on August
      14, 2009, two-thirds of the stock option award was forfeited and the
      balance must be exercised within 90 days of August 14,
    2009.
  (2)
                The
      stock option award vests in three equal annual installments commencing on
      January 1, 2010.  As a result of Ms. Jones’s termination on
      August 14, 2009, two-thirds of the stock option award was forfeited and
      the balance must be exercised within 90 days of August 14,
      2009.
  Option
Exercises and Stock Vested
  During
the fiscal year ended June 30, 2009, no stock options were exercised by our
named executive officers and no shares of restricted stock held by our named
executive officers vested.
  38
  Director
Compensation and Other Information
  For
fiscal year 2010 we will compensate non-employee members of our board of
directors through a mixture of cash and equity-based compensation. We will pay
each non-employee director an annual retainer consisting of $5,000 cash, 20,000
shares of restricted stock, vesting in one year, and 50,000 options to purchase
our common stock, vesting in one year.  The chairperson of our Audit
Committee will receive an additional 5,000 shares of restricted stock, vesting
in one year.  Paul Eibeler, who joined our board of directors July 28,
2009, will receive an additional 50,000 options to purchase our common stock,
vesting in one year, as a an initial bonus for joining our board of
directors.  To the extent that a non-employee director serves for less
than the full fiscal year, he or she would receive a pro-rated portion of the
annual retainer equal to the proportionate amount of the fiscal year for which
he or she served as a director. We reimburse our directors for reasonable
travel and other expenses incurred in connection with attending meetings of our
board of directors. Employees who also serve as directors receive no additional
compensation for their services as a director.
  The
following table sets forth the compensation earned by our non-employee directors
in the fiscal year ended June 30, 2009.
  Name (1)
                      
                      Fees
                        Earned or
                        Paid in
                        Cash
                      
                      
                      Stock
                        Awards (2)(3)
                      
                      
                      Option
                        Awards (2)(4)(5)
                      
                      
                      TotalDavid
      Buckel
                      
                      $
                      5,000
                      
                      
                      $
                      10,000
                      
                      
                      $
                      48,700
                      
                      
                      $
                      63,700Louis
      M. Jannetty
                      
                      $
                      5,000
                      
                      
                      $
                      10,000
                      
                      
                      $
                      88,300
                      
                      
                      $
                      103,300
 
 (1)
                On
      July 28, 2009, Paul Eibeler was appointed as an additional non-employee
      members of our board of directors.
 
 (2)
                Amounts
      reported represent the compensation cost recognized by us for financial
      statement reporting purposes in accordance with SFAS No. 123R
      utilizing the assumptions discussed in Note 16 to our condensed
      consolidated financial statements.
 
 (3)
                The
      grant date fair values of the stock awards granted to our non-employee
      directors during the fiscal year ended June 30, 2009 are as
      follows:
 
 Name
                        
                        Total
                          Grant Date
                          Fair ValueDavid
      Buckel
                        
                        $
                        10,000Louis
      M. Jannetty
                        
                        $
                        10,000
 
 (4)
                As
      of June 30, 2009, the number of aggregate shares underlying outstanding
      option awards held by our non-employee directors is as
      follows:
 
 Name
                        
                        Option Awards
                          OutstandingDavid
      Buckel
                        
                        
                        65,000Louis
      M. Jannetty
                        
                        
                        95,000
 
 (5)
                The
      grant date fair values of option awards granted to our non-employee
      directors during the fiscal year ended June 30, 2009 are as
      follows:
 
 Name
                        
                        Total
                          Grant Date
                          Fair ValueDavid
      Buckel
                        
                        $
                        48,700Louis
      M. Jannetty
                        
                        $
                        88,300
  Employment
Arrangements with Executive Officers
  In May
2008, we entered into employment agreements with Terry Phillips, pursuant to
which Mr. Phillips serves as our chairman.  Also in May 2008, we
entered into an employment agreement with Melanie Mroz, pursuant to which
Ms. Mroz serves as our president and chief executive
officer.  The employment agreements have an initial term of three
years, and will automatically renew for successive additional one-year periods
thereafter unless either we or the executive notifies the other that the term
will not be extended. Mr. Phillips and Ms. Mroz receive salaries of
$100,000 and $150,000, respectively, per year, and are also eligible
to receive bonuses and equity awards that may be granted by our board of
directors or its compensation committee.  The employment agreements
provide for continuation of salary and benefits for a period of three months
upon termination other than for “cause” (as defined in
the agreement) and continuation of salary for a period of three months upon
termination due to disability.
  39
  Potential Payments upon
Termination
  We are
not a party to any employment agreement providing for payments with respect to
an event that may constitute a “change of control.”
  Mr.
Phillips and Ms. Mroz are entitled to receive their applicable base salary and
health benefits for three months following termination of employment other than
for “cause.” Mr. Phillips and Ms. Mroz are entitled to receive their applicable
base salary for three months following termination of employment due to
disability.
  Termination
of Employment by the Company other than for “Cause” (1)
  Name
                                          
                                          Continuation of
                                            Salary
                                          
                                          Continuation of
                                            Health Benefits
                                          
                                          TotalTerry
      Phillips
                                          
                                          
                                          $
                                          25,000
                                          
                                          
                                          $
                                          4,332
                                          
                                          
                                          $
                                          29,332Melanie
      Mroz
                                          
                                          
                                          $
                                          37,500
                                          
                                          
                                          $
                                          3,021
                                          
                                          
                                          $
                                          40,521
  Termination
of Employment due to Disability (2)
  Name
                                Continuation of
                                  Salary
                                
                                Continuation of
                                  Health Benefits
                                
                                
                                TotalTerry
      Phillips
                                
                                $
                                25,000
                                
                                
                                $
                                -
                                
                                
                                $
                                25,000Melanie
      Mroz
                                
                                $
                                37,500
                                
                                
                                $
                                -
                                
                                
                                $
                                37,500
  (1)
                Under the employment agreements,
      each executive may be terminated for “cause” if such executive: (i)
      commits a material breach of (a) his or her obligations or agreements
      under his or her employment agreement or (b) any of the covenants
      regarding non-disclosure of confidential information, assignment of
      intellectual property rights, non-competition and/or non-solicitation
      applicable to such executive under any stock option agreement or other
      agreement entered into between the executive and the Company; (ii)
      willfully neglects or fails to perform his or her material duties or
      responsibilities to the Company, such that the business or reputation of
      the Company is (or is threatened to be) materially and adversely affected;
      (iii) commits an act of embezzlement, theft, fraud or any other act of
      dishonesty involving the Company or any of its customers; or (iv) is
      convicted of or pleads guilty or no contest to a felony or other crime
      that involves moral
turpitude.
 
 (2)
                Under the employment agreements,
      each executive may be terminated due to disability if such executive: (i)
      is unable, despite whatever reasonable accommodations the law requires, to
      render services to the Company for more than 90 consecutive days because
      of physical or mental disability, incapacity, or illness, or (ii) is found
      to be disabled within the meaning of the Company’s long-term disability
      insurance coverage as then in effect (or would be so found if he or she
      applied for the coverage or
benefits).
 
 We
anticipate that we will generally enter into negotiated severance and release
agreements with an executive upon the event of termination of an executive
without cause.
  Item 12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  The
following table provides information concerning beneficial ownership of our
common stock as of September 30, 2009, by:
  ·
                each stockholder, or group of
      affiliated stockholders, that we know owns more than 5% of our outstanding
      common stock;
  ·
                each
      of our executive officers;
  40
  ·
                each of our directors;
      and
  ·
                all of our executive officers and
      directors as a group.
  The
following table lists the number of shares and percentage of shares beneficially
owned based on 44,998,600 shares of common stock outstanding as of September 30,
2009.
  Beneficial
ownership is determined in accordance with the rules of the SEC, and generally
includes voting power and/or investment power with respect to the securities
held. Shares of common stock subject to options and warrants currently
exercisable or exercisable within 60 days of September 30, 2009, are deemed
outstanding and beneficially owned by the person holding such options or
warrants for purposes of computing the number of shares and percentage
beneficially owned by such person, but are not deemed outstanding for purposes
of computing the percentage beneficially owned by any other person. Except as
indicated in the footnotes to this table, the persons or entities named have
sole voting and investment power with respect to all shares of our common stock
shown as beneficially owned by them.
  Unless
otherwise indicated, the principal address of each of the persons below is c/o
SouthPeak Interactive Corporation, 2900 Polo Parkway, Midlothian, Virginia
23113.
  Number ofShares
                              
                              Percentage ofBeneficially
                              
                              OutstandingOwned
                              
                              SharesExecutive Officers and
      DirectorsTerry
      Phillips
                              
                              
                              17,138,660
                              
                              38.1
                              %Melanie
      Mroz
                              
                              
                              3,246,126
                              
                              7.2
                              %Reba
      McDermott
                              
                              
                              -
                              
                              -David
      Buckel (1)
                              
                              
                              35,000
                              
                              *Paul
      Eibeler (2)
                              
                              
                              20,000
                              
                              *Louis
      M. Jannetty (3)
                              
                              
                              40,000
                              
                              *All
      executive officers and directors as a group
    (6 persons)
                              
                              
                              20,479,786
                              
                              45.5
                              %Other 5%
      StockholdersGreg
      Phillips
                              
                              
                              10,494,900
                              
                              23.3
                              %Kathleen
      Morgan (4)
                              
                              
                              3,400,000
                              
                              7.6
                              %Hummingbird
      Management, L.L.C. (5)
                              
                              
                              4,078,499
                              
                              8.8
                              %Atlas
      II, LP (6)
                              
                              
                              3,866,000
                              
                              8.3
                              %Edward
      S. Gutman (7)
                              
                              
                              2,390,516
                              
                              5.2
                              %FI
      Investment Group, LLC (8)
                              
                              
                              3,808,523
                              
                              7.8
                              %
 
 *
                Less than
    1%
 
 (1)
                Includes 5,000 shares of common
      stock issuable upon exercise of options.  The address of Mr.
      Buckel is 1065 Admiral Crossing, Alpharetta, Georgia
      30005.
 
 (2)
                The address of Mr. Eibeler
      is 41 Frost Creek Drive, Lattingtown, New York
      11560.
 
 (3)
                Includes 15,000 shares of common
      stock issuable upon exercise of options.  The address of Mr.
      Jannetty is 10 Cordage Park Circle, Suite 235, Plymouth,
      Massachusetts 02360.
 
 (4)
                The address of Ms. Morgan is
      24743 Senda Pajaro, Calabasas, California
  91302.
 
 (5)
                Includes
      1,350,030 shares of common stock issuable upon exercise of Class Y
      warrants, held by Hummingbird Value Fund, L.P. (“HVF”), Hummingbird
      Microcap Value Fund, L.P. (“Microcap Fund”), Hummingbird SPAC Partners,
      L.P. (“SPAC”), Hummingbird Concentrated Fund, L.P. (“Concentrated”) and
      Tarsier Nanocap Value Fund, L.P. (“Tarsier”, together with HVF, Microcap
      Fund, SPAC and Concentrated, the “Hummingbird Funds”). As investment
      manager of the Hummingbird Funds, Hummingbird Management, L.L.C.
      (“Hummingbird”) may be deemed to have the sole voting and investment
      authority over the shares of common stock and warrants owned by the
      Hummingbird Funds. The managing member of Hummingbird is Paul Sonkin. Mr.
      Sonkin, as the managing member and control person of Hummingbird, may be
      deemed to have the sole voting and investment authority over the shares of
      common stock and the warrants beneficially owned by Hummingbird.
      Hummingbird Capital, LLC (“HC”), as the general partner of each of the
      Hummingbird Funds, may be deemed to have the sole voting and investment
      authority over such shares and warrants owned by the Hummingbird Funds.
      Each of Hummingbird, Mr. Sonkin and HC disclaim any beneficial ownership
      of the shares of common stock and the warrants owned by the Hummingbird
      Funds. The business address of Hummingbird Management, L.L.C. is 145 East
      57th Street,
      8th Floor,
      New York, New York 10022.
  41




(6)
                Includes
      1,496,500 shares of common stock issuable upon exercise of Class Y
      warrants and Class Z warrants. Patty Shanley is the General Partner of
      Atlas II, L.P. and consequently may be deemed to be the beneficial owner
      of its holdings by virtue of controlling the voting and dispositive powers
      of Atlas II, L.P. The business address of Atlas II, L.P. is 11470 Stone
      Corral Place, Gold River, CA 95670.
 
 (7)
                Includes
      21,500 shares of common stock issuable upon exercise of Class W warrants,
      600,000 shares of common stock issuable upon exercise of Class Y warrants
      and 506,700 shares of common stock issuable upon exercise of Class Z
      warrants. The address of Mr. Gutman is 888 7thAvenue, Suite 901, New York, New York
  10106
 
 (8)
                Includes
      3,093,333 shares of common stock issuable upon conversion of Series A
      Convertible Preferred Stock and 500,000 shares of common stock issuable
      upon exercise of Class Y warrants. On June 5, 2008, FI Investment Group,
      LLC acquired 2,093,333 shares of Series A Convertible Preferred Stock upon
      the conversion of outstanding principal and interest owed by SouthPeak
      Interactive, L.L.C., a subsidiary of the Company, at a purchase price of
      $1.00 per share. Frank Islam is the principal of FI Investment Group and,
      as such, has indirect voting and dispositive power over the shares of
      Series A Convertible Preferred Stock and the warrants held by FI
      Investment Group, LLC. The business address of FI Investment Group, LLC is
      1600 Tysons Boulevard, Suite 1150, McLean, Virginia
    22102.
 
 Equity
Compensation Plan Information
  The
following table sets forth certain information as of the end of the most
recently completed fiscal year with respect to compensation plans (including
individual compensation arrangements) under which our equity securities are
authorized for issuance.
  Number of Securities
                            
                            Weighted Averageto be Issued Upon
                            
                            Exercise Price of
                            
                            Number ofExercise of Outstanding
                            
                            Outstanding
                            
                            SecuritiesOptions, Warrants
                            
                            Options, Warrants
                            
                            Remaining AvailablePlan Category
                            and Rights
                            
                            and Rights
                            
                            for Future IssuanceEquity
      compensation plans approved by security holders
                            
                            1,960,300
                            
                            
                            1.69
                            
                            
                            2,924,200Equity
      compensation plans not approved by security holders
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
  Item 13.Certain
Relationships and Related Transactions, and Director
Independence
  Certain
Relationships and Related Transactions
  Other
than the transactions described under the heading “Executive Compensation” (or
with respect to which such information is omitted in accordance with SEC
regulations) and the transactions described below, since July 1, 2008 there
have not been, and there is not currently proposed, any transaction or series of
similar transactions to which we were or will be a participant in which the
amount involved exceeded or will exceed $120,000, and in which any director,
executive officer, holder of 5% or more of any class of our capital stock or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest.
  On
January 1, 2008, we entered into a three-year lease for office space for our
headquarters in Midlothian, Virginia. The lease is with Phillips Land, L.C., an
organization in which Terry Phillips and Greg Phillips each
beneficially own 50%. The rent is $9,167 per month. The terms of the lease
are comparable to those terms available from non-affiliate sources in that
the price per square foot is equal to prevailing rates.
  On
January 1, 2008, we leased office space in our Grapevine, Texas office to
Phillips Sales, Inc., an organization in which Terry Phillips and Greg
Phillips collectively own 5%. Terry Phillips is the managing member of Phillips
Sales. The lease agreement provides for a term of three years and a rent of
$1,303 per month. The terms of the lease are comparable to those terms available
to non-affiliate sources in that the price per square foot is equal to
prevailing rates.
  42
  We have
paid sales commissions, upon the sale of products, to Phillips Sales and West
Coast Sales, Inc., an organization in which Terry Phillips indirectly
owns 37.5%. Terry Phillips is the managing member of West Coast
Sales. Such commissions approximated market rates and equaled $705,032 for
the fiscal year ended June 30, 2009. The sales commission arrangements are
materially and substantially the same as our sales commission arrangements with
unrelated parties.
  Terry
Phillips, our chairman and holder of 5% or more of our capital stock, and Greg
Phillips, a holder of 5% or more of our capital stock, provided personal
guarantees and have pledged personal assets to collateralize our line of credit
and our mortgage note payable on both facilities in Grapevine,
Texas.
  In
February 2009, we received a short-term advance of $307,440 from Terry Phillips,
our chairman.  This advance was unsecured and non-interest
bearing.  The amount of principal repaid to Mr. Phillips during the
year ended June 30, 2009 was $75,000. At June 30, 2009, the amount due to Mr.
Phillips was $232,440.  The advance was made on a short-term basis to
fund the production of additional cartridges for a particular videogame. The
terms of the advance were superior to those terms available from non-affiliate
sources in that the advance was non-interest bearing and the outstanding
principal amount was not secured by any of our assets.
  Procedures
for Approval of Related Transactions
  Our
policy for the review and approval of transactions between us and related
persons is set forth in the charter of our Audit Committee. Pursuant to the
charter of our Audit Committee, it is the responsibility of our Audit Committee,
unless specifically delegated by our board of directors to another committee of
the board of directors, to review and approve all transactions or arrangements
in which we were or will be a participant in which the amount involved,
exceeded, or will exceed $120,000 and in which any director, executive officer,
holder of 5% or more of any class of our capital stock or any member of the
immediate family of any of the foregoing persons had or will have a direct or
indirect material interest. Additionally, it is the responsibility of our Audit
Committee, unless specifically delegated by our board of directors to another
committee of the board of directors, to review and make recommendations to the
board of directors, or approve, any contracts or other transactions with
our current or former executive officers, including consulting
arrangements, employment agreements, change-in-control agreements,
termination arrangements, and loans to employees made or guaranteed by
us.
  In
February 2009, we received a short-term advance of $307,440 from Terry Phillips,
our chairman.  The advance was made on a short-term basis to fund the
production of additional cartridges for a particular videogame.  Mr.
Phillips did not obtain Audit Committee approval prior to making the advance,
however, the Audit Committee has subsequently ratified the advance.
  Director
Independence
  Our board
of directors has determined, after considering all the relevant facts and
circumstances, that each of Messrs. Buckel, Eibeler and Jannetty are independent
directors, as “independence” is defined in the Nasdaq Marketplace Rules, because
they have no relationship with us that would interfere with their exercise of
independent judgment.
  Item 14.Principal Accountant
Fees and Services
  Reznick
Group, P.C., an
independent registered public accounting firm, has audited our consolidated
financial statements for the fiscal years ended June 30, 2009 and
2008.
  The
aggregate fees billed to us by Reznick Group, P.C. for the fiscal years ended
June 30, 2009 and June 30, 2008 are as follows:
  2009
                    
                    
                    2008Audit
      Fees
                    
                    $
                    349,546
                    
                    
                    $
                    155,026Audit-Related
      Fees
                    
                    $
                    –
                    
                    
                    $
                    –Total
                    
                    $
                    349,546
                    
                    
                    $
                    155,026
 
 (1)
                Audit Fees consist of fees
      incurred for the audits of our annual financial statements and the review
      of our interim financial
statements.
 
