UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549




FORM
10-Q




(Mark
      One)þ
            
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the quarterly period ended
      December 31, 2008 ̈
            
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period
      from          to




Commission
File Number 000-51869




SouthPeak
Interactive Corporation


(Exact Name of Registrant as
Specified in Its Charter)




Delaware
              (State
      or other jurisdiction of
              incorporation or
      organization)
            
            20-3290391
              (I.R.S.
      Employer
              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)




Not
applicable


(Former name, former address and
former fiscal year, if changed since last report)




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
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 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  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer  ̈
            Smaller
      reporting company þ


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes o     No þ




As of February 17, 2009,
36,043,100shares of common stock, par value
$0.0001 per share, of the registrant were outstanding.







TABLE
OF CONTENTS




PART I 
      - FINANCIAL INFORMATIONItem
      1.
                        
                        Condensed
      Consolidated Financial Statements (unaudited)
                        
                        1Condensed
      Consolidated Balance Sheets as of December 31, 2008 and June 30,
      2008 (unaudited)
                        
                        1Condensed
      Consolidated Statements of Operations for the three and six months ended
      December 31, 2008 and 2007 (unaudited)
                        
                        2Condensed
      Consolidated Statements of Cash Flows for the six months ended December
      31, 2008 and 2007 (unaudited)
                        
                        3Notes
      to Condensed Consolidated Financial Statements
                        
                        4Item
      2.
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        21Item
      3.
                        
                        Quantitative
      and Qualitative Disclosures about Market Risk
                        
                        31Item
      4.
                        
                        Controls
      and Procedures
                        
                        32PART II
      - OTHER INFORMATIONItem
      1.
                        
                        Legal
      Proceedings
                        
                        32Item
      1A.
                        
                        Risk
      Factors
                        
                        32Item
      2.
                        
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        34Item
      6.
                        
                        Exhibits
                        
                        34SIGNATURES
                        
                        
                        35







PART I





Item 1.Condensed Consolidated Financial
Statements
 
 SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE
SHEETS
 (UNAUDITED)
 
 December
      31,
                  2008
                
                
                June
      30,
                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                212,647
                
                
                $
                4,095,036Restricted
      cash
                
                
                141,008
                
                
                
                139,104Accounts
      receivable, net
                
                
                12,154,657
                
                
                
                13,665,332Inventories
                
                
                5,135,803
                
                
                
                6,538,644Current
      portion of advances on royalties
                
                
                11,117,049
                
                
                
                3,321,954Current
      portion of intellectual property licenses
                
                
                1,533,874
                
                
                
                133,458Related
      party receivables
                
                
                23,570
                
                
                
                48,243Prepaid
      expenses and other current assets
                
                
                1,358,258
                
                
                
                1,281,371Total
      current assets
                
                
                31,676,866
                
                
                
                29,223,142Property
      and equipment, net
                
                
                2,018,696
                
                
                
                1,679,434Advances
      on royalties, net of current portion
                
                
                448,177
                
                
                
                1,053,500Intellectual
      property licenses, net of current portion
                
                
                713,053
                
                
                
                1,311,542Goodwill
                
                
                7,322,977
                
                
                
                —Intangible
      assets, net
                
                
                1,211,936
                
                
                
                —Other
      assets
                
                
                17,708
                
                
                
                12,690Total
      assets
                
                $
                43,409,413
                
                
                $
                33,280,308Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Line
      of credit
                
                $
                7,422,558
                
                
                $
                4,851,819Current
      maturities of mortgage payable
                
                
                25,261
                
                
                
                24,252Accounts
      payable
                
                
                14,509,619
                
                
                
                14,254,085Accrued
      royalties
                
                
                832,665
                
                
                
                523,013Accrued
      expenses and other current liabilities
                
                
                3,591,630
                
                
                
                1,456,915Deferred
      revenues
                
                
                2,849,014
                
                
                
                —Due
      to shareholders
                
                
                —
                
                
                
                228,998Due
      to related parties
                
                
                25,769
                
                
                
                15,658Accrued
      expenses - related party
                
                
                —
                
                
                
                4,182Total
      current liabilities
                
                
                29,256,516
                
                
                
                21,358,922Mortgage
      payable, net of current maturities
                
                
                1,024,920
                
                
                
                1,038,140Total
      liabilities
                
                
                30,281,436
                
                
                
                22,397,062Commitments
      and contingencies
                
                
                —
                
                
                
                —Shareholders’
      equity:Preferred
      stock, $.0001 par value; 5,000,000 shares authorized; no shares
      issued at December 31, 2008 and June 30, 2008,
respectively
                
                
                —
                
                
                