 (2)
                Audit-Related Fees consist of
      fees incurred for assurance and related services that are reasonably
      related to the performance of the audit or review of our financial
      statements and are not reported under the category “Audit
      Fees.”
  43
  The
charter of our Audit Committee provides that the duties and responsibilities of
our Audit Committee include the pre-approval of all audit, audit-related, tax,
and other services permitted by law or applicable SEC regulations (including fee
and cost ranges) to be performed by our independent registered public accounting
firm. Any pre-approved services that will involve fees or costs exceeding
pre-approved levels will also require specific pre-approval by the Audit
Committee. Unless otherwise specified by the Audit Committee in pre-approving a
service, the pre-approval will be effective for the 12-month period following
pre-approval. The Audit Committee will not approve any non-audit services
prohibited by applicable SEC regulations or any services in connection with a
transaction initially recommended by the independent registered public
accounting firm, the purpose of which may be tax avoidance and the tax treatment
of which may not be supported by the Internal Revenue Code and related
regulations.
  To the
extent deemed appropriate, the Audit Committee may delegate pre-approval
authority to the Chairman of the Audit Committee or any one or more other
members of the Audit Committee provided that any member of the Audit Committee
who has exercised any such delegation must report any such pre-approval decision
to the Audit Committee at its next scheduled meeting. The Audit Committee will
not delegate to management the pre-approval of services to be performed by the
independent registered public accounting firm.
  Our Audit
Committee requires that our independent registered public accounting firm, in
conjunction with our chief financial officer, be responsible for seeking
pre-approval for providing services to us and that any request for pre-approval
must inform the Audit Committee about each service to be provided and must
provide detail as to the particular service to be provided.
  All of
the services provided by Reznick Group, P.C. described above under the captions
“Audit Fees” and “Audit-Related Fees” were pre-approved by our Audit
Committee.
  44
  PART IV
  Item 15. Exhibits and
Financial Statement Schedules
  (a)   Documents filed as part of this
report:
  Consolidated
      Financial Statements:Report
      of Independent Registered Public Accounting Firm for the years ended June
      30, 2009 and 2008;Consolidated
      balance sheets as of June 30, 2009 and 2008;Consolidated
      statements of operations for the years ended June 30, 2009 and
      2008;Consolidated
      statements of cash flows for the years ended June 30, 2009 and
      2008;Consolidated
      statements of shareholders’ equity for the years ended June 30, 2009 and
      2008; andNotes
      to consolidated financial statements.
  All other
financial schedules are not required under the related instructions or are
inappropriate and, therefore, have been omitted.
  (b)   Exhibits
  The
exhibits listed in the accompanying Index to Exhibits are filed or incorporated
by reference as part of this report.
  45
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
  SOUTHPEAK
      INTERACTIVE CORPORATIONBy:
                  /s/ Melanie MrozMelanie
      MrozPresident,
      Chief Executive Officer and Interim Chief Financial
  OfficerDate: October
      13, 2009
 
  POWER
OF ATTORNEY
  KNOW ALL
MEN BY THESE PRESENTS that each person whose signature to this Annual
Report on Form 10-K appears below hereby constitutes and appoints each of Terry
Phillips and Melanie Mroz as such person’s true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for such person and
in such person’s name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the SEC, and does hereby grant unto each said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agents or any
of them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
  Signature
                                            
                                            Title
                                            
                                            Date/s/
      TERRY PHILLIPS
                                            
                                            Chairman
      of the Board
                                            
                                            October
      13, 2009Terry
      Phillips/s/
      MELANIE MROZ
                                            
                                            President,
      Chief Executive Officer,
                                              Interim
      Chief Financial Officer and Director
                                            
                                            October
      13, 2009Melanie
      Mroz
                                            
                                            (Principal
      Executive Officer)/s/
      REBA L. McDERMOTT
                                            
                                            Interim
      Chief Accounting Officer
                                            
                                            October
      13, 2009Reba
      L. McDermott
                                            
                                            (Principal
      Financial and Accounting Officer)/s/
      DAVID BUCKEL
                                            
                                            Director
                                            
                                            October
      13, 2009David
      Buckel/s/
      PAUL EIBELER
                                            
                                            Director
                                            
                                            October
      13, 2009Paul
      Eibeler/s/
      LOUIS M. JANNETTY
                                            
                                            Director
                                            
                                            October
      13, 2009Louis
      M. Jannetty
  46
  INDEX
TO FINANCIAL STATEMENTS
  PagesReport
      of Independent Registered Public Accounting Firm
                      
                      
                      F-2Consolidated
      balance sheets as of June 30, 2009 and 2008
                      
                      
                      F-3Consolidated
      statements of operations for the years ended June 30, 2009 and
      2008
                      
                      
                      F-4Consolidated
      statements of cash flows for the years ended June 30, 2009 and
      2008
                      
                      
                      F-5Consolidated
      statements of shareholders’ equity for the years ended June 30, 2009 and
      2008
                      
                      
                      F-6Notes
      to Consolidated Financial Statements
                      
                      
                      F-7
  F-1
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders of
 SouthPeak
Interactive Corporation:
 
 We have
audited the accompanying consolidated balance sheets of SouthPeak Interactive
Corporation and subsidiaries as of June 30, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing auditing procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  As
discussed under Liquidity Risk in Note 1 to the consolidated financial
statements, the Company faces a material uncertainty in connection with the
renewal of its line of credit that may affect the Company’s
liquidity.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SouthPeak Interactive
Corporation and subsidiaries as of June 30, 2009 and 2008, and the results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
  /s/
Reznick Group, P.C.
 
 Vienna,
Virginia
 October
13,
2009
  F-2
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30, 2009
                                            
                                            
                                            June 30, 2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            648,311
                                            
                                            
                                            $
                                            4,095,036Restricted
      cash
                                            
                                            
                                            1,245,582
                                            
                                            
                                            
                                            139,104Accounts
      receivable, net of allowances of $7,214,984 and $1,108,465 at June 30,
      2009 and 2008, respectively
                                            
                                            
                                            4,872,767
                                            
                                            
                                            
                                            13,665,332Inventories
                                            
                                            
                                            4,459,837
                                            
                                            
                                            
                                            6,538,644Current
      portion of advances on royalties
                                            
                                            
                                            8,435,415
                                            
                                            
                                            
                                            3,321,954Current
      portion of intellectual property licenses
                                            
                                            
                                            378,575
                                            
                                            
                                            
                                            133,458Related
      party receivables
                                            
                                            
                                            33,207
                                            
                                            
                                            
                                            48,243Prepaid
      expenses and other current assets
                                            
                                            
                                            672,795
                                            
                                            
                                            
                                            1,281,371Total
      current assets
                                            
                                            
                                            20,746,489
                                            
                                            
                                            
                                            29,223,142Property
      and equipment, net
                                            
                                            
                                            2,754,139
                                            
                                            
                                            
                                            1,669,150Advances
      on royalties, net of current portion
                                            
                                            
                                            1,556,820
                                            
                                            
                                            
                                            1,053,500Intellectual
      property licenses, net of current portion
                                            
                                            
                                            1,950,278
                                            
                                            
                                            
                                            1,311,542Goodwill
                                            
                                            
                                            7,490,065
                                            
                                            
                                            
                                            -Intangible
      assets, net
                                            
                                            
                                            43,810
                                            
                                            
                                            
                                            -Other assets
                                            
                                            
                                            11,872
                                            
                                            
                                            
                                            22,974Total
      assets
                                            
                                            $
                                            34,553,473
                                            
                                            
                                            $
                                            33,280,308Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Line
      of credit
                                            
                                            $
                                            5,349,953
                                            
                                            
                                            $
                                            4,851,819Current
      maturities of long-term debt
                                            
                                            
                                            50,855
                                            
                                            
                                            
                                            24,252Accounts
      payable
                                            
                                            
                                            19,686,168
                                            
                                            
                                            
                                            14,258,255Accrued
      royalties
                                            
                                            
                                            414,696
                                            
                                            
                                            
                                            523,013Accrued
      expenses and other current liabilities
                                            
                                            
                                            2,419,100
                                            
                                            
                                            
                                            1,456,915Deferred
      revenues
                                            
                                            
                                            2,842,640
                                            
                                            
                                            
                                            -Due
      to shareholders
                                            
                                            
                                            232,440
                                            
                                            
                                            
                                            228,998Due
      to related parties
                                            
                                            
                                            125,045
                                            
                                            
                                            
                                            9,900Accrued
      expenses - related parties
                                            
                                            
                                            184,766
                                            
                                            
                                            
                                            5,770Total
      current liabilities
                                            
                                            
                                            31,305,663
                                            
                                            
                                            
                                            21,358,922Long-term
      debt, net of current maturities
                                            
                                            
                                            1,538,956
                                            
                                            
                                            
                                            1,038,140Total
      liabilities
                                            
                                            
                                            32,844,619
                                            
                                            
                                            
                                            22,397,062Commitments
      and contingencies
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Shareholders’
      equity:Preferred
      stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued
      and outstanding at June 30, 2009 and 2008
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Series
      A convertible preferred stock, $0.0001 par value; 15,000,000 shares
      authorized; 5,953,833 and 12,984,833 shares issued and outstanding at June
      30, 2009 and 2008, respectively; aggregate liquidation preference of
      $5,953,833
                                            
                                            
                                            595
                                            
                                            
                                            
                                            1,298Common
      stock, $0.0001 par value; 90,000,000 shares authorized; 44,530,100 and
      35,920,100 shares issued and outstanding at June 30, 2009 and 2008,
      respectively
                                            
                                            
                                            4,453
                                            
                                            
                                            
                                            3,592Additional
      paid-in capital
                                            
                                            
                                            25,210,926
                                            
                                            
                                            
                                            20,825,105Accumulated
      deficit
                                            
                                            
                                            (23,145,800
                                            )
                                            
                                            
                                            (9,796,709
                                            )Accumulated
      other comprehensive loss
                                            
                                            
                                            (361,320
                                            )
                                            
                                            
                                            (150,040
                                            )Total
      shareholders’ equity
                                            
                                            
                                            1,708,854
                                            
                                            
                                            
                                            10,883,246Total
      liabilities and shareholders’ equity
                                            
                                            $
                                            34,553,473
                                            
                                            
                                            $
                                            33,280,308
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the years ended June 30,2009
                                                      
                                                      
                                                      2008Net
      revenues
                                                      
                                                      $
                                                      47,307,960
                                                      
                                                      
                                                      $
                                                      40,153,094Cost
      of goods sold:Product
      costs
                                                      
                                                      
                                                      24,377,621
                                                      
                                                      
                                                      
                                                      22,280,392Royalties
                                                      
                                                      
                                                      9,654,810
                                                      
                                                      
                                                      
                                                      4,924,967Write-off
      of acquired game sequel titles
                                                      
                                                      
                                                      1,142,000
                                                      
                                                      
                                                      
                                                      -Intellectual
      property licenses
                                                      
                                                      
                                                      454,437
                                                      
                                                      
                                                      
                                                      -Total
      cost of goods sold
                                                      
                                                      
                                                      35,628,868
                                                      
                                                      
                                                      
                                                      27,205,359Gross
      profit
                                                      
                                                      
                                                      11,679,092
                                                      
                                                      
                                                      
                                                      12,947,735Operating
      expenses:Warehousing
      and distribution
                                                      
                                                      
                                                      1,254,947
                                                      
                                                      
                                                      
                                                      468,008Sales
      and marketing
                                                      
                                                      
                                                      11,778,958
                                                      
                                                      
                                                      
                                                      4,434,894Restructuring
      costs
                                                      
                                                      
                                                      639,210
                                                      
                                                      
                                                      
                                                      -Transaction
      costs
                                                      
                                                      
                                                      64,628
                                                      
                                                      
                                                      
                                                      1,579,946General
      and administrative
                                                      
                                                      
                                                      9,748,754
                                                      
                                                      
                                                      
                                                      3,650,017Total
      operating expenses
                                                      
                                                      
                                                      23,486,497
                                                      
                                                      
                                                      
                                                      10,132,865(Loss)
      income from operations
                                                      
                                                      
                                                      (11,807,405
                                                      )
                                                      
                                                      
                                                      2,814,870Interest
      expense, net
                                                      
                                                      
                                                      399,247
                                                      
                                                      
                                                      
                                                      1,191,014(Loss)
      income before income taxes
                                                      
                                                      
                                                      (12,206,652
                                                      )
                                                      
                                                      
                                                      1,623,856Income
      tax expense
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      70,298Net
      (loss) income
                                                      
                                                      
                                                      (12,206,652
                                                      )
                                                      
                                                      
                                                      1,553,558Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
                                                      
                                                      
                                                      1,142,439
                                                      
                                                      
                                                      
                                                      8,405,383Net
      loss attributable to common shareholders
                                                      
                                                      $
                                                      (13,349,091
                                                      )
                                                      
                                                      $
                                                      (6,851,825
                                                      )Basic loss per
      share:
                                                      
                                                      $
                                                      (.36
                                                      )
                                                      
                                                      $
                                                      (.20
                                                      )Diluted loss per
      share:
                                                      
                                                      $
                                                      (.36
                                                      )
                                                      
                                                      $
                                                      (.20
                                                      )Weighted
      average number of common shares outstanding - Basic
                                                      
                                                      
                                                      36,978,758
                                                      
                                                      
                                                      
                                                      35,125,697Weighted
      average number of common shares outstanding - Diluted
                                                      
                                                      
                                                      36,978,758
                                                      
                                                      
                                                      
                                                      35,125,697
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the
      years ended June 30,2009
                                                        
                                                        
                                                        2008Cash flows from
      operating activities:Net
      (loss) income
                                                        
                                                        $
                                                        (12,206,652
                                                        )
                                                        
                                                        $
                                                        1,553,558Adjustments
      to reconcile net cash used in operating activities:Depreciation
      and amortization
                                                        
                                                        
                                                        378,153
                                                        
                                                        
                                                        
                                                        92,668Allowances
      for price protection, returns, and defective
    merchandise
                                                        
                                                        
                                                        5,510,293
                                                        
                                                        
                                                        
                                                        (872,218
                                                        )Bad
      debt expense
                                                        
                                                        
                                                        596,226
                                                        
                                                        
                                                        
                                                        37,057Stock-based
      compensation expense
                                                        
                                                        
                                                        741,618
                                                        
                                                        
                                                        
                                                        800,656Amortization
      of royalties and intellectual property licenses
                                                        
                                                        
                                                        10,109,247
                                                        
                                                        
                                                        
                                                        4,924,967Write-off
      of acquired game sequel titles
                                                        
                                                        
                                                        1,142,000
                                                        
                                                        
                                                        
                                                        -Changes
      in operating assets and liabilities:Accounts
      receivable
                                                        
                                                        
                                                        3,176,920
                                                        
                                                        
                                                        
                                                        (8,236,494
                                                        )Inventories
                                                        
                                                        
                                                        2,235,552
                                                        
                                                        
                                                        
                                                        (5,699,208
                                                        )Advances
      on royalties
                                                        
                                                        
                                                        (11,845,881
                                                        )
                                                        
                                                        
                                                        (7,838,978
                                                        )Intellectual
      property licenses
                                                        
                                                        
                                                        (1,290,000
                                                        )
                                                        
                                                        
                                                        (1,360,000
                                                        )Related
      party receivables
                                                        
                                                        
                                                        15,036
                                                        
                                                        
                                                        
                                                        (48,243
                                                        )Prepaid
      expenses and other current assets
                                                        
                                                        
                                                        644,945
                                                        
                                                        
                                                        
                                                        (1,206,099
                                                        )Other
      assets
                                                        
                                                        
                                                        11,102
                                                        
                                                        
                                                        
                                                        -Accounts
      payable
                                                        
                                                        
                                                        (70,383
                                                        )
                                                        
                                                        
                                                        12,290,066Accrued
      royalties
                                                        
                                                        
                                                        (387,345
                                                        )
                                                        
                                                        
                                                        (523,492
                                                        )Accrued
      expenses - related parties
                                                        
                                                        
                                                        178,996
                                                        
                                                        
                                                        
                                                        (646,707
                                                        )Deferred
      revenues
                                                        
                                                        
                                                        (886,460
                                                        )
                                                        
                                                        
                                                        -Accrued
      expenses and other current liabilities
                                                        
                                                        
                                                        (1,305,245
                                                        )
                                                        
                                                        
                                                        568,517Total
      adjustments
                                                        
                                                        
                                                        8,954,774
                                                        
                                                        
                                                        
                                                        (7,717,508
                                                        )Net
      cash used in operating activities
                                                        
                                                        
                                                        (3,251,878
                                                        )
                                                        
                                                        
                                                        (6,163,950
                                                        )Cash
      flows from investing activities:Purchases
      of property and equipment
                                                        
                                                        
                                                        (499,410
                                                        )
                                                        
                                                        
                                                        (560,455
                                                        )Cash
      payments to effect acquisition, net of cash acquired
                                                        
                                                        
                                                        (247,543
                                                        )
                                                        
                                                        
                                                        -Security
      deposits
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (8,731
                                                        )Increase
      in restricted cash
                                                        
                                                        
                                                        (1,106,478
                                                        )
                                                        
                                                        
                                                        (139,104
                                                        )Net
      cash used in investing activities
                                                        
                                                        
                                                        (1,853,431
                                                        )
                                                        
                                                        
                                                        (708,290
                                                        )Cash
      flows from financing activities:Proceeds
      from line of credit
                                                        
                                                        
                                                        35,739,346
                                                        
                                                        
                                                        
                                                        19,445,500Repayments
      of line of credit
                                                        
                                                        
                                                        (35,241,212
                                                        )
                                                        
                                                        
                                                        (19,416,553
                                                        )Repayments
      of long-term debt
                                                        
                                                        
                                                        (30,681
                                                        )
                                                        
                                                        
                                                        (6,058
                                                        )Proceeds
      from long-term debt
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,000,000Net
      proceeds from (repayments) of amounts due to
    shareholders
                                                        
                                                        
                                                        3,442
                                                        
                                                        
                                                        
                                                        (277,328
                                                        )Net
      proceeds from (repayments) of amounts due to related
      parties
                                                        
                                                        
                                                        115,145
                                                        
                                                        
                                                        
                                                        (25,135
                                                        )Proceeds
      from the issuance of Series A convertible preferred stock, net of cash
      offering costs
                                                        
                                                        
                                                        1,283,824
                                                        
                                                        
                                                        
                                                        9,952,936Cash
      acquired in reverse acquisition
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        43,551Distributions
      to shareholders
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,205,004
                                                        )Net
      cash provided by financing activities
                                                        
                                                        
                                                        1,869,864
                                                        
                                                        
                                                        
                                                        10,511,909Effect
      of exchange rate changes on cash and cash equivalents
                                                        
                                                        
                                                        (211,280
                                                        )
                                                        
                                                        
                                                        (54,898
                                                        )Net
      (decrease) increase in cash and cash equivalents
                                                        
                                                        
                                                        (3,446,725
                                                        )
                                                        
                                                        
                                                        3,584,771Cash
      and cash equivalents at beginning of year
                                                        
                                                        
                                                        4,095,036
                                                        
                                                        
                                                        
                                                        510,265Cash
      and cash equivalents at end of year
                                                        
                                                        $
                                                        648,311
                                                        
                                                        
                                                        $
                                                        4,095,036Supplemental
      cash flow information:Cash
      paid during the year for interest
                                                        
                                                        $
                                                        372,032
                                                        
                                                        
                                                        $
                                                        460,556Cash
      paid during the year for taxes
                                                        
                                                        $
                                                        62,888
                                                        
                                                        
                                                        $
                                                        11,850Supplemental
      disclosure of non-cash activities:Intellectual
      property licenses included in accrued expenses and other current
      liabilities
                                                        
                                                        $
                                                        50,000
                                                        
                                                        
                                                        $
                                                        85,000Purchase
      of land and building through the assumption of a mortgage note
      payable
                                                        
                                                        $
                                                        500,000
                                                        
                                                        
                                                        $
                                                        1,068,450Purchase
      of vehicle through the assumption of a note payable
                                                        
                                                        $
                                                        58,100
                                                        
                                                        
                                                        $
                                                        -Warrants
      issued in connection with Gamecock acquisition
                                                        
                                                        $
                                                        1,218,098
                                                        
                                                        
                                                        $
                                                        -Contingent
      purchase price payment obligations related to Gamecock
      acquisition
                                                        
                                                        $
                                                        876,053
                                                        
                                                        
                                                        $
                                                        -Conversion
      of secured term note payable to Series A convertible preferred
      stock
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        2,000,000Barter
      transaction in exchange for inventory
                                                        
                                                        $
                                                        73,208
                                                        
                                                        
                                                        $
                                                        -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS
OF SHAREHOLDERS’ EQUITY
  Series A Convertible
                                                                                                                                  Preferred Stock
                                                                                                                                
                                                                                                                                Common Stock
                                                                                                                                
                                                                                                                                Additional
                                                                                                                                  Paid-in
                                                                                                                                
                                                                                                                                Accumulated
                                                                                                                                
                                                                                                                                
                                                                                                                                Accumulated
                                                                                                                                  Other
                                                                                                                                  Comprehensive
                                                                                                                                
                                                                                                                                
                                                                                                                                Treasury
                                                                                                                                
                                                                                                                                
                                                                                                                                Total
                                                                                                                                  Shareholders’
                                                                                                                                  EquityShares
                                                                                                                                
                                                                                                                                Amount
                                                                                                                                
                                                                                                                                Shares
                                                                                                                                
                                                                                                                                Amount
                                                                                                                                
                                                                                                                                Capital
                                                                                                                                
                                                                                                                                Deficit
                                                                                                                                
                                                                                                                                
                                                                                                                                Income
      (loss)
                                                                                                                                
                                                                                                                                
                                                                                                                                Stock
                                                                                                                                
                                                                                                                                
                                                                                                                                (Deficit)Balance, June 30, 2007
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                35,000,000
                                                                                                                                
                                                                                                                                $
                                                                                                                                3,500
                                                                                                                                
                                                                                                                                $
                                                                                                                                (3,500
                                                                                                                                )
                                                                                                                                $
                                                                                                                                (1,716,324
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                175,666
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                (1,540,658
                                                                                                                                )Net
      income
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                1,553,558
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,553,558Foreign
      currency translation adjustment
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (325,706
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (325,706
                                                                                                                                )Comprehensive
      income
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,227,852Stock
      issuance in connection with reverse merger
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                920,100
                                                                                                                                
                                                                                                                                
                                                                                                                                92
                                                                                                                                
                                                                                                                                
                                                                                                                                (123,630
                                                                                                                                )
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (123,538
                                                                                                                                )Distributions
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,434,002
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,434,002
                                                                                                                                )Capitalization
      of accumulated losses of limited liability company
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                (205,442
                                                                                                                                )
                                                                                                                                
                                                                                                                                205,442
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -Shareholder
      contribution of shares
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                643,418
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (643,418
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -Issuance
      of Series A convertible preferred stock, net of offering
      costs
                                                                                                                                
                                                                                                                                
                                                                                                                                12,984,833
                                                                                                                                
                                                                                                                                
                                                                                                                                1,298
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                11,951,638
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                11,952,936Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                8,405,383
                                                                                                                                
                                                                                                                                
                                                                                                                                (8,405,383
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -Compensatory
      restricted stock and stock options
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                157,238
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                643,418
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                800,656Balance,
      June 30, 2008
                                                                                                                                
                                                                                                                                
                                                                                                                                12,984,833
                                                                                                                                
                                                                                                                                
                                                                                                                                1,298
                                                                                                                                
                                                                                                                                
                                                                                                                                35,920,100
                                                                                                                                
                                                                                                                                
                                                                                                                                3,592
                                                                                                                                
                                                                                                                                
                                                                                                                                20,825,105
                                                                                                                                
                                                                                                                                
                                                                                                                                (9,796,709
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (150,040
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                10,883,246Net
      loss
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                (12,206,652
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (12,206,652
                                                                                                                                )Foreign
      currency translation
      adjustment
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (211,280
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (211,280
                                                                                                                                )Comprehensive
      loss
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (12,417,932
                                                                                                                                )Issuance
      of Series A convertible preferred stock, net of offering
      costs
                                                                                                                                
                                                                                                                                
                                                                                                                                1,579,000
                                                                                                                                
                                                                                                                                
                                                                                                                                158
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                1,283,666
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,283,824Conversion
      of preferred stock to common
      stock
                                                                                                                                
                                                                                                                                
                                                                                                                                (8,610,000
                                                                                                                                )
                                                                                                                                
                                                                                                                                (861
                                                                                                                                )
                                                                                                                                
                                                                                                                                8,610,000
                                                                                                                                
                                                                                                                                
                                                                                                                                861
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                1,142,439
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,142,439
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -Compensatory
      restricted stock and stock options
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                741,618
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                741,618Warrants
      issued in connection with acquisition
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                1,218,098
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,218,098Balance,
      June 30, 2009
                                                                                                                                
                                                                                                                                
                                                                                                                                5,953,833
                                                                                                                                
                                                                                                                                $
                                                                                                                                595
                                                                                                                                
                                                                                                                                
                                                                                                                                44,530,100
                                                                                                                                
                                                                                                                                $
                                                                                                                                4,453
                                                                                                                                
                                                                                                                                $
                                                                                                                                25,210,926
                                                                                                                                
                                                                                                                                $
                                                                                                                                (23,145,800
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                (361,320
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                1,708,854
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 1. Summary of Significant
Accounting Policies
  Operations
  Global
Services Partners Acquisition Corporation, a Delaware corporation (“Global
Services”), was organized on August 10, 2005 as a blank check company whose
objective was to acquire an operating business.
  On April
25, 2008, Global Services entered into an agreement (the “SouthPeak
Acquisition”) with SouthPeak Interactive, L.L.C. (“SouthPeak”). The agreement
provided for Global Services to issue 35,000,000 shares of common stock to the
members of SouthPeak in exchange for all of the membership interests in
SouthPeak.
  On May
12, 2008, the stockholders of Global Services voted in favor of the SouthPeak
Acquisition. Subsequent to the SouthPeak Acquisition, SouthPeak’s business
activities were the activities of Global Services, which changed its name to
SouthPeak Interactive Corporation (herein referred to as the “Company”). The
prior members of SouthPeak own a majority of the equity of the Company and
are responsible for carrying out its business plan.  The
transaction has been treated as a reverse acquisition and a capital transaction,
equivalent to the issuance of stock by SouthPeak for the Company’s net assets,
and accordingly, the historical financial statements prior to May 12, 2008 are
those of SouthPeak. The Company has retroactively presented the reverse
acquisition as if it occurred on July 1, 2005. All shares and per share data
prior to the SouthPeak Acquisition have been restated to reflect the stock
issuance and the effect of closing of the SouthPeak Acquisition. Accordingly,
the June 30, 2007 consolidated statement of shareholders’ equity has been
adjusted to reflect the effect of the aforementioned reverse
acquisition.
  At the
closing of the SouthPeak Acquisition, the President of SouthPeak, entered into
an employment agreement to serve as the Company’s Chairman, and the Chief
Executive Officer of SouthPeak, entered into an employment agreement to serve as
the Company’s President and Chief Executive Officer.
  Risks
and Uncertainties
  Liquidity
Risk
  For the
fiscal year ended June 30, 2009 the Company incurred a significant
loss.  In order to meet its working capital needs during the past
fiscal year as well as currently, the Company has been, and is, dependent on its
line of credit with SunTrust Banks, Inc. (“SunTrust”).  This line of
credit is scheduled to expire on November 30, 2009.  The line of
credit has been in place since 2005 and has been extended every year thereafter.
Management is currently in discussions with SunTrust to renew the line of
credit.  While management believes the line of credit will be renewed,
there are no assurances that the line of credit will be renewed or renewed at
terms that are acceptable to the Company.  In the event the line of
credit is not renewed, management, plans to pursue other financing sources
which, based upon the quality of the Company’s receivables, management believes
will be available to the Company.  The Company’s largest shareholder
who serves as the Company’s chairman, has committed to fund operating cash
shortfalls in the absence of another source of financing.   In
addition, independent of the risks associated with the non-renewal of the Sun
Trust line, the Company has engaged an investment bank for the purpose of
potentially raising capital to fund its growth most likely through the sale of
equity securities during its fiscal year ended June 30,
2010.  However, such capital, if needed and available may not have
terms favorable to the Company or its current shareholders.
 
 The
Company’s business model allows it to scale certain of its costs in reference to
its available capital and market conditions including funding new game
development costs as well as certain operating expenses such as sales and
marketing costs.  Irrespective of having a credit facility or other
funding in place, management closely monitors the retail/consumer landscape,
especially for upcoming holiday seasons, and reevaluates its sales and revenue
forecasts in order to scale its expenses and game development costs to the
Company’s performance and its available capital.  Based on the
Company’s projected operating plan, the Company believes that it has access to
adequate financial resources to fund its operations for at least the next twelve
months
  Business
  The
Company is an independent developer and publisher of interactive entertainment
software.  The Company develops, markets and publishes videogames for
all leading gaming and entertainment hardware platforms, including home
videogame consoles such as Microsoft Xbox 360, Nintendo Wii, Sony PlayStation 3
and Sony PlayStation 2; handheld platforms such as Nintendo DS, Nintendo DSi,
Sony PSP, Sony PSPgo and Apple iPhone; and personal computers.  The
Company’s titles span a wide range of categories and target a variety of
consumer demographics, ranging from casual players to hardcore gaming
enthusiasts.
  The
Company maintains its operations in the United States and the United Kingdom.
The Company sells its games to retailers and distributors in North America and
United Kingdom, and primarily to distributors in the rest of Europe, Australia,
Asia and Japan.
  Gamecock
Acquisition
  On
October 10, 2008, the Company acquired Gone Off Deep, LLC, doing business
as Gamecock Media Group (“Gamecock”), pursuant to a definitive purchase
agreement (see Note 2).  Gamecock’s operations were included in the
Company’s financial statements for all periods subsequent to the consummation of
the business combination only.
  F-7




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Consolidated Financial Statements
  1. Summary
of Significant Accounting Policies,
continued
  Principles
of Consolidation
  The
consolidated financial statements include the accounts of SouthPeak Interactive
Corporation, and its wholly-owned subsidiaries SouthPeak Interactive, L.L.C.,
SouthPeak Interactive, Ltd., Vid Sub, LLC, Gone Off Deep, L.L.C. and Gamecock
Media Europe Ltd. All intercompany accounts and transactions have been
eliminated in consolidation.
  Segment
Reporting
  The
Company has one operating segment, a publisher and distributor of interactive
entertainment software for home video consoles, handheld platforms and personal
computers, pursuant to the provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” To date,
management has not considered discrete geographical or other information to be
relevant for purposes of making decisions about allocations of
resources.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of net revenues and
expenses during the reporting periods. The most significant estimates and
assumptions relate to the recoverability of advances on royalties, intellectual
property licenses and intangibles, valuation of inventories, realization of
deferred income taxes, the adequacy of allowances for sales returns,
price protection and doubtful accounts, accrued liabilities, the valuation
of stock-based transactions and assumptions used in the Company’s goodwill
impairment test.  These estimates generally involve complex issues and
require the Company to make judgments, involve analysis of historical and the
prediction of future trends, and are subject to change from period to period.
Actual amounts could differ significantly from these estimates.
  Concentrations
of Credit Risk, Major Customers and Major Vendors
  The
financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash balances with financial institutions and
accounts receivable. At various times during the years ended June 30, 2009 and
2008, the Company had deposits in excess of the Federal Deposit Insurance
Corporation (“FDIC”) limit at a financial institution in the United States; and
in excess of the Financial Services Compensation Scheme (“FSCS”) limit at a
financial institution in the UK.
  The
Company does not generally require collateral or other security to support
accounts receivable. Management must make estimates of the uncollectibility of
the accounts receivable. The Company considers accounts receivable past due
based on how recently payments have been received. The Company has established
an allowance for doubtful accounts based upon the facts surrounding the credit
risk of specific customers, past collections history and other
factors.
  The
Company has two customers, Wal-Mart and GameStop, that accounted for 18% and
16%, respectively, of consolidated gross revenues for the year ended June 30,
2009.  Navarre Corporation, GameStop, and Wal-Mart accounted for 20%,
17% and 15%, respectively, of consolidated gross accounts receivable at June 30,
2009.  For year ended June 30, 2008, Wal-Mart and SVG Distribution
accounted for 12% and 11%, respectively, of consolidated gross
revenues.  SVG Distribution, Solutions 2 Go, and Wal-Mart accounted
for 22%, 21% and 13%, respectively, of consolidated gross accounts receivable at
June 30, 2008.
  The
Company publishes video games for the proprietary console and hand-held
platforms created by Microsoft, Sony and Nintendo, pursuant to the licenses they
have granted to the Company. Should the Company’s licenses with any of such
three platform developers not be renewed by the developer, it would cause a
disruption in the Company’s operations. The Company expects that such contracts
will be renewed in the normal course of business.
  Amounts
incurred related to these three vendors as of and for the years ended June 30,
2009 and 2008 are as follows:
 
 Cost
      of Goods Sold — Products
                          For
      the years ended
                        
                        
                        Accounts
      Payable
                          As
      of June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Microsoft
                        
                        $
                        1,895,357
                        
                        
                        $
                        3,082,383
                        
                        
                        $
                        142,329
                        
                        
                        $
                        -Nintendo
                        
                        $
                        2,169,093
                        
                        
                        $
                        302,864
                        
                        
                        $
                        -
                        
                        
                        $
                        -Sony
                        
                        $
                        675,005
                        
                        
                        $
                        1,068,583
                        
                        
                        $
                        12,493
                        
                        
                        $
                        -
 In
addition, the Company has purchased a significant amount of video games for
resale for such platforms from a single supplier. Such purchases amounted to
$4,191,109 and $14,887,910 in "cost of goods sold - product costs" for the years
ended June 30, 2009 and 2008, respectively. Amounts included in accounts payable
for this vendor at June 30, 2009 and 2008 totaled $8,652,019 and $14,390,008,
respectively.
  F-8
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  Fair
Values of Financial Instruments
  The
recorded amounts of the Company’s cash and cash equivalents, receivables,
accounts payable, and accrued liabilities approximate fair values principally
because of the short-term nature of these items.  The fair value of
the Company's long-term obligations, the majority of which are carried at a
variable rate of interest, are estimated based on the current rates offered to
the Company for obligations of similar terms and maturities. Under this method,
the Company's fair value of long-term obligations was not significantly
different than the carrying values at June 30, 2009 and 2008.
  Cash
and Cash Equivalents
  Cash and
cash equivalents include all highly liquid investments with maturities of three
months or less when purchased.
  Restricted
Cash
  Restricted
cash relates to deposits held as cash collateral for the line of credit and
funds held in escrow pending resolution of an outstanding litigation
matter.
  At June
30, 2009 and 2008, restricted cash consisted of the following:
  2009
                          
                          
                          2008Cash
      collateral for the line of credit (See Note 6)
                          
                          $
                          742,199
                          
                          
                          $
                          139,104Funds
      held in escrow pending resolution of litigation (See Note 18), of which
      $265,919 is included as a liability at June 30,
      2009
                          
                          
                          503,383
                          
                          
                          