                —Series
      A convertible preferred stock, $.0001 par value; aggregate liquidation
      preference of $14,563,833 and $12,984,833; 15,000,000 shares authorized;
      14,563,833 and 12,984,833 shares issued and outstanding at December 31,
      2008 and June 30, 2008, respectively
                
                
                1,456
                
                
                
                1,298Common
      stock, $.0001 par value, 90,000,000 shares authorized; 35,920,100 shares
      issued and outstanding at December 31, 2008 and June 30, 2008,
      respectively
                
                
                3,592
                
                
                
                3,592Additional
      paid-in capital
                
                
                24,778,269
                
                
                
                20,825,105Accumulated
      deficit
                
                
                (11,324,356
                )
                
                
                (9,796,709
                )Accumulated
      other comprehensive loss
                
                
                (330,984
                )
                
                
                (150,040
                )Total
      shareholders’ equity
                
                
                13,127,977
                
                
                
                10,883,246Total
      liabilities and shareholders’ equity
                
                $
                43,409,413
                
                
                $
                33,280,308
 See notes
to condensed consolidated financial statements.


1




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 For
      the Three months ended
                December
      31,
              
              
              For
      the Six months ended
                December
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenues
              
              $
              17,312,781
              
              
              $
              4,249,116
              
              
              $
              25,704,392
              
              
              $
              22,545,578Cost
      of goods sold:Product
      costs
              
              
              6,939,774
              
              
              
              770,404
              
              
              
              12,365,327
              
              
              
              7,803,572Royalties
              
              
              1,492,259
              
              
              
              1,125,548
              
              
              
              2,301,180
              
              
              
              5,231,043Intellectual
      property licenses
              
              
              67,517
              
              
              
              —
              
              
              
              111,498
              
              
              
              —Total
      cost of goods sold
              
              
              8,499,550
              
              
              
              1,895,952
              
              
              
              14,778,005
              
              
              
              13,034,615Gross
      profit
              
              
              8,813,231
              
              
              
              2,353,164
              
              
              
              10,926,387
              
              
              
              9,510,963Operating
      expenses:Warehousing
      and distribution
              
              
              268,980
              
              
              
              87,308
              
              
              
              476,563
              
              
              
              310,363Sales
      and marketing
              
              
              3,823,149
              
              
              
              630,460
              
              
              
              5,721,603
              
              
              
              3,093,859Restructuring
      costs
              
              
              560,806
              
              
              
              —
              
              
              
              560,806
              
              
              
              —Transaction
      costs
              
              
              10,295
              
              
              
              —
              
              
              
              28,675
              
              
              
              —General
      and administrative
              
              
              2,883,401
              
              
              
              1,213,998
              
              
              
              4,365,015
              
              
              
              2,158,553Total
      operating expenses
              
              
              7,546,631
              
              
              
              1,931,766
              
              
              
              11,152,662
              
              
              
              5,562,775Operating
      income (loss)
              
              
              1,266,600
              
              
              
              421,398
              
              
              
              (226,275
              )
              
              
              3,948,188Interest
      expense
              
              
              100,055
              
              
              
              140,486
              
              
              
              158,934
              
              
              
              290,310Net
      income (loss)
              
              
              1,166,545
              
              
              
              280,912
              
              
              
              (385,209
              )
              
              
              3,657,878Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
              
              
              —
              
              
              
              —
              
              
              
              1,142,439
              
              
              
              —Net
      income (loss) attributable to common shareholders
              
              $
              1,166,545
              
              
              $
              280,912
              
              
              $
              (1,527,648
              )
              
              $
              3,657,878Basic
      earnings (loss) per share:
              
              $
              0.03
              
              
              $
              —
              
              
              $
              (0.04
              )
              
              $
              0.10Diluted
      earnings (loss) per share:
              
              $
              0.02
              
              
              $
              —
              
              
              $
              (0.04
              )
              
              $
              0.10Weighted-average
      shares outstanding - basic:
              
              
              35,920,100
              
              
              
              35,000,000
              
              
              
              35,920,100
              
              
              
              35,000,000Dilutive
      effect of common stock equivalents:
              
              
              17,268,586
              
              
              
              —
              
              
              
              17,616,289
              
              
              
              —Weighted-average
      shares outstanding - diluted:
              
              
              53,188,686
              
              
              
              35,000,000
              
              
              
              53,536,389
              
              
              
              35,000,000
   See notes
to condensed consolidated financial statements.