                          -Total
                          
                          $
                          1,245,582
                          
                          
                          $
                          139,104
  Allowances
for Returns, Price Protection, and Doubtful Accounts
  Management
closely monitors and analyzes the historical performance of the Company’s
various games, the performance of games released by other publishers, and the
anticipated timing of other releases in order to assess future demands of
current and upcoming games. Initial volumes shipped upon title launch and
subsequent reorders are evaluated to ensure that quantities are sufficient
to meet the demands from the retail markets, but at the same time are
controlled to prevent excess inventory in the channel.
  The
Company may permit product returns from, or grant price protection to, its
customers under certain conditions. Price protection refers to the circumstances
when the Company elects to decrease the wholesale price of a product based
on the number of products in the retail channel and, when granted
and taken, allows customers a credit against amounts owed by such customers to
the Company with respect to open and/or future invoices. The criteria the
Company’s customers must meet to be granted the right to return products or
price protection include, among other things, compliance with applicable payment
terms, and consistent delivery to the Company of inventory and sell-through
reports. In making the decision to grant price protection to customers, the
Company also considers other factors, including the facilitation of slow-moving
inventory and other market factors.
  Management
must estimate the amount of potential future product returns and price
protection related to current period revenues utilizing industry and historical
Company experience, information regarding inventory levels, and the demand and
acceptance of the Company’s games by end consumers. The following factors are
used to estimate the amount of future returns and price protection for a
particular game: historical performance of games in similar genres; historical
performance of the hardware platform; sales force and retail customer feedback;
industry pricing; weeks of on-hand retail channel inventory; absolute quantity
of on-hand retail channel inventory; the game’s recent sell-through history (if
available); marketing trade programs; and competing games. Significant
management judgments and estimates must be made and used in connection with
establishing the allowance for returns and price protection in any accounting
period. Based upon historical experience, management believes the estimates are
reasonable. However, actual returns and price protection could vary materially
from management’s allowance estimates due to a number of unpredictable reasons
including, among others, a lack of consumer acceptance of a game, the release in
the same period of a similarly themed game by a competitor, or technological
obsolescence due to the emergence of new hardware platforms. Material
differences may result in the amount and timing of the Company’s revenues for
any period if factors or market conditions change or if management makes
different judgments or utilizes different estimates in determining the
allowances for returns and price protection.
  F-9
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  Similarly,
management must make estimates of the uncollectibility of the Company’s accounts
receivable. In estimating the allowance for doubtful accounts, the Company
analyzes the age of current outstanding account balances, historical bad debts,
customer concentrations, customer creditworthiness, current economic trends, and
changes in the Company’s customers’ payment terms and their economic condition.
Any significant changes in any of these criteria would affect management’s
estimates in establishing the allowance for doubtful accounts.
  At June
30, 2009 and 2008, accounts receivable allowances consisted of the
following:
  2009
                        
                        
                        2008Sales
      returns
                        
                        $
                        1,294,082
                        
                        
                        $
                        155,652Price
      protection
                        
                        
                        4,998,622
                        
                        
                        
                        823,085Doubtful
      accounts
                        
                        
                        874,645
                        
                        
                        
                        22,169Defective
      items
                        
                        
                        47,635
                        
                        
                        
                        107,559Total
      allowances
                        
                        $
                        7,214,984
                        
                        
                        $
                        1,108,465
  Inventories
  Inventories
are stated at the lower of average cost or market. Management regularly reviews
inventory quantities on hand and in the retail channel and records a provision
for excess or obsolete inventory based on the future expected demand for the
Company’s games. Significant changes in demand for the Company’s games would
impact management’s estimates in establishing the inventory
provision.  Inventory costs include licensing fees paid toplatform proprietors.
These licensing fees include the cost to manufacture the game cartridges. These
licensing fees included in “cost of goods sold - product costs” amounted to
$4,739,455 and $4,453,831, for the years ended June 30, 2009 and 2008,
respectively. Licensing fees included in inventory at June 30, 2009 and 2008
totaled $920,747 and $200,789, respectively.
  Advances on
Royalties
  The
Company utilizes independent software developers to develop its
games in exchange for payments to the developers based upon
certain contract milestones. The Company enters into contracts with the
developers once the game design has been approved by the platform proprietors
and is technologically feasible.  Accordingly, the Company capitalizes
such payments to the developers during development of the games. These payments
are considered non-refundable royalty advances and are applied against the
royalty obligations owed to the developer from future sales of the game. Any
pre-release milestone payments that are not prepayments against future royalties
are expensed to “cost of goods sold - royalties” in the period when the game is
released. Capitalized royalty costs for those games that are cancelled or
abandoned are charged to “cost of goods sold - royalties” in the period of
cancellation.  Capitalized costs for games that are cancelled or
abandoned prior to product release are charged to “cost of goods sold -
royalties” in the period of cancellation. The costs were $202,562 and $3,000 for
the years ended June 30, 2009 and 2008, respectively.
  Beginning
upon the related games release, capitalized royalty costs are amortized to “cost
of goods sold – royalties” based on the ratio of current revenues to total
projected revenues for the specific game, generally resulting in an amortization
period of twelve months or less.
  The
Company evaluates the future recoverability of capitalized royalty costs on a
quarterly basis. For games that have been released in prior periods, the primary
evaluation criterion is actual title performance. For games that are scheduled
to be released in future periods, recoverability is evaluated based on the
expected performance of the specific game to which the royalties relate.
Criteria used to evaluate expected game performance include: historical
performance of comparable games developed with comparable technology; orders for
the game prior to its release; and, for any game sequel, estimated performance
based on the performance of the game on which the sequel is based.
  Significant
management judgments and estimates are utilized in the assessment of the
recoverability of capitalized royalty costs. In evaluating the recoverability of
capitalized royalty costs, the assessment of expected game performance utilizes
forecasted sales amounts and estimates of additional costs to be incurred. If
revised forecasted or actual game sales are less than, and/or revised forecasted
or actual costs are greater than, the original forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than
originally estimated in any given quarter, which could result in an impairment
charge. Material differences may result in the amount and timing of charges for
any period if management makes different judgments or utilizes different
estimates in evaluating these qualitative factors.
  F-10
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary
of Significant Accounting Policies, continued
  Intellectual
Property Licenses
  Intellectual
property license costs consist of fees paid by the Company to license the use of
trademarks, copyrights, and software used in the development of games. Depending
on the agreement, the Company may use acquired intellectual property in multiple
games over multiple years or for a single game.  When no significant
performance remains with the licensor upon execution of the license agreement,
the Company records an asset and a liability at the contractual amount. The
Company believes that the contractual amount represents the fair value of the
liability. When significant performance remains with the licensor, the Company
records the payments as an asset when paid and as a liability when incurred,
rather than upon execution of the agreement. The Company classifies these
obligations as current liabilities to the extent they are contractually due
within the next twelve months.  Capitalized intellectual property
license costs for those games that are cancelled or abandoned are charged to
“cost of goods sold - intellectual property licenses” in the period of
cancellation.
  Beginning
upon the related game’s release, capitalized intellectual property license costs
are amortized to “cost of sales - intellectual property licenses” based on the
greater of (1) the ratio of current revenues for the specific game to total
projected revenues for all games in which the licensed property will be utilized
or (2) the straight-line amortization method over the estimated useful lives of
the licenses. As intellectual property license contracts may extend for multiple
years, the amortization of capitalized intellectual property license costs
relating to such contracts may extend beyond one year.
  The
Company evaluates the future recoverability of capitalized intellectual property
license costs on a quarterly basis. For games that have been released in prior
periods, the primary evaluation criterion is actual title performance. For games
that are scheduled to be released in future periods, recoverability is evaluated
based on the expected performance of the specific games to which the costs
relate or in which the licensed trademark or copyright is to be used. Criteria
used to evaluate expected game performance include: historical performance of
comparable games developed with comparable technology; orders for the game prior
to its release; and, for any game sequel, estimated performance based on the
performance of the game on which the sequel is based.  Further, as
intellectual property licenses may extend for multiple games over multiple
years, the Company also assesses the recoverability of capitalized intellectual
property license costs based on certain qualitative factors, such as the
success of other products and/or entertainment vehicles utilizing the
intellectual property and the continued promotion and exploitation of the
intellectual property.
  Significant
management judgments and estimates are utilized in the assessment of the
recoverability of capitalized intellectual property license costs. In evaluating
the recoverability of capitalized intellectual property license costs, the
assessment of expected game performance utilizes forecasted sales amounts and
estimates of additional costs to be incurred. If revised forecasted or actual
game sales are less than, and/or revised forecasted or actual costs are greater
than, the original forecasted amounts utilized in the initial recoverability
analysis, the net realizable value may be lower than originally estimated in any
given quarter, which could result in an impairment charge. Material differences
may result in the amount and timing of charges for any period if management
makes different judgments or utilizes different estimates in evaluating these
qualitative factors.
  Property
and Equipment
  Property
and equipment are recorded at cost. Depreciation and amortization is provided
using the straight-line method over the estimated useful lives: buildings, 40
years; computer equipment and software, 3 to 5 years; office furniture and other
equipment, 5 to 10 years; and leasehold improvements, 5 years. When assets are
retired or disposed of, the cost and accumulated depreciation and amortization
thereon are removed and any resulting gains or losses are recognized in current
operations. Expenditures for maintenance and repairs are charged to operations
as incurred. Renewals and betterments are capitalized.
  Internal-use
Software
 
 The
Company capitalizes direct costs of materials and services used in the
development of internal-use software.  Amounts capitalized are
amortized on a straight-line basis over a period of three to five years and are
reported as a component of computer equipment and software within property and
equipment, net.  Unamortized computer software costs as of June 30, 2009
and 2008 are $74,617 and $64,938, respectively.  Amortization expense
of computer software costs are $34,330 and $20,556 for the years ended June
30, 2009 and 2008, respectively.
  Goodwill
and Intangible Assets
  Goodwill
is the excess of purchase price paid over identified intangible and tangible net
assets of Gamecock. Intangible assets consist of acquired game sequel titles,
distribution and non-compete agreements. Certain intangible assets acquired in a
business combination are recognized as assets apart from goodwill. Identified
intangibles other than goodwill are generally amortized using the straight-line
method over the period of expected benefit ranging from one to three years,
except for acquired game sequel titles, which is a usage-based intangible asset
that is amortized using the shorter of the useful life or expected revenue
stream. During
the year ended June 30, 2009, the Company incurred an impairment charge of
$1,142,000 related to the write-off of acquired game sequel titles due to the
underperformance of the acquired titles.
   F-11
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary
of Significant Accounting Policies, continued
  Assessment
of Impairment of Assets
  Current
accounting standards require that the Company assess the recoverability of
purchased intangible assets and other long-lived assets whenever events or
changes in circumstances indicate the remaining value of the assets recorded on
its consolidated balance sheets is potentially impaired. In order to determine
if a potential impairment has occurred, management must make various assumptions
about the estimated fair value of the asset by evaluating future business
prospects and estimated cash flows. For some assets, the Company’s estimated
fair value is dependent upon predicting which of its products will be
successful. This success is dependent upon several factors, which are beyond the
Company’s control, such as which operating platforms will be successful in
the marketplace, market acceptance of the Company’s products and competing
products. Also, the Company’s revenues and earnings are dependent on the
Company’s ability to meet its product release schedules.
  SFAS No.
142 “Goodwill and Other Intangible Assets,” requires a two-step approach to
testing goodwill for impairment for each reporting unit. The Company’s reporting
units are determined by the components of its operating segments that constitute
a business for which both (1) discrete financial information is available and
(2) segment information that management regularly reviews for the operating
results of that component. SFAS No. 142 requires that the impairment test be
performed at least annually by applying a fair-value-based test. The first step
measures for impairment by applying fair-value-based tests at the reporting unit
level. The second step (if necessary) measures the amount of impairment by
applying fair-value-based tests to the individual assets and liabilities within
each reporting unit.
  To
determine the fair values of the reporting units used in the first step, the
Company uses a combination of the market approach, which utilizes comparable
companies’ data and/or the income approach, or discounted cash flows. Each step
requires management to make judgments and involves the use of significant
estimates and assumptions. These estimates and assumptions include long-term
growth rates and operating margins used to calculate projected future cash
flows, risk-adjusted discount rates based on the Company’s weighted average cost
of capital, future economic and market conditions and determination of
appropriate market comparables. These estimates and assumptions have to be made
for each reporting unit evaluated for impairment. The Company’s estimates for
market growth, its market share, and costs are based on historical data, various
internal estimates, and certain external sources, and are based on assumptions
that are consistent with the plans and estimates the Company is using to manage
the underlying business. The Company’s business consists of publishing and
distribution of interactive entertainment software and content using both
established and emerging intellectual properties, and its forecasts for emerging
intellectual properties are based upon internal estimates and external sources
rather than historical information and have an inherently higher risk of
accuracy. If future forecasts are revised, they may indicate or require future
impairment charges. The Company bases its fair value estimates on assumptions it
believes to be reasonable but that are unpredictable and inherently uncertain.
Actual future results may differ from those estimates.
  Derivative
Financial Instruments
  The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
  The
Company reviews the terms of convertible debt and equity instruments issued to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. When the risks and rewards of
any embedded derivative instrument are not “clearly and closely” related to the
risks and rewards of the host instrument, the embedded derivative instrument is
generally required to be bifurcated and accounted for separately. If the
convertible instrument is debt, or has debt-like characteristics, the risks and
rewards associated with the embedded conversion option are not “clearly and
closely” related to that debt host instrument. The conversion option has the
risks and rewards associated with an equity instrument, not a debt instrument,
because its value is related to the value of our common stock. Nonetheless, if
the host instrument is considered to be “conventional convertible debt” (or
“conventional convertible preferred stock”), bifurcation of the embedded
conversion option is generally not required. However, if the instrument is not
considered to be conventional convertible debt (or conventional convertible
preferred stock), bifurcation of the embedded conversion option may be required
in certain circumstances. Generally, where the ability to physical or net-share
settle the conversion option is deemed to be not within the control of the
Company, the embedded conversion option is required to be bifurcated and
accounted for as a derivative financial instrument liability.
  F-12
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  In
connection with the sale of convertible debt and equity instruments, the Company
may also issue freestanding options or warrants. Additionally, the Company may
issue options or warrants to non-employees in connection with consulting or
other services they provide. Although the terms of the options and warrants may
not provide for net-cash settlement, in certain circumstances, physical or
net-share settlement may be deemed to not be within the control of the Company
and, accordingly, the Company may be required to account for these freestanding
options and warrants as derivative financial instrument liabilities, rather than
as equity.
  Derivative
financial instruments are required to be initially measured at their fair value.
For derivative financial instruments that shall be accounted for as liabilities,
the derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.
  In
circumstances where the embedded conversion option in a convertible instrument
may be required to be bifurcated and there are also other embedded derivative
instruments in the convertible instrument that are required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.
  If the
embedded derivative instrument is to be bifurcated and accounted for as a
liability, the total proceeds received will be first allocated to the fair value
of the bifurcated derivative instrument. If freestanding options or warrants
were also issued and are to be accounted for as derivative instrument
liabilities (rather than as equity), the proceeds are next allocated to the fair
value of those instruments. The remaining proceeds, if any, are then allocated
to the convertible instrument itself, usually resulting in that instrument being
recorded at a discount from its face amount. In circumstances where a
freestanding derivative instrument is to be accounted for as an equity
instrument, the proceeds are allocated between the convertible instrument and
the derivative equity instrument, based on their relative fair
values.
  To the
extent that the fair values of the bifurcated and/or freestanding derivative
instrument liabilities exceed the total proceeds received, an immediate charge
to income is required to be recognized, in order to initially record the
derivative instrument liabilities at their fair value. The discount from the
face value of the convertible debt instrument is required to be amortized over
the life of the instrument through periodic charges to income, using the
effective interest method. When the instrument is convertible preferred stock,
the periodic amortization of the discount is charged directly to retained
earnings.
  The
Company reviews the classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, at the end of
each reporting period. Derivative instrument liabilities are required to be
classified in the balance sheet as current or non-current based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date. The Company currently does not have any
derivative instruments that are required to be bifurcated and recorded as
liabilities.
  Convertible
Preferred Stock with Detachable Warrants and Beneficial Conversion
Feature
  The
Company has accounted for the issuance of detachable stock purchase warrants in
accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants,” whereby the Company separately measured the fair
value of the convertible preferred stock and the detachable warrants and
allocated the total proceeds on a relative fair value basis to
each.
  In
accordance with the provisions of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, and EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” the Company allocated a portion of the proceeds
received to the embedded beneficial conversion feature, based on the difference
between the effective conversion price of the proceeds allocated to the
convertible preferred stock and the fair value of the underlying common stock on
the date the convertible preferred stock was issued. Since the convertible
preferred stock also had detachable stock purchase warrants, the Company first
allocated the proceeds to the stock purchase warrants and the convertible
preferred stock and then allocates the resulting convertible preferred stock
proceeds between the beneficial conversion feature, which was accounted for as
paid-in capital, and the initial carrying amount of the convertible preferred
stock. The discount resulting from the beneficial conversion feature is recorded
as a deemed dividend.
  F-13
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  Registration
Rights
  Pursuant
to the sale of Series A convertible preferred stock, the Company is obligated to
file a registration statement with the Securities Exchange Commission (“SEC”)
covering the resale of the shares of its common stock within 30 days following
the Company’s filing of its Form 10-K for the year ended June 30, 2008 but no
later than October 15, 2008 (the “Filing Deadline”).
  If the
registration statement is not filed with the SEC by the Filing Deadline, the
Company will make pro rata payments to each holder of Series A convertible
preferred stock in an amount equal to .5% of the aggregate amount invested by
such holder of Series A convertible preferred stock for each 30 day period (or
portion thereof) for which no registration statement is filed.  In
accordance with FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements”,the Company
has recognized a $196,511 liability associated with the registration rights
agreement.
  Income
Taxes
  Prior
to May 12, 2008, SouthPeak Interactive, L.L.C. and its subsidiaries had elected
to be taxed as partnership under Subchapter K of the Internal Revenue Code.
Therefore, the results of the Company’s operations were included in the taxable
income of the individual members. As a result, no provision for federal income
taxes was recorded. Subsequent to the SouthPeak Acquisition, the Company was
reorganized as a C corporation under which income taxes are accounted for under
the asset and liability method in accordance with SFAS No. 109, “Accounting for
Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established to
reduce deferred tax assets to the amounts expected to be
realized.
  Revenue
Recognition
  The
Company recognizes revenue from the sale of video games upon the transfer of
title and risk of loss to the customer.  The Company applies the
provisions of Statement of Position 97-2, "Software Revenue Recognition," in
conjunction with the applicable provisions of Staff Accounting Bulletin No. 104,
"Revenue Recognition." Accordingly, the Company recognizes revenue for
software titles when (1) there is persuasive evidence that an arrangement
with the customer exists, which is generally a purchase order, (2) the product
is delivered, (3) the selling price is fixed or determinable and (4) collection
of the customer receivable is deemed probable.  The Company’s
payment arrangements with customers typically provides for net 30 and 60 day
terms. Advances received for licensing and exclusivity arrangements are reported
on the consolidated balance sheets as deferred revenues until the Company meets
its performance obligations, at which point the revenues are
recognized. Revenue is recognized after deducting estimated reserves for
returns, price protection and other allowances. In circumstances when the
Company does not have a reliable basis to estimate returns and
price protection or is unable to determine that collection of a receivable
is probable, the Company defers the revenue until such time as it can reliably
estimate any related returns and allowances and determine that collection of the
receivable is probable.
  Some of
the Company’s video games provide limited online features at no additional cost
to the consumer. Generally, the Company considers such features to be incidental
to the overall product offering and an inconsequential deliverable. Accordingly,
the Company recognizes revenue related to video games containing these limited
online features upon the transfer of title and risk of loss to the
customer.  In instances where online features or additional
functionality are considered a substantive deliverable in addition to the video
game, the Company takes this into account when applying its revenue recognition
policy.  This evaluation is performed for each video game together
with any online transactions, such as electronic downloads or video game add-ons
when it is released.  When the Company determines that a video game
contains online functionality that constitutes a more-than-inconsequential
separate service deliverable in addition to the video game, principally because
of its importance to game play, the Company considers that its performance
obligations for this game extend beyond the delivery of the game. Fair
value does not exist for the online functionality, as the Company does not
separately charge for this component of the video game. As a result, the Company
recognizes all of the revenue from the sale of the game upon the delivery of the
remaining online functionality.  In addition, the Company defers the
costs of sales for this game and recognizes the costs upon delivery of the
remaining online functionality.
  With
respect to online transactions, such as electronic downloads of games or add-ons
that do not include a more-than-inconsequential separate service deliverable,
revenue is recognized when the fee is paid by the online customer to purchase
online content and the Company is notified by the online retailer that the
product has been downloaded. In addition, persuasive evidence of an arrangement
must exist, collection of the related receivable must be probable and the fee
must be fixed and determinable.
  F-14
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  Third-party
licensees in Europe distribute Gamecock’s video games under license agreements
with Gamecock. The licensees paid certain minimum, non-refundable, guaranteed
royalties when entering into the licensing agreements. Upon receipt of the
advances, the Company defers their recognition and recognizes the revenues in
subsequent periods as these advances are earned by the Company. As the
licensees pay additional royalties above and beyond those initially advanced,
the Company recognizes these additional royalties as revenues when
earned.
  With
respect to license agreements that provide customers the right to make multiple
copies in exchange for guaranteed amounts, revenue is recognized upon delivery
of a master copy. Per copy royalties on sales that exceed the guarantee are
recognized as earned.  In addition, persuasive evidence of an
arrangement must exist, collection of the related receivable must be probable,
and the fee must be fixed and determinable.
  Consideration
Given to Customers and Received from Vendors
  Sales
incentives or other consideration given by the Company to its customers are
accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No.
01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)” (“EITF No. 01-9”).  In accordance
with EITF No. 01-9, sales incentives and other consideration that are considered
adjustments of the selling price of the Company’s games, such as rebates and
product placement fees, are reflected as reductions to revenue.  Sales
incentives and other consideration that represent costs incurred by the Company
for assets or services received, such as the appearance of games in a customer’s
national circular ad, are reflected as sales and marketing
expenses.
  Cost
of Goods Sold
  Cost
of goods sold includes: manufacturing costs, royalties, write-off of
acquired game sequel titles, and amortization of intellectual property
licenses.
  Shipping
and Handling
  The
Company incurs shipping and handling costs in its operations. These costs
consist of freight expenses incurred for third-party shippers to transport the
product to the customers. These costs are included in the warehousing and
distribution expenses in the accompanying consolidated statements of operations.
Amounts billed to customers are included in net revenues.
  Advertising
  The
Company expenses advertising sales promotion expenses as incurred, except for
production costs associated with media advertising which are deferred and
charged to expense the first time the related advertisement is run. The Company
engages in cooperative marketing with certain retail channel partners. The
Company accrues marketing and sales incentive costs when the revenue is
recognized and such amounts are included in sales and marketing expense when
there is an identifiable benefit for which the Company can reasonably estimate
the fair value of the benefit; otherwise, they are recognized as a reduction of
net revenues. In addition, during the year ended June 30, 2009, the Company
engaged in an advertising barter transaction in which
the Company sold inventory in exchange for marketing services and recorded the
transaction based on the value of the asset transferred. Revenues and marketing
expenses in the amount of $73,208 were recorded in accordance with
EITF No. 99-17 “Accounting for Advertising Barter Transactions.” Advertising
expenses for the years ended June 30, 2009 and 2008 were $10,178,741 and
$3,359,622, respectively, and are included in sales and marketing in the
accompanying consolidated statements of operations.
  Stock-Based
Compensation
  The
Company accounts for stock-based compensation in accordance with SFAS No. 123,
“Share-Based Payment” (“SFAS No. 123R”).  SFAS No. 123R requires
companies to estimate the fair value of share-based payment awards on the
measurement date using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the consolidated statements of
operations.
  F-15
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  Stock-based
compensation expense recognized in the consolidated statements of operations is
based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
  The
Company estimates the value of employee stock options on the date of grant using
the Black-Scholes option pricing model. The Company’s determination of fair
value of share-based payment awards on the date of grant using an option-pricing
model is affected by the Company’s stock price as well as assumptions regarding
a number of highly complex and subjective variables. These variables include,
but are not limited to; the expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise
behaviors.
  The
Company accounts for equity instruments issued to non-employees in accordance
with SFAS No. 123(R) and EITF No. 96-18, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.”  Accordingly, the estimated fair value of
the equity instrument is recorded on the earlier of the performance commitment
date or the date the services required are completed.  Until shares
under the award are fully vested, the Company marks-to-market the fair value of
the options at the end of each accounting period.
  Transaction
Costs
  In
connection with the Company’s acquisition of SouthPeak Interactive L.L.C., the
Company has incurred certain professional fees, which have been expensed during
the years ended June 30, 2009 and 2008.
  Foreign
Currency Translation
  The
functional currency for the Company’s foreign operations is the applicable local
currency. Accounts of foreign operations are translated into U.S. dollars using
exchange rates for assets and liabilities at the balance sheet date and average
prevailing exchange rates for the period for revenue and expense accounts.
Adjustments resulting from translation are included in other comprehensive
income (loss). Realized transaction gains and losses are included in income in
the period in which they occur, except on intercompany balances considered to be
long-term. Transaction gains and losses on intercompany balances considered to
be long-term are recorded in other comprehensive income (loss). Foreign exchange
transaction gains (losses) included in general and administrative expenses in
the accompanying consolidated statements of operations for the years ended June
30, 2009 and 2008 amounted to $(45,676) and $(237,699),
respectively.
  Comprehensive
Income (Loss)
  SFAS
No. 130, “Reporting Comprehensive Income,” requires the Company to report
foreign currency translation adjustments as a component of other comprehensive
income or loss. Comprehensive income (loss) is disclosed in the consolidated
statements of shareholders’ equity (deficit). Foreign currency translation
adjustments have been the only component of comprehensive loss to date.
Accordingly, accumulated other comprehensive loss is equal to the accumulated
translation adjustment of $361,320 and $150,040 at June 30, 2009 and 2008,
respectively. The Company's item of other comprehensive income (loss) is
its foreign currency translation adjustment, which relates to investments that
are considered permanent in nature and therefore do not require tax
adjustments.
  Fair
Value Measurements
  Effective
July 1, 2009, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS
157") for certain financial assets and liabilities. This standard establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. SFAS
157 also establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The statement requires that
assets and liabilities carried at fair value be classified and disclosed in one
of the following three categories:
  §
              Level
      1: Quoted market prices in active markets for identical assets or
      liabilities.
  §
              Level
      2: Quoted prices in active markets for similar assets and liabilities,
      quoted prices for identically similar assets or liabilities in markets
      that are not active and models for which all significant inputs are
      observable either directly or
indirectly.
  F-16
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  §
              Level
      3: Unobservable inputs reflecting the reporting entity's own assumptions
      or external inputs for inactive
markets.
  The
determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. While the Company has previously invested in certain assets that
would be classified as "level 1", as of June 30, 2009, the Company does not hold
any "level 1" cash equivalents that are measured at fair value on a recurring
basis, nor does the Company have any assets or liabilities that are based on
"level 2" or "level 3" inputs.
  Earnings
(Loss) Per Common Share
  Basic
earnings (loss) per share is computed by dividing net income (loss) attributable
to common shareholders by the weighted average number of common shares
outstanding for all periods.  Diluted earnings per share is computed
by dividing net income (loss) attributable to common shareholders by the
weighted average number of shares outstanding, increased by common stock
equivalents.  Common stock equivalents represent incremental shares
issuable upon exercise of outstanding options and warrants, the conversion of
preferred stock and the vesting of restricted stock. However, potential common
shares are not included in the denominator of the diluted earnings (loss) per
share calculation when inclusion of such shares would be anti-dilutive, such as
in a period in which a net loss is recorded.  Potentially dilutive
securities including outstanding options, warrants, restricted stock, and the
conversion of preferred stock amounted to 14,145,866 and 1,716,809 during the
years ended June 30, 2009 and 2008, respectively.
  Reclassifications
  Certain
reclassifications have been made to the June 30, 2008 financial statements to
conform to the June 30, 2009 financial statement presentation. These
reclassifications did not change previously reported total assets, liabilities,
shareholders’ equity or net loss.
  Recent
Accounting Pronouncements
  During
September 2009, the Emerging Issues Task Force issued EITF 08-1, “Revenue
Arrangements with Multiple Deliverables” and EITF 09-3, “Applicability of
Statement of Position 97-2 to Certain Arrangements that include Software
Elements”.  EITF 08-1 modifies the requirements for determining
whether deliverables meet the separate unit of accounting criteria and requires
allocation of arrangement consideration based on relative selling
price.  EITF 09-3 provides more guidance on whether transactions
should be accounted for under SOP 97-2, “Software Revenue Recognition.” The
Company must adopt EITF 08-1 and EITF 09-3 at the same time, no later than in
the first fiscal year beginning after June 15, 2010, but earlier adoption is
permitted.  Companies may adopt prospectively or
retrospectively.  The Company is currently evaluating the impact that
the adoption of EITF 08-1 and EITF 09-3 will have on the Company’s consolidated
financial position and results of operations.
 
 In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets”. SFAS No. 166 amends FASB Statement No. 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”by
removing the concept of a qualifying special-purpose entity from Statement 140
and removing the exception from applying FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities”, to qualifying
special-purpose entities. SFAS 166 also requires enhanced disclosures to provide
financial statement users with greater transparency about transfers of financial
assets and a transferor’s continuing involvement with transferred financial
assets. SFAS 166 must be applied as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009. The
Company is currently evaluating the potential impact of SFAS 166 on its
consolidated financial position and results of operations.
 
 In
June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No. 162." SFAS
No. 168 establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS No. 162 is effective for the Company's
interim reporting period ending on September 30, 2009. The Company does not
anticipate the adoption of SFAS No. 168 will have a material impact on its
consolidated financial position, results of operations or cash
flows.
 
 In May
2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS No. 165 is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This SFAS requires the disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date. The disclosure requirement under this SFAS is effective for the
Company's annual reporting for the fiscal year ended on June 30, 2009. The
Company has adopted the required disclosures in its financial
statements.
  F-17
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  1. Summary of Significant
Accounting Policies, continued
  In April
2009, the FASB issued FSP SFAS No. 141(R)-1, "Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies."
FSP SFAS No. 141(R)-1 will amend the provisions related to the initial
recognition and measurement, subsequent measurement and disclosure of assets and
liabilities arising from contingencies in a business combination under SFAS No.
141(R), "Business Combinations." The FSP will carry forward the requirements in
SFAS No. 141, "Business Combinations," for acquired contingencies, thereby
requiring that such contingencies be recognized at fair value on the acquisition
date if fair value can be reasonably estimated during the allocation period.
Otherwise, entities would typically account for the acquired contingencies in
accordance with SFAS No. 5, "Accounting for Contingencies." The FSP will have
the same effective date as SFAS No. 141(R), and will therefore be effective for
the Company's business combinations for which the acquisition date is on or
after July 1, 2009. The Company is currently evaluating the impact of the
implementation of FSP SFAS No. 141(R)-1 on its consolidated financial position,
results of operations and cash flows.
  In
April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments." FSP SFAS No. 107-1 and
APB 28-1 enhances consistency in financial reporting by increasing the frequency
of fair value disclosures. The FSP relates to fair value disclosures for any
financial instruments that are not currently reflected on a company's balance
sheet at fair value. Prior to the effective date of this FSP, fair values for
these assets and liabilities have only been disclosed once a year. The FSP will
now require these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. The disclosure
requirement under this FSP is effective for the Company's interim reporting
period ending on September 30, 2009. The
Company is currently evaluating the impact, if any, that this FSP will have on
its consolidated results of operations, financial condition, or cash
flows.
  In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, "Determination
of the Useful Life of Intangible Assets." This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets," or SFAS 142. The intent of this FSP is
to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141R and other generally accepted accounting
principles. This FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The Company is currently evaluating the
impact, if any, that this FSP will have on its consolidated results of
operations, financial position or cash flows.
  In
December 2007, the FASB issued Statement No. 141 (Revised), "Business
Combinations" ("SFAS No. 141R") and SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements ("SFAS 160"). SFAS No. 141R and SFAS 160
revise the method of accounting for a number of aspects of business combinations
and non-controlling interests, including acquisition costs, contingencies
(including contingent assets, contingent liabilities and contingent purchase
price), the impacts of partial and step-acquisitions (including the valuation of
net assets attributable to non-acquired minority interests), and post
acquisition exit activities of acquired businesses. SFAS 141R and SFAS 160 will
be effective for the Company during the fiscal year beginning July 1, 2009. The
Company cannot anticipate whether the adoption of SFAS No. 141R will have a
material impact on its consolidated results of operations and financial
condition as the impact is solely dependent on the terms of any business
combination entered into by the Company after July 1, 2009.
  2. GamecockAcquisition
  On
October 10, 2008, the Company acquired Gamecock pursuant to a definitive
purchase agreement (the “Gamecock Agreement”) with Vid Agon, LLC (the “Seller”)
and Vid Sub, LLC (the “Member”). The Member is a wholly-owned subsidiary of the
Seller and Gamecock is a wholly-owned subsidiary of the
Member.  Pursuant to the terms of the Gamecock Agreement, the Company
acquired all of the outstanding membership interests of the Member in exchange
for aggregate consideration of 7% of the future revenues from sales of certain
Gamecock games, net of certain distribution fees and advances, and a warrant to
purchase 700,000 shares of the Company’s common stock.
  The
Gamecock acquisition allows the Company to broaden its portfolio of games by
purchasing games under development. Goodwill arises from the Gamecock
acquisition due to the acquired work force of Gamecock, and the expected
synergies from the Gamecock acquisition.
  The
amount of the contingent purchase price payment obligations (the “Gamecock
Earn-Out”) will be added to the purchase price (i.e. goodwill) when the
contingency is resolved.
  F-18




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2. Gamecock Acquisition, continued
  The
purchase price of Gamecock consists of the following items:
  Fair
      value of 700,000 warrants to purchase common stock with an exercise price
      of $1.50 per share based on the closing date of the transaction, October
      10, 2008
                      
                      $
                      1,033,164Transaction
      costs
                      
                      
                      750,000Total
      initial purchase consideration
                      
                      $
                      1,783,164
  The fair
value of the stock warrants was determined using the Black-Scholes option
pricing model and the following assumptions: (a) the fair value of the Company’s
common stock of $2.35 per share, which is the closing price as of October 10,
2008, (b) volatility of 57.68%, (c) a risk free interest rate of 2.77%, (d)
an expected term, also the contractual term, of 5.0 years, and (e) an
expected dividend yield of 0.0%.
  The
allocation of the purchase price below was based upon a valuation and the
Company’s estimates and assumptions are subject to change. The primary areas of
those purchase price allocations that are not finalized relate to certain
intangible assets and residual goodwill. Any material adjustments to this
purchase price allocation in future periods will be disclosed. The valuation of
acquired assets and liabilities performed in part by an unrelated third-party
valuation firm is as follows:
  Working
      capital, excluding inventories
                    
                    $
                    827,287Inventories
                    
                    156,745Other
      current assets
                    
                    36,369Property
      and equipment
                    
                    209,441
 
 Estimated useful
                      lifeIntangible
      assets:Royalty
      agreements (Advances on royalties)
                    1 –
      2 years
                    
                    3,424,000Game
      sequel titles
                    5 –
      12 years
                    
                    1,142,000Non-compete
      agreements
                    Less
      than 1 year
                    
                    200,000Distribution
      agreements
                    3
      years
                    
                    40,000Goodwill
                    Indefinite
                    
                    
                    6,595,123Liabilities
                    
                    
                    
                    (10,847,801
                    )Total
      initial purchase consideration
                    
                    
                    $
                    1,783,164
  The
following table presents the gross and net balances, and accumulated
amortization of the components of the Company’s purchased amortizable intangible
assets included in the acquisition as of June 30, 2009:
  AccumulatedGross
                    
                    
                    Amortization
                    
                    
                    NetRoyalty
      agreements (Advances on royalties)
                    
                    $
                    3,424,000
                    
                    
                    $
                    2,268,099
                    
                    
                    $
                    1,155,901Intangible
      assets, netGame
      sequel titles
                    
                    $
                    1,142,000
                    
                    
                    $
                    1,142,000
                    
                    
                    $
                    -Non-compete
      agreements
                    
                    
                    200,000
                    
                    
                    
                    186,549
                    
                    
                    
                    13,451Distribution
      agreements
                    
                    
                    40,000
                    
                    
                    
                    9,641
                    
                    
                    
                    30,359Total
      intangible assets, net
                    
                    $
                    1,382,000
                    
                    
                    $
                    1,338,190
                    
                    
                    $
                    43,810
  Intangible
assets and goodwill are expected to be tax deductible.  During the
year ended June 30, 2009, the Company incurred an impairment charge of
$1,142,000 related to write-off of acquired game sequel titles due to the
underperformance of the acquired titles.
    F-19
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2. Gamecock Acquisition, continued
 Year ending June
      30,2010
                          
                          
                          $
                          26,7852011
                          
                          
                          $
                          13,3332012
                          
                          
                          $
                          3,692
  The
weighted average estimated amortization period as of June 30, 2009 is 20
months.
  As of
June 30, 2009, a total of $876,053, which may be netted contractually against
adjustments for excess payables, as defined pursuant to the Gamecock Agreement,
of the Gamecock Earn-Out has been achieved and was included to goodwill in the
consolidated balance sheets.
  The
following table summarizes the unaudited pro forma information assuming the
business combination had occurred at the beginning of the periods
presented.  This pro forma financial information is for informational
purposes only and does not reflect any operating efficiencies or inefficiencies
which may result from the business combination and therefore is not necessarily
indicative of results that would have been achieved had the businesses been
combined during the periods presented.
  For the years ended
                    June 30,2009
                  
                  
                  2008Pro
      forma net revenues
                  
                  $
                  48,109,355
                  
                  
                  $
                  44,692,824Pro
      forma net loss
                  
                  
                  (45,563,382
                  )
                  
                  
                  (6,363,417
                  )Pro
      forma net loss per share—basic
                  
                  
                  (1.23
                  )
                  
                  
                  (.18
                  )Pro
      forma net loss per share—diluted
                  
                  
                  (1.23
                  )
                  
                  
                  (.18
                  )
  On
December 4, 2008, the Company acquired the remaining 4% minority interest in
Gamecock in exchange for aggregate consideration of 50,000 warrants to purchase
shares of the Company’s common stock, with an exercise price of $1.50 per
share, exercisable subject to the achievement of certain revenue targets.
The transaction has been accounted for as a purchase and resulted in an increase
to goodwill of $18,889.  The fair value of the stock warrants was
determined using the Black-Scholes option pricing model and the following
assumptions: (a) the fair value of the Company’s common stock of $1.10 per
share, which is the closing price as of December 4, 2008, (b) volatility of
63.76%, (c) a risk free interest rate of 1.51%, (d) an expected term, also the
contractual term, of 3.0 years, and (e) an expected dividend yield of
0.0%.
  3. Inventories
  At June
30, 2009 and 2008, inventories consist of the following:
  2009
                        
                        
                        2008Finished
      goods
                        
                        $
                        3,858,518
                        
                        
                        $
                        6,239,060Purchased
      parts and components
                        
                        
                        601,319
                        
                        
                        
                        299,584Total
                        
                        $
                        4,459,837
                        
                        
                        $
                        6,538,644
  During
the years ended June 30, 2009 and 2008, inventory was written down in the amount
of $-0- and $33,643, respectively.
  4. Property and Equipment,
net
  At June
30, 2009 and 2008, property and equipment, net was comprised of the
following:
  2009
                      
                      
                      2008Land
                      
                      $
                      544,044
                      
                      
                      $
                      355,999Building
      and leasehold improvements
                      
                      
                      1,496,147
                      
                      
                      
                      984,267Computer
      equipment and software
                      
                      
                      719,621
                      
                      
                      
                      421,229Office
      furniture
      and other equipment
                      
                      
                      353,406
                      
                      
                      
                      94,1773,113,218
                      
                      
                      
                      1,855,672Less:
      accumulated depreciation and amortization
                      
                      
                      359,079
                      
                      
                      
                      186,522Property
      and equipment, net
                      
                      $
                      2,754,139
                      
                      
                      $
                      1,669,150
 F-20
 SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  4. Property and Equipment,
net,continued
  Depreciation
and amortization expense for the years ended June 30, 2009 and 2008 was
$181,963 and $92,668, respectively.
  On
January 30, 2009, the Company purchased a building in Grapevine, Texas for
$625,000.  In connection with the purchase, the Company entered into a
mortgage with a financial institution in the amount of $500,000 (see Note
7).  On October 4, 2007 the Company purchased a building and land in
Grapevine, Texas for $1,175,000. In connection with the purchase, the Company
entered into a mortgage with a financial institution in the amount of $1,068,450
(see Note 7).
  5. Intellectual Property
Licenses
  On
August 28, 2007, the Company contracted to use copyrighted images in a game that
a third party developer is developing for the Company for a total cost of
$100,000. As of June 30, 2009, the Company has recorded royalty payments
totaling $13,200 as an asset under the terms of the agreement.  In
addition, on October 29, 2007, the Company contracted to license software that
would be used in the development of games by third parties for a total cost of
$2,685,000 to be paid within 18 months. For the years ended June 30, 2009
and 2008, intellectual property expense related to the software was $456,147 and
$-0-, respectively.  At June 30, 2009 and 2008, the Company has
$135,000 and $85,000, respectively, related to these contracts, which is
included in accrued expenses and other current liabilities.
  6. Line of
Credit
  The
Company has a $7.5 million revolving line of credit facility with a financial
institution that expires on November 30, 2009. The line of credit bears interest
at prime plus 1⁄2%, which was 3.75% and 5.50% at June 30, 2009 and 2008,
respectively. The financial institution processes payments received on such
accounts receivable as payments on the revolving line of credit. The line is
collateralized by gross accounts receivable of approximately $8,673,000 and
$13,629,000 at June 30, 2009 and 2008, respectively. The line of credit is
further collateralized by personal guarantees, and pledge of personal securities
and assets by two Company shareholders, one of whom is the Company’s
chairman, and certain other affiliates. The agreement contains certain financial
and non-financial covenants. At June 30, 2009, the Company was in compliance
with these covenants.
  At June
30, 2009 and 2008, the outstanding line of credit balance was $5,349,953 and
$4,851,819, respectively. As of June 30, 2009 and 2008, the Company had $-0- and
$148,181, respectively, available under its credit facility. For the years ended
June 30, 2009 and 2008, interest expense relating to the line of credit was
$211,063 and $247,357, respectively.
  7. Long-term
Debt
  At June
30, 2009 and 2008, long-term debt was comprised of the following:
  2009
                        
                        
                        2008Mortgages
      payableFirst
      National Bank
                        
                        $
                        1,039,078
                        
                        
                        $
                        1,062,392Southwest
      Securities, FSB
                        
                        
                        493,437
                        
                        
                        
                        -Vehicle
      note payable
                        
                        
                        57,296
                        
                        
                        
                        -Total
      debt
                        
                        
                        1,589,811
                        
                        
                        
                        1,062,392Less
      current portion
                        
                        
                        50,855
                        
                        
                        
                        24,252Total
      long-term debt
                        
                        $
                        1,538,956
                        
                        
                        $
                        1,038,140
  F-21
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  7. Long-term Debt,continued
  On
January 30, 2009, the Company purchased a building in Grapevine, Texas for
$625,000.  In connection with the purchase, the Company entered into a
five year mortgage with a financial institution in the amount of
$500,000.  The interest rate on the mortgage adjusts daily to prime
plus 1.0% (5.5% at June 30, 2009).  Principal and interest are payable
in monthly installments of $3,439 beginning February 28, 2009 and continuing
until January 28, 2014 when the entire balance of principal and accrued interest
is due and payable.  The mortgage is secured by the land and
building. The Company’s chairman has personally guaranteed the
mortgage note.
  On
October 4, 2007, the Company purchased a building and land in Grapevine, Texas
for $1,175,000. This building is being used by the Company as office space. In
connection with the purchase, the Company entered into a 20 year mortgage with a
financial institution in the amount of $1,068,450. The interest rate on the
mortgage adjusts every five years to prime minus 1⁄4% (7.5% at June 30, 2009). The
monthly principal and interest payment is $8,611 with interest only payments for
the first six months. The mortgage is secured by the purchased land and
building. Two shareholders of the Company, one of whom is the Company’s
chairman, have personally guaranteed the mortgage note.
  The
scheduled maturities of the long-term debt as of June 30, 2009 are as
follows:
  Year
      ending June 30,2010
                      
                      $
                      50,8552011
                      
                      
                      54,4782012
                      
                      
                      58,3632013
                      
                      
                      62,5302014
                      
                      
                      478,008Thereafter
                      
                      
                      885,577Total
                      
                      
                      1,589,811Less:
      current maturities
                      
                      
                      50,855Long-term
      debt, net of current portion
                      
                      $
                      1,538,956
  8. Note
Payable
  On
February 27, 2008, the Company entered into a $2,000,000 secured term
note with FI Investment Group, LLC. The note bore interest at 14%, payable
monthly. On April 30, 2008, the note was modified granting a security interest
in substantially all of the assets of the Company, except for certain property
and equipment. On June 4, 2008, a shareholder of the Company issued the
holder of the note 215,190 shares of common stock as an inducement to convert
the entire note into Series A convertible preferred stock. The note was fully
converted by the holder on June 5, 2008 into 2,093,333 shares of Series A
convertible preferred stock.  During the year ended June 30, 2008, the
Company recognized $643,418 in interest expense related to the fair value of the
common stock issued to the holder to induce conversion.
  9. Related
Party Transactions
  Related
party receivables
  Related
party receivables consist of short-term advances to employees. No allowance has
been provided due to the short-term nature and recoverability of such
advances.
  F-22


SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  9. Related
Party Transactions,continued
  Due
to Shareholders
  During
the year ended June 30 2009, the Company’s chairman advanced the Company
$307,440. The advance was unsecured, payable on demand and non-interest
bearing.  At June 30, 2009, the amount due was
$232,440.  Subsequent to June 30, 2009, the amount was
repaid.
  On
January 14, 2008, the Company entered into an agreement with its members prior
to the reverse acquisition (see Note 1) to distribute an amount, in cash, for
the purpose of enabling existing shareholders of the Company to make tax
payments on the income the Company earned while it was taxed as partnership
under Subchapter K of the Internal Revenue Code. At June 30, 2008, the amounts
due to these shareholders were $228,998.  During the year ended June
30, 2009, $228,998 was distributed to these shareholders.  At June 30,
2009, the amount due to was $-0-.
  During
the year ended June 30, 2007, the Company received advances payable on demand
from a shareholder of the Company.  These advances were repaid during
the year ended June 30, 2008.  Such advances were unsecured and bore
interest at the annual rate of 8%. Interest expense under the advances was
$19,039 for the year ended June 30, 2008.
  Due
to Related Parties
  During
the year ended June 30, 2009, the Company collected sales commissions totaling
$226,216 on behalf of an affiliate of two shareholders of the Company, one
of whom is the Company's chairman.  At June 30, 2009, $113,499
remained payable to the affiliate and is included in due to related parties in
the accompanying consolidated balance sheets.
  During
the years ended June 30, 2009 and 2008, the Company expensed $78,562 and
$69,620, respectively, related to broadband usage from an internet
service provider partially owned by two shareholders of the Company, one of whom
is the Company's chairman, of which $11,546 and $9,900 remained as a
payable to the affiliate and is included in due to related parties in the
accompanying consolidated balance sheets at June 30, 2009 and 2008,
respectively.  These amounts are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
  During
the years ended June 30, 2009 and 2008, the Company expensed $12,927 and
$135,645, respectively, related to purchases from an import company
partially owned by the Company's chairman, of which no amounts were
outstanding at June 30, 2009 and 2008, respectively.  These amounts
are included in general and administrative expenses in the accompanying
consolidated statements of operations.
  Accrued
Expenses - Related Parties
  Accrued
expenses - related parties as of and for the years ended June 30, 2009 and 2008
are as follows:
  2009
                              
                              
                              2008Balance
      at July 1
                              
                              $
                              5,770
                              
                              
                              $
                              650,889Expenses
      incurred:Consulting
      fees
                              
                              
                              -
                              
                              
                              
                              920,930Rent
                              
                              
                              100,250
                              
                              
                              
                              56,917Commissions
                              
                              
                              705,032
                              
                              
                              
                              433,825Less:
      amounts paid
                              
                              
                              (626,286
                              )
                              
                              
                              (2,056,791
                              )Balance
      at June 30
                              
                              $
                              184,766
                              
                              
                              $
                              5,770
  The
Company incurred fees for office space and staff services under an informal
arrangement, which terminated during the year ended June 30, 2008, to an entity
partially owned by two shareholders of the Company, one of whom is the Company's
chairman. Fees for the years ended June 30, 2009 and 2008 were $-0- and
$920,930, respectively. These amounts are included in the general and
administrative expense in the accompanying consolidated statements of
operations.  The Company incurred sales commissions for the marketing
and sale of video games with two affiliates of the Company's
chairman.  Sales commissions for the years ended June 30, 2009 and
2008 were $705,032 and $433,825, respectively.  These amounts are
included in sales and marketing in the accompanying consolidated statements of
operations.
  F-23
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  9. Related
Party Transactions,continued
  Lease
- Related Parties
  The
Company leases certain office space from a company whose shareholders are also
shareholders of the Company, one of whom is the Company's
chairman.  Related party lease expense was $100,250 and $56,917 for
the years ended June 30, 2009 and 2008, respectively.  These amounts
are included in the general and administrative expense in the accompanying
consolidated statements of operations. The lease expires on December 31,
2010.
  The
Company leases certain office space to a company whose shareholders are also
shareholders of the Company, one of whom is the Company's chairman. 
Related lease income was $15,636 and $7,818 for years ended June 30, 2009 and
2008, respectively.  These amounts are included in general and
administrative expense in the accompanying consolidated statements of
operations.  The lease expires on December 31, 2010.
  10. Product Sales and Geographic
Information
  The
Company operates in one reportable segment in which it is a publisher and
distributor of interactive entertainment software for home video consoles,
handheld platforms and personal computers. The Company’s published games have
accounted for a significant portion of the net revenues of the Company. Net
revenues by product groups are as follows:
  Console
                    
                    
                    Hand-held
                    
                    
                    PC
                    
                    
                    Strategy
                      Guide
                    
                    
                    TotalFor
      the year endedJune
      30, 2009
                    
                    $
                    25,278,674
                    
                    
                    $
                    19,389,942
                    
                    
                    $
                    2,709,124
                    
                    
                    $
                    (69,780
                    )
                    
                    $
                    47,307,960June
      30, 2008
                    
                    $
                    34,847,458
                    
                    
                    $
                    810,606
                    
                    
                    $
                    3,972,433
                    
                    
                    $
                    522,597
                    
                    
                    $
                    40,153,094
  Geographic
information is based on the location of the selling entity. Geographic
information regarding net revenues for the year ended June 30, 2009 and 2008 is
as follows:
  North America
                    
                    
                    Europe
                    
                    
                    Other
                    
                    
                    ConsolidatedAs
      of and for the year ended June 30, 2009Net
      revenues
                    
                    $
                    42,009,085
                    
                    
                    $
                    4,273,463
                    
                    
                    $
                    1,025,412
                    
                    
                    $
                    47,307,960Long-lived
      assets
                    
                    
                    13,502,827
                    
                    
                    
                    304,157
                    
                    
                    
                    -
                    
                    
                    
                    13,806,984As
      of and for the year ended June 30, 2008Net
      revenues
                    
                    $
                    34,453,098
                    
                    
                    $
                    4,837,274
                    
                    
                    $
                    862,722
                    
                    
                    $
                    40,153,094Long-lived
      assets
                    
                    
                    3,673,522
                    
                    
                    
                    383,644
                    
                    
                    
                    -
                    
                    
                    
                    4,057,166
  11. Commitments
  The
total future minimum commitments as of June 30, 2009 are as
follows:
  Software
                      
                      
                      
                      
                      
                      OfficeDevelopers
                      
                      
                      Marketing
                      
                      
                      Lease
                      
                      
                      TotalFor
      the year ending June 30,2010
                      
                      $
                      10,260,479
                      
                      
                      $
                      71,793
                      
                      
                      $
                      182,688
                      
                      
                      $
                      10,514,9602011
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      93,052
                      
                      
                      
                      93,0522012
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      38,052
                      
                      
                      
                      38,052Total
                      
                      $
                      10,260,479
                      
                      
                      $
                      71,793
                      
                      
                      $
                      313,792
                      
                      
                      $
                      10,646,064
  F-24
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  11. Commitments, continued
  Developer
of Intellectual Property Contracts
  The
Company regularly enters into contractual arrangements with third parties for
the development of games as well as the rights to license intellectual property.
Under these agreements, the Company commits to provide specified payments to a
developer or intellectual property holders, based upon contractual arrangements,
and conditioned upon the achievement of specified development milestones. These
payments to third-party developers and intellectual property
holders typically are deemed to be advances and are recouped against future
royalties earned by the developers based on the sale of the related game. On
October 26, 2007, the Company entered into an agreement with a third party game
developer in connection with certain development agreements. Pursuant to the
agreement, the Company has committed to spend specified amounts for marketing
support of the related game which is to be developed. “Cost of goods sold -
royalties” amounted to $9,654,810 and $4,924,967 for the years ended June 30,
2009 and 2008, respectively.
  Lease
Commitments
  In
January 2008, the Company entered into a new four year lease for its United
Kingdom office, with a yearly rent of approximately $30,000 plus value added tax
(VAT).  Prior to this lease, the United Kingdom office had a one year
lease for office space beginning in December 2007, with a monthly rent of
approximately $5,200.  Office rent expense for the years ended June
30, 2009 and 2008 was $50,902 and $50,502, respectively.
  The
Company entered into a non-cancelable operating lease with an affiliate, on
January 1, 2008, for offices located in Midlothian, Virginia. The lease provided
for monthly payments of $7,542 for the first 12 months and increased to $9,167
in January 2009 for the remaining 24 months. Office rent expense for the years
ended June 30, 2009 and 2008 was $100,250 and $56,917,
respectively.
  Solicitation
Services
  Prior to
Global Services’ initial public offering, the Company engaged HCFP/Brenner
Securities, LLC (“HCFP”), on a non-exclusive basis, to act as its agent for the
solicitation of the exercise of the Class W and Class Z warrants. In
consideration for solicitation services, the Company agreed to pay HCFP a
commission equal to 5% of the exercise price for each Class W warrant and Class
Z warrant exercised after April 18, 2007 if the exercise is solicited by HCFP.
No services have been provided as of June 30, 2009.
  In
exchange for investment banking services related to the sale of the Series A
convertible preferred stock, the Company agreed to pay HCFP a fee
consisting of, (a) cash in an amount equal to 6.5% of the gross proceeds
received by the Company, including the conversion of indebtedness, (b) warrants
with an exercise price of $1.00 per share to purchase a number of shares of
common stock equal to 10% of the total number of shares of Series A convertible
preferred stock issued by the Company (for which HCFP received 1,456,383
warrants to purchase shares of common stock during the year ended June 30,
2009), and (c) one Class Y warrant for every ten Class Y warrants issued in
connection with the sale of Series A convertible preferred stock (for which HCFP
received Y warrants to purchase 616,015 shares of common stock during the year
ended June 30, 2009).  The fair value of the warrants was accounted
for as a cost of the Series A convertible preferred stock offering (see Notes 12
and 13).
  Employment
Agreements
  The
Company has employment agreements with several members of senior management. The
agreements, with terms ranging from approximately two to three years, provide
for minimum salary levels, performance bonuses, and severance
payments.
  12. Capital
Stock
  Preferred
Stock
  On May
12, 2008 the Company amended the articles of incorporation by increasing the
number of preferred stock authorized, par value $0.0001 per share, from
5,000,000 to 20,000,000 shares of preferred stock. Of the 20,000,000 authorized,
15,000,000 of the preferred stock were designated Series A convertible preferred
stock. The Series A convertible preferred stock votes together as a single class
and on an as converted basis with the common stock. The Series A convertible
preferred stock has no dividend right. The Company can require the conversion of
the Series A convertible preferred stock if the 10 day weighted closing price
per share of the Company’s common stock is at least $2.00 per share. The
remaining preferred stock may be issued in one or more series and to fix the
number of shares constituting any such series and the preferences, limitations
and relative rights, including but not limited to, dividend rights, dividend
rate, voting rights, terms of redemption, redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any
series.
  F-25
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 12. Capital
Stock, continued
  Series
A Convertible Preferred Stock
  During
the fiscal years ended June 30, 2009 and 2008, the Company raised $1,579,000 and
$10,891,500, respectively, in gross cash proceeds through the private placement
of 12,470,500 shares of a newly designated class of Series A convertible
preferred stock at a purchase price of $1.00 per share to a group of accredited
investors. The Company issued an additional 2,093,333 shares of Series A
convertible preferred stock at $1.00 per share in exchange for cancellation of
existing short-term indebtedness (see Note 8).
  The
shares of Series A convertible preferred stock are initially convertible into
common stock at a conversion price of $1.00 per share. In conjunction with the
private placement, for every two shares of preferred stock purchased, each
purchaser was entitled to exchange one Class W or Class Z warrant in exchange
for one Class Y warrant. Each Class Y warrant entitles the holder to purchase a
share of common stock for $1.50 per share. The expiration date for the Y
warrants is May 31, 2013. The Company issued 6,160,149 Class Y warrants in
exchange for the cancellation of 4,689,950 Class W and 1,470,199 Class Z
warrants (see Note 13).
  The
Company has accounted for the warrant exchange right similar to the issuance of
detachable stock purchase warrants in accordance with APB No. 14 “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants,” whereby the
Company separately measured the fair value of the convertible preferred stock
and the warrant exchange right and allocated the total proceeds on a relative
fair value basis to each.
  In
accordance with the provisions of EITF No. 98-5 and EITF No. 00-27, the Company
allocated a portion of the proceeds received to the embedded beneficial
conversion feature, based on the difference between the effective conversion
price of the proceeds allocated to the convertible preferred stock and the fair
value of the underlying common stock on the date the convertible preferred stock
was issued. Since the convertible preferred stock also had detachable stock
purchase warrants, the Company first allocated the proceeds to the stock
purchase warrants and the convertible preferred stock and then allocated the
resulting convertible preferred stock proceeds between the beneficial conversion
feature, which was accounted for as paid-in capital, and the initial carrying
amount of the convertible preferred stock. During the years ended June 30, 2009
and 2008, the discount resulting from the beneficial conversion feature was
recorded as a deemed dividend in the amount of $1,142,439 and $8,405,383,
respectively, representing the beneficial conversion feature of the Series A
convertible preferred stock.
  The
Company incurred a fee for the financing equal to: (a) 6.5% of the gross
proceeds received for the sale of Series A convertible preferred stock,
including the conversion of indebtedness, payable in cash, (b) warrants with an
exercise price of $1.00 per share to purchase a number of shares of common stock
equal to 10% of the total number of shares of Series A convertible preferred
stock issued, and (c) one Class Y warrant for every ten Class Y warrants issued
pursuant to the sale of Series A convertible preferred stock. The fee was
accounted for as a cost of capital.
  The
Company has registered for resale shares of its common stock issuable to the
investors and finders upon conversion of the preferred stock and exercise of the
warrants issued in the private placement. If the Company is unable to maintain
the effectiveness of the registration statement related to the Series A
convertible preferred stock for more than 30 days in any given year, the Company
is obligated to pay investors liquidated damages in cash equal to .5% of the
stated value of the Series A convertible preferred stock per month. Liquidated
damages will not accrue nor be payable for times during which the shares covered
by the related prospectus are transferable by the holder pursuant to Rule 144(k)
under the Securities Act of 1933, as amended.
  Common
Stock
  On May
12, 2008 the Company amended the articles of incorporation by increasing the
number of common stock authorized, par value $0.0001 per share, from 24,000,000
to 90,000,000 shares of common stock. Holders of the Company’s common stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Holders of common stock
are entitled to receive proportionately any dividends that may be declared by
the Company’s board of directors, subject to the preferences and rights of any
shares of preferred stock. In the event of the Company’s liquidation,
dissolution or winding-up, holders of common stock will be entitled to receive
proportionately any of the Company’s assets remaining after the payment of debts
and liabilities and subject to the preferences and rights of any shares of
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The rights and privileges of holders of the
Company’s common stock are subject to any series of preferred stock that the
Company has issued or may issue in the future, including the Series A
convertible preferred stock.
  F-26
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 12. Capital
Stock,continued
  Registration
Rights
  The
warrants issued in connection with the Gamecock acquisition contain piggy-back
registration rights.  If the Company registers any securities for
public sale, the holders of the warrants will have the right to include their
shares issued upon the exercise of the warrants in the registration statement,
subject to specified limitations.In
accordance with FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements”, the
Company has recognized a $196,511 liability associated with the registration
rights agreement.
  Treasury
Stock
  In
conjunction with the conversion of the $2,000,000 note payable into Series A
convertible preferred stock (see Note 8), a shareholder of the Company
transferred 215,190 shares of common stock to the note holder. Since the
shares were transferred by a stockholder to settle an obligation of the Company,
the economic substance of the transaction is a capital contribution by the
stockholder for the payment of the Company’s expenses. Accordingly, the Company
recorded the treasury stock equal to the fair value of the shares
transferred. As of June 30, 2009 and 2008, the Company holds no treasury
stock.
  13. Warrants to Purchase Common
Stock
  At the
time of SouthPeak Acquisition, the Company had issued Class W warrants to
purchase 7,517,500 shares of its common stock, and Class Z warrants to purchase
6,137,500 shares of its common stock.  The Class W and Class Z
warrants are subject to a registration rights agreement.  In
connection with the sale of Series A convertible preferred stock, during the
year ended June 30, 2009, the Company issued 6,160,149 Class Y warrants in
exchange for 4,689,950 Class W warrants and 1,470,199 Class Z
warrants.  The Company also issued 616,015 Class Y warrants to HCFP in
exchange for investment banking services.
  The
holders of Class W and Class Z warrants may request the filing of a registration
statement; the Company is only required to use its best efforts to cause the
registration statement to be declared effective and, once effective, only to use
its best efforts to maintain its effectiveness. Accordingly, because the
Company’s obligation is merely to use its best efforts in connection with the
registration rights agreement and upon exercise of the warrants, the Company can
satisfy its obligation by delivering unregistered shares of common
stock.
  Each
Class Y warrant issued is exercisable for one share of common stock. Except as
set forth below, the Class Y warrants entitle the holder to purchase shares, on
or before May 31, 2013, at $1.50 per share, subject to adjustment in the event
of stock dividends and splits, reclassifications, combinations and similar
events. As of June 30, 2009, there were 6,776,164 Class Y warrants outstanding,
including the 616,015 warrants to HCFP.
  Each
Class W warrant issued is exercisable for one share of common stock. Except
as set forth below, the Class W warrants entitle the holder to purchase shares,
on or before April 17, 2011, at $5.00 per share, subject to adjustment in the
event of stock dividends and splits, reclassifications, combinations and similar
events. As of June 30, 2009, there were 2,827,550 Class W warrants
outstanding.
  Each
Class Z warrant issued is exercisable for one share of common stock. Except as
set forth below, the Class Z warrants entitle the holder to purchase shares, on
or before April 17, 2013, at $5.00 per share, subject to adjustment in the event
of stock dividends and splits, reclassifications, combinations and similar
events. As of June 30, 2009, there were 4,667,301 Class Z warrants
outstanding.
  The
Company may redeem the Class Y warrants, Class W warrants and/or Class Z
warrants with the prior consent of HCFP, in whole or in part, at a price of
$0.05 per warrant at any time after the warrants become exercisable, upon a
minimum of 30 days’ prior written notice of redemption, and if, and only if, the
last sale price of the Company’s common stock equals or exceeds $2.50 per share,
$7.50 per share and $8.75 per share, for a Class Y warrant, Class W warrant and
Class Z warrant, respectively, for any 20 trading days within a 30 trading day
period ending three business days before the Company sent the notice of
redemption (the “Measurement Period”). In addition, the Company may not redeem
the Class Y warrants, Class W warrants and/or the Class Z warrants unless the
shares of common stock underlying such warrants are covered by an effective
registration statement.
  The
Company has no obligation to net cash settle the exercise of the warrants. The
holders of Class Y warrants, Class W warrants and Class Z warrants do not have
the rights or privileges of holders of the Company’s common stock or any voting
rights until such holders exercise their respective warrants and receive shares
of the Company’s common stock.
  In
connection with the Gamecock acquisition, the Company issued warrants to
purchase an aggregate of 862,500 shares of common stock at an exercise price of
$1.50 per share, and exercisable until October 10, 2013 as
follows:
  F-27
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 13. Warrants to
Purchase Common Stock, continued
  Warrants
      issued in connection with the purchase of the Gamecock acquisition (See
      Note 2)
                              
                              
                              700,000Warrants
      issued in connection with the purchase of the remaining 4% minority
      interest in Gamecock (See Note 2)
                              
                              
                              50,000Warrants
      issued to attorneys in connection with Gamecock
      acquisition
                              
                              
                              100,000Warrants
      issued to outside-consultant in connection with Gamecock
      acquisition
                              
                              
                              12,500862,500
  The
fair value of the stock warrants issued to the attorneys and the
outside-consultant was determined using the Black-Scholes option pricing model
and the following assumptions: (a) the fair value of the Company’s common stock
of $2.35 per share, which is the closing price as of October 10, 2008, (b)
volatility of 57.68%, (c) a risk-free interest rate of 2.77%, (d) an expected
term, also the contractual term, of 5.0 years, and (e) an expected dividend
yield of 0.0%. The fair value of these warrants was accounted for as a cost of
the Gamecock Acquisition.
  The
warrants contain a net exercise provision under which the holder may, in
lieu of payment of the exercise price in cash, surrender the warrant and receive
a net amount of shares based on the fair market value of the Company’s common
stock after deduction of the aggregate exercise price. The warrants also contain
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon exercise of the warrants in the event of stock dividends,
stock splits, reorganizations, reclassifications and consolidations. The
warrants also contain piggy-back registration rights and other customary
provisions.
  In
April 2008, in connection with the SouthPeak Acquisition, the Company issued
five-year fully vested warrants to purchase 500,000 shares of common stock at
$1.00 per share valued at $63,905 for services related to the reverse
acquisition.  The fair value of the warrants issued in connection with
the SouthPeak Acquisition was determined using the Black-Scholes option pricing
model and the following assumptions: (a) the fair value of the Company’s common
stock of $0.40 per share, which is the closing price as of April 25, 2008, (b)
volatility of 60.94%, (c) a risk free interest rate of 3.20%, (d) an expected
term, also the contractual term, of 5.0 years, and (e) an expected dividend
yield of 0.0%.
  14. Income
Taxes
  Prior
to May 12, 2008, the Company and its subsidiaries had elected to be taxed as
partnerships under Subchapter K of the Internal Revenue Code. Therefore, the
results of the Company’s operations are included in the taxable income of the
individual members. Following the SouthPeak Acquisition, the Company was
reorganized as a C corporation under which income taxes are accounted for under
the asset and liability method in accordance with SFAS No. 109, “Accounting
for Income Taxes.” Income tax expense consists of the following for the years
ended June 30, 2009 and 2008:
  2009
                            
                            
                            2008Current:
                            
                            $
                            -
                            
                            
                            $
                            57,045Federal
                            
                            
                            -
                            
                            
                            
                            13,253State
                            
                            
                            -
                            
                            
                            
                            -Foreign
                            
                            
                            -
                            
                            
                            
                            --
                            
                            
                            
                            70,298Deferred:Federal
                            
                            
                            (3,846,931
                            )
                            
                            
                            16,686State
                            
                            
                            (893,751
                            )
                            
                            
                            3,877Foreign
                            
                            
                            -
                            
                            
                            
                            -(4,740,682
                            )
                            
                            
                            20,563Other:Change
      in valuation allowance
                            
                            
                            4,740,682
                            
                            
                            
                            (20,563
                            )Income
      tax expense
                            
                            $
                            -
                            
                            
                            $
                            70,298
  F-28
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  14. Income
Taxes, continued
  A
reconciliation of the statutory rate and the effective tax rate for the years
ended June 30, 2009 and 2008 is as follows:
  2009
                            
                            
                            2008Statutory
      rate
                            
                            
                            35.00
                            %
                            
                            
                            35.00
                            %Permanent
      differences
                            
                            
                            (0.64
                            )%
                            
                            
                            (30.09
                            )%State
      income taxes—net of federal benefit
                            
                            
                            4.80
                            %
                            
                            
                            0.69
                            %Change
      in valuation allowance
                            
                            
                            (39.16
                            )%
                            
                            
                            (1.27
                            )%0.00
                            %
                            
                            
                            4.33
                            %
  Income
taxes payable consists of the following at June 30, 2009 and 2008:
  2009
                              
                              
                              2008Current:Federal
                              
                              $
                              -
                              
                              
                              $
                              48,064State
                              
                              
                              -
                              
                              
                              
                              8,156Income
      taxes payable
                              
                              $
                              -
                              
                              
                              $
                              56,220
  Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Components of the Company's deferred
tax assets and liabilities at June 30, 2009 and 2008 were as
follows:
   2009
                            
                            
                            2008Deferred
      tax assets:Bad
      debt reserves
                            
                            $
                            348,878
                            
                            
                            $
                            8,843Allowance
      for sales returns and price protection
                            
                            
                            1,937,634
                            
                            
                            
                            330,381Foreign
      subsidiary net operating loss
                            
                            
                            322,393
                            
                            
                            
                            322,393Foreign
      currency fluctuations
                            
                            
                            -
                            
                            
                            
                            31,217Domestic
      net operating loss carryforwards
                            
                            
                            1,697,215
                            
                            
                            
                            246,664Share
      based compensation
                            
                            
                            295,817
                            
                            
                            
                            -Accrued
      expenses and other
                            
                            
                            22,587
                            
                            
                            
                            -Other
      intangibles
                            
                            
                            71,874
                            
                            
                            
                            -Impairment
      of royalties, intellectual property licenses and acquired game sequel
      titles not currently deductible
                            
                            
                            1,286,532
                            
                            
                            
                            -$
                            5,982,930
                            
                            
                            $
                            939,498Less—valuation
      allowance
                            
                            
                            (5,615,303
                            )
                            
                            
                            (874,621
                            )Net
      deferred tax assets
                            
                            $
                            367,627
                            
                            
                            $
                            64,877Deferred
      tax liabilities:Depreciation
      and amortization
                            
                            $
                            61,703
                            
                            
                            $
                            28,065Prepaid
      expenses
                            
                            
                            42,956
                            
                            
                            
                            36,812Amortization
      of goodwill
                            
                            
                            199,176
                            
                            
                            
                            -Foreign
      currency fluctuations
                            
                            
                            63,792
                            
                            
                            
                            -Net
      deferred tax liabilities
                            
                            $
                            367,627
                            
                            
                            $
                            64,877Net
      deferred tax assets
                            
                            $
                            -
                            
                            
                            $
                            -
  F-29
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 14. Income
Taxes, continued
  As of
June 30, 2009 and 2008, the Company has recorded valuation allowances for
certain tax attributes and other deferred tax assets. At this time, sufficient
uncertainty exists regarding the future realization of these deferred tax assets
though future taxable income. If in the future the Company believes that it is
more likely than not that these deferred tax benefits will be realized, the
valuation allowances will be reversed.
  At June
30, 2009, the Company had federal and state net operating loss carryforwards of
approximately $3,636,000 which will expire at various dates beginning in 2025
through 2028, if not utilized.
  The
operations of the Company in the United Kingdom (“UK”) are subject to income tax
by the UK. However, because of the history of losses in the UK operations, the
Company has not paid any tax to the UK, and at June 30, 2009 and 2008, the
Company had foreign net operating loss carryforwards of approximately
$1,075,000, and $1,075,000, respectively. At June 30, 2009 and 2008, at the UK
current tax rate of 30%, the estimated net tax benefit of the foreign net
operating loss carryforwards was approximately $322,000 and 322,000,
respectively, and has not been recorded as a deferred tax asset in the
consolidated financial statements as a full valuation allowance has been
recorded due to the uncertainty of the future realization of the tax
benefit.
  The
Company has adopted the provisions of FASB Interpretation No. (“FIN”) 48
“Accounting for Uncertainty in Income Taxes, an Interpretation of “FASB
Statement No. 109” (FIN 48).  The Company did not have any significant
unrecognized tax benefits and there was no material effect on its consolidated
financial condition or results of operations as a result of implementing FIN
48.  During the year ended June 30, 2009, the Company did not record
any liabilities or benefits with regards to FIN 48.
  The
Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.  As of
the date of adoption of FIN 48, the Company did not have any material accrued
interest or a penalty associated with any unrecognized tax benefits, nor was any
material interest expense recognized during the year ended June 30,
2009.
  The
Company files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions and the UK.  The tax years 2006 through 2008 remain open
to examination by the major taxing jurisdictions to which the Company is
subject, including U.S. and non-U.S. locations. The Company does not believe
there will be any material changes in its unrecognized tax positions over the
next twelve months.
  15. Stock-based
Compensation
  In May
2008, the Company’s board of directors and its shareholders approved the 2008
Equity Incentive Compensation Plan (the “2008 Plan”) for the grant of stock
awards, including restricted stock and stock options, to officers, directors,
employees and consultants.  The 2008 Plan expires in May 2018. Shares
available for future grant as of June 30, 2009 and 2008 were 2,924,200 and
5,000,000, respectively, under the 2008 Plan.
  Stock
awards and shares are generally granted at prices which the Company’s board of
directors believe approximates the fair market value of the awards or shares at
the date of grant. Individual grants generally become exercisable ratably over a
period of three years from the date of grant. The contractual terms of the
options range from three to ten years from the date of grant.
  The
Company uses the Black-Scholes option pricing model to determine the fair value
of stock-based compensation to employees and non-employees. The determination of
fair value is affected by the Company’s stock price and volatility, employee
exercise behavior, and the time for the shares to vest.
  The
assumptions used in the Black-Scholes option pricing model to value the
Company’s option grants were as follow:
  For the year ended
                        June 30, 2009Risk-free
      interest rate
                      
                      1.65
      – 4.01%Weighted-average
      volatility
                      
                      58
      – 112%Expected
      term
                      
                      5-10
      yearsExpected
      dividends
                      
                      0.0%Estimated
      forfeiture rate
                      
                      5.0%
  F-30
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 15. Stock-based
Compensation, continued
  The
following table summarizes the stock-based compensation expense resulting from
stock options and restricted stock in the Company’s consolidated statements of
operations:
  For the year ended
                        June 30, 2009Sales
      and marketing
                      
                      $
                      92,299General
      and administrative
                      
                      
                      649,319Total
      stock-based compensation expense
                      
                      $
                      741,618
  As of
June 30, 2009, the Company’s unrecognized stock-based compensation for stock
options issued to employees and non-employee directors was approximately
$808,829 and will be recognized over a weighted average of 1.4
years.
  The
following table summarizes the Company’s stock option activity for employees,
non-employee directors, and non-employees for the year ended June 30,
2009:
  Options
                          
                          
                          Weighted-
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted-
                            Average
                            Remaining
                            Contractual
                            Term
                            (in years)
                          
                          
                          Aggregate
                            Intrinsic
                            ValueOutstanding
      as of June 30, 2008
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          -Activity
      for the year ended June 30, 2009Granted
                          
                          
                          2,050,300
                          
                          
                          
                          1.69Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited,
      cancelled or expired
                          
                          
                          (90,000
                          )
                          
                          
                          1.69Outstanding
      as of June 30, 2009
                          
                          
                          1,960,300
                          
                          
                          $
                          1.69
                          
                          
                          
                          9.35
                          
                          
                          $
                          -Exercisable
      as of June 30, 2009
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          -Exercisable
      and expected to be exercisable
                          
                          
                          1,862,285
                          
                          
                          $
                          1.69
                          
                          
                          
                          9.35
                          
                          
                          $
                          -
  Included
in the above table are options to purchase 710,000 shares of common stock
granted to non-employees.  The options were granted at prices ranging
from $0.81 to $2.30 per share and vest over a 36 month period.
  The
aggregate intrinsic value represents the total pre-tax intrinsic value based on
the Company’s closing stock price ($0.72 per share) as of June 30, 2009, which
would have been received by the option holders had all option holders exercised
their options as of that date. No stock options have vested as of June 30,
2009.
  The
weighted average fair value of stock options granted to employees and
non-employee directors during the year ended June 30, 2009 was $1.01 per
share.
  The
following table summarizes the Company’s restricted stock activity for the year
ended June 30, 2009:
  Shares
                    
                    
                    Weighted-
                      Average
                      Grant Date
                      Fair ValueOutstanding
      as of June 30, 2008
                    
                    
                    -
                    
                    
                    $
                    -Activity
      for the year ended June 30, 2009Granted
                    
                    
                    123,000
                    
                    
                    
                    2.15Vested
                    
                    
                    -
                    
                    
                    
                    -Forfeited,
      cancelled or expired
                    
                    
                    7,500
                    
                    
                    
                    2.30Outstanding
      as of June 30, 2009
                    
                    
                    115,500
                    
                    
                    $
                    2.14Vested
      as of June 30, 2009
                    
                    
                    -
                    
                    
                    
                    -
  F-31
 SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  16. Employee Savings
Plan
  The
Company maintains an Employee Savings Plan (the “ Plan”) which
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. The Plan is available to all United States employees who meet the
eligibility requirements. Under the Plan, participating employees may elect
to defer a portion of their pre tax earnings, up to the maximum amount
allowed by the Internal Revenue Service. The Company currently does not match
employee contributions.
  17. Restructuring
  The
Company has implemented an organizational restructuring as a result of the
Gamecock acquisition described in Note 2. This organizational restructuring is
to integrate different operations to create a streamlined organization within
the Company.
  The
primary goals of the organizational restructuring were to rationalize the title
portfolio and consolidate certain corporate functions so as to realize the
synergies of the Gamecock acquisition.
  Since the
consummation of the Gamecock acquisition, the Company has commenced the
organizational restructuring activities, focusing first on North American and
European staff as well as redundant premises.  The Company has
communicated to the North America and United Kingdom redundant employees and
ceased use of certain offices under operating lease agreements. The following
table details the amount of restructuring reserves included in accrued expenses
and other current liabilities in the consolidated balance sheets at June 30,
2009:
  FacilitiesSeverance(1)
                      
                      
                      Costs(1)
                      
                      
                      TotalRestructuring
      charges (charged to expense)
                      
                      $
                      562,761
                      
                      
                      $
                      76,449
                      
                      
                      $
                      639,210Utilization
      (cash paid or otherwise settled) (2)
                      
                      
                      529,120
                      
                      
                      
                      76,449
                      
                      
                      
                      605,569Balance
      at June 30, 2009
                      
                      $
                      33,641
                      
                      
                      $
                      -
                      
                      
                      $
                      33,641
  (1)
              Accounted for in accordance with
      SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
      Activities” (“SFAS No.
146”).
 (2)
              Utilization represents the amount
      of cash paid to settle restructuring liabilities incurred ($529,120 of
      severance and $76,449 of facility
costs).
  18. Contingencies
  The
Company was obligated to file a registration statement with the SEC covering the
resale of the shares of its common stock issued upon conversion of the Series A
convertible preferred stock and the exercise of Class Y warrants within 30 days
following the Company’s filing of its Form 10-K for the fiscal year in 2008 but
no later than January 15, 2009. The Company filed a registration statement on
Form S-1 with the SEC, however, the registration statement was not declared
effective by the SEC within the prescribed time period.
  Since the
registration statement was not declared effective by the SEC within the
prescribed time period, the Company is obligated to make pro rata payments to
each holder of Series A convertible preferred stock in an amount equal to .5% of
the aggregate amount invested by such holder of Series A convertible preferred
stock for each 30 day period (or portion thereof) for which no registration
statement is effective. In accordance with FSP EITF No. 00-19-2, “Accounting for
Registration Payment Arrangements”, the Company has recognized a liability for
liquidating damages and interest totaling $196,511 for the year ended June 30,
2009.
  F-32
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 18. Contingencies , continued
  The
Company is engaged in ordinary routine litigation incidental to the Company’s
business to which the Company is a party. While the Company cannot predict the
ultimate outcome of these various legal proceedings, it is management’s opinion
that the resolution of these matters should not have a material effect on the
consolidated financial position or results of operations of the
Company.
  On
March 12, 2009, the Company, Gamecock, SouthPeak Interactive, Ltd. and Gamecock
Media Europe, Ltd. were served with a complaint by a videogame distributor
alleging a breach of contract and other claims related to a publishing and
distribution agreement, or the Distribution Agreement, entered into
between Gamecock Media Europe, Ltd. and the videogame distributor in January
2008. The videogame distributor is seeking the return of $4,590,000 in advances,
an injunction against the Company and its subsidiaries, approximately $650,000
in specified damages, further damages to be assessed, and discretionary interest
and costs.  Gamecock Media Europe, Ltd. has filed a counterclaim
against the videogame distributor for $950,000 and discretionary interest and
costs, resulting from videogame sales and the achievement of a milestone under
the Distribution Agreement.  The case was heard in the United Kingdom
in July 2009 and closing submissions were made to the court on or about July 22,
2009.  The court has reserved judgment and the Company expects a
decision in the near future.  As part of the court proceedings between
the Company and the videogame distributor, the Company agreed (to avoid further
costly hearings) to pay 35% of certain European sales into an escrow account
pending the final resolution of the case.  As of June 30, 2009, the
amount held in escrow was approximately $500,000 and is included in restricted
cash.  Legal expenses associated with this complaint have been
expensed as incurred.  The Company’s management currently believes
that resolution of this matter will not have a material adverse effect on the
Company’s consolidated financial position or results of operations. However,
legal issues are subject to inherent uncertainties and there exists the
possibility that the ultimate resolution of this matter could have a material
adverse effect on the Company’s consolidated financial position and the results
of operations in the period in which any such effect is recorded.
  On
October 27, 2008, Gamecock was served with a demand for arbitration by a
developer alleging various breaches of contract related to a publishing
agreement entered into between Gamecock and the developer on December 12, 2007.
The developer is seeking to terminate the publishing agreement, obtain exclusive
control of the subject videogame, and compete and exploit the videogame on its
own. Gamecock has responded stating that the developer’s attempts to terminate
the publishing Agreement constitute wrongful termination of the agreement.
Gamecock has also filed a counterclaim against the developer seeking the return
of approximately $5.9 million in advances on royalties in the event the
publishing agreement is terminated.  As of June 30, 2009, no amounts
have been accrued related to this matter.
  19. Composition of Certain
Financial Statement Captions
  Accrued
expenses and other current liabilities consist of the following:
 
 June 30,2009
                            
                            
                            2008Accrued
      expenses
                            
                            $
                            1,686,332
                            
                            
                            $
                            171,021Reserve
      for marketing development funds (MDF)
                            
                            
                            217,485
                            
                            
                            
                            13,089Commissions
                            
                            
                            139,527
                            
                            
                            
                            342,050Guaranteed
      royalty payments
                            
                            
                            135,000
                            
                            
                            
                            85,000Accrued
      payroll and payroll taxes
                            
                            
                            83,484
                            
                            
                            
                            17,181Customer
      cash in advance deposits
                            
                            
                            44,548
                            
                            
                            
                            792,291Accrued
      interest
                            
                            
                            -
                            
                            
                            
                            1,506Other
                            
                            
                            112,724
                            
                            
                            
                            34,777$
                            2,419,100
                            
                            
                            $
                            1,456,915
  20. Subsequent
Events
  The
Company has evaluated subsequent events through October 13,
2009, which is the date the Company filed its Annual Report on Form 10-K for the
year ended June 30, 2009 with the Securities and Exchange Commission. With the
exception of the items listed below, there are no further subsequent events for
disclosure.
  On
August 26, 2009, the Company was notified that the SEC was conducting a
non-public, fact-finding investigation regarding certain matters underlying the
amendment of its Form 10-Q, and the restatement of its financial statements, for
the period ended March 31, 2009, and the termination of its former chief
financial officer.  The Company has provided the SEC with the documents
requested and intends to cooperate in all respects with the SEC’s
investigation.
  In the
normal course of business the Company executes contracts with third parties for
the development of games.  During the period from July 1, 2009 through
October 13,
2009, the Company executed agreements with such developers for a commitment to
pay royalties of $7,924,104.
  F-33
  Index to Exhibits
  Exhibit
                  Number
                
                Description2.1(1)
                
                Membership
      Interest Purchase Agreement, dated as of May 12, 2008, among the
      Registrant, SouthPeak Interactive, LLC, and the members of SouthPeak
      Interactive, L.L.C.3.1(1)
                
                Amended
      and Restated Certificate of Incorporation of the Registrant, filed with
      the Secretary of State of the State of Delaware on May 12,
      2008.3.2(1)
                
                Amended
      and Restated Bylaws, dated as of May 12, 2008.3.3(1)
                
                Certificate
      of the Designations, Powers, Preferences and Rights of the Series A
      Convertible Preferred Stock (par value $.0001 per share), filed with the
      Secretary of State of the State of Delaware on May 12,
    2008.4.1(2)
                
                Specimen
      Common Stock Certificate.4.2(3)
                
                Specimen
      Class Y Warrant Certificate.4.3(2)
                
                Specimen
      Class W Warrant Certificate.4.4(2)
                
                Specimen
      Class Z Warrant Certificate.4.5(4)
                
                Form
      of Unit Purchase Option to be granted to
Representative.4.6(4)
                
                Form
      of Warrant Agreement between American Stock Transfer & Trust Company
      and the Registrant.4.7(4)
                
                Form
      of Warrant Agreement between American Stock Transfer & Trust Company
      and the Registrant.4.8(7)
                
                Warrant
      issued to Vid Agon, LLC, dated October 10, 2008.4.9(3)
                
                Form
      of Warrant issued in connection with the acquisition of Gamecock Media
      Group.4.10(8)
                
                Form
      of Warrant issued to Gamecock Media Group
Founders.4.11(9)
                
                Form
      of Warrant issued to HCFP/Brenner Securities, LLC.10.1(1)
                
                Registrant’s
      2008 Equity Incentive Compensation Plan.10.2(1)
                
                Employment
      Agreement, dated as of May 12, 2008 between the Registrant and Terry M.
      Phillips.10.3(1)
                
                Employment
      Agreement, dated as of May 12, 2008 between the Registrant and Melanie
      Mroz.10.4(1)
                
                Purchase
      Agreement, dated as of May 12, 2008 among the Registrant, SouthPeak
      Interactive, L.L.C., and the investors set forth
  therein.10.5(1)
                
                Registration
      Rights Agreement, dated as of May 12, 2008 among the Registrant and the
      investors set forth therein.10.6(1)
                
                Form
      of Lock-Up Agreement, dated as of May 12, 2008.10.7(1)
                
                Loan
      Agreement between SouthPeak Interactive, L.L.C., SouthPeak Interactive
      Limited and SunTrust Bank, as amended, dated December 16,
      2005.10.8(1)
                
                Sales
      Representative Agreement between SouthPeak Interactive, L.L.C. and
      Phillips Sales, Inc. dated July 21, 2006.10.9(1)
                
                Sales
      Representative Agreement between SouthPeak Interactive, L.L.C. and West
      Coast Sales, Inc. dated July 21, 2006.10.10(1)
                
                Secured
      Term Note made by SouthPeak Interactive, L.L.C. to FI Investment Group,
      LLC, dated February 27, 2008.10.11(1)
                
                Description
      of material terms of Consulting Agreement between Phillips Sales, Inc. and
      SouthPeak Interactive, L.L.C.10.12(1)
                
                Description
      of material terms of Consulting Agreement between Kathleen Morgan and
      SouthPeak Interactive, L.L.C.10.13(1)
                
                Description
      of material terms of advances made by West Coast Sales to SouthPeak
      Interactive, L.L.C.10.14(1)
                
                Description
      of material terms of advances made by Eastern Sales, LLC to SouthPeak
      Interactive, L.L.C.10.15(1)
                
                Description
      of material terms of advances made by Capital Distributing, LLC to
      SouthPeak Interactive, L.L.C.10.16(1)
                
                Description
      of material terms of advances made by Phillip Sales, Inc. to SouthPeak
      Interactive, L.L.C.10.17(1)
                
                Description
      of material terms of advances made by Terry Phillips to SouthPeak
      Interactive, L.L.C.10.18(6)
                
                Lease
      Agreement, dated January 1, 2008, between Phillips Land, L.C. and
      SouthPeak Interactive, L.L.C.10.19(6)
                
                Lease
      Agreement, dated January 1, 2008, between SouthPeak Interactive, L.L.C.
      and Phillips Sales, Inc.10.20(7)
                
                Membership
      Interest Purchase Agreement, dated as of October 10, 2008, among the
      Registrant, Vid Agon, LLC and Vid Sub, LLC.21.1*
                
                List
      of subsidiaries.23.1*
                
                Consent
      of Reznick Group, P.C.24.1*
                
                Power
      of Attorney (included on the signature page to this
    report).31.1*
                
                Certification
      of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated
      under the Securities Exchange Act of 1934.31.2*
                
                Certification
      of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated
      under the Securities Exchange Act of 1934.32.1*
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*
                
                Filed
      herewith(1)
                
                Incorporated
      by reference to an exhibit to the Current Report on Form 8-K of the
      Registrant filed with the Commission on May 15, 2008.(2)
                
                Incorporated
      by reference to an exhibit to the Quarterly Report on Form 10-Q of the
      Registrant filed with the Commission on June 16,
  2008.
  
 
 (3)
                
                Incorporated
      by reference to an exhibit to the Registration Statement on Form S-1 of
      the Registrant originally filed with the Commission on October 15,
      2008.(4)
                
                Incorporated
      by reference to an exhibit to the Registration Statement on Form S-1 of
      the Registrant originally filed with the Commission on September 15,
      2005.(5)
                
                Incorporated
      by reference to an exhibit to the Current Report on Form 8-K of the
      Registrant filed with the Commission on August 14,
2008.(6)
                
                Incorporated
      by reference to an exhibit to the Annual Report on Form 10-K of the
      Registrant filed with the Commission on October 6,
2008.(7)
                
                Incorporated
      by reference to an exhibit to the Current Report on Form 8-K of the
      Registrant filed with the Commission on October 15,
  2008.(8)
                
                Incorporated
      by reference to an exhibit to the Quarterly Report on Form 10-Q of the
      Registrant filed with the Commission on February 17,
      2009.(9)
                
                Incorporated
      by reference to an exhibit to the Current Report on Form 8-K of the
      Registrant filed with the Commission on March 19,
  2009.