2




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  For
      the Six Months Ended
                December 31,2008
              
              2007Cash flows from
      operating activities:Net
      (loss) income
              
              $
              (385,209
              )
              $
              3,657,878Adjustments
      to reconcile net cash and cash equivalents (used in) provided
      by operating activities:Non-cash
      expenses related to the issuance of stock and stock
options
              
              
              342,505
              
              
              —Depreciation
      and amortization
              
              
              164,909
              
              
              34,843Amortization
      of royalties and intellectual property licenses
              
              
              1,844,853
              
              
              —Change
      in operating assets and liabilities:Accounts
      receivable
              
              
              2,001,549
              
              
              1,472,866Inventories
              
              
              1,559,586
              
              
              370,767Advances
      on royalties
              
              
              (5,604,552
              )
              
              (120,732
              )Intellectual
      property licenses
              
              
              (915,000
              )
              
              (467,500
              )Related
      party receivables
              
              
              24,673
              
              
              (592
              )Prepaid
      expenses and other current assets
              
              
              (40,518
              )
              
              (313,540
              )Other
      assets
              
              
              (5,017
              )
              
              (12,199
              )Accounts
      payable
              
              
              (5,188,640
              )
              
              (971,082
              )Accrued
      royalties
              
              
              (363,324
              )
              
              3,073,755Accrued
      expenses - related party
              
              
              (4,182
              )
              
              (586,325
              )Deferred
      revenues
              
              
              (872,886
              )
              
              —Accrued
      expenses and other current liabilities
              
              
              1,040,954
              
              
              2,917
 Total
      adjustments
              
              
              (6,015,090
              )
              
              2,483,178Net
      cash and cash equivalents (used in) provided by operating
      activities
              
              
              (6,400,299
              )
              
              6,141,056Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (219,666
              )
              
              (329,863
              )Cash
      payments to effect acquisition, net of cash acquired
              
              
              (247,542
              )
              
              —Contingent
      consideration for acquisition
              
              
              (421,956
              )
              
              —Change
      in restricted cash
              
              
              (1,904
              )
              
              —Net
      cash and cash equivalents used in investing activities
              
              
              (891,068
              )
              
              (329,863
              )Cash
      flows from financing activities:Net
      proceeds from (repayments of) line of credit
              
              
              2,570,739
              
              
              (4,190,399
              )Repayments
      of mortgage note payable
              
              
              (12,211
              )
              
              —Payments
      of amounts due to shareholder
              
              
              (228,998
              )
              
              (277,328
              )Repayments
      of amounts due to related parties
              
              
              —
              
              
              (40,794
              )Advances
      from related parties
              
              
              10,111
              
              
              38,807Proceeds
      from the issuance of Series A convertible preferred stock, net of cash
      offering costs
              
              
              1,250,281
              
              
              —Net
      cash and cash equivalents provided by (used in) financing
      activities
              
              
              3,589,922
              
              
              (4,469,714
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (180,944
              )
              
              8,582Net
      (decrease) increase in cash and cash equivalents
              
              
              (3,882,389
              )
              
              1,350,061Cash
      and cash equivalents at beginning of period
              
              
              4,095,036
              
              
              510,265Cash
      and cash equivalents at end of period
              
              $
              212,647
              
              $
              1,860,326
  See notes
to condensed consolidated financial statements.


3




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.
Summary of Significant
Accounting Policies




Business




SouthPeak
Interactive Corporation, a Delaware corporation, (herein after collectively
referred to as 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 Sony’s PLAYSTATION®3, or PS3, and PlayStation®2, or PS2, computer
entertainment systems; Sony’s PSP® (PlayStation®Portable) system, or PSP;
Microsoft’s Xbox 360® video game and entertainment system, or Xbox 360,
Nintendo’s WiiTM, or Wii, DSTM, or DS, and Game Boy® Advance, or GBA, and for the
PC and Games for Windows®. The Company’s titles span a wide range of categories
and target a variety of consumer demographics ranging from casual players to
hardcore game 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
primarily to distributors in Europe, Australia, Asia and Japan.





Business
Combination





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.





Basis
of Presentation





The
accompanying unaudited consolidated financial statements as of December 31, 2008
and for the three and six month periods ended December 31, 2008 and 2007 have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) and in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) for interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP. In the opinion of management, all adjustments (all of
which are of a normal, recurring nature) considered for a fair presentation have
been included. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.  The most significant estimates
relate to royalties, licenses, accounts receivable allowances, impairment and
stock-based compensation expense.  Actual results may differ from
these estimates. Interim results are not necessarily indicative of results for a
full fiscal year.





The
accounting policies followed by the Company with respect to unaudited interim
financial statements are consistent with those stated in the Company’s annual
report on Form 10-K. The accompanying June 30, 2008 financial position data were
derived from the Company’s audited financial statements. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company’s annual report on Form 10-K for the year ended June 30, 2008 filed with
the SEC.





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,






4




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.
Summary of Significant
Accounting Policies, continued





management
has not considered discrete geographical or other information to be relevant for
purposes of making decisions about allocations of resources.





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 by a
certain amount and, when granted and applicable, allows customers a credit
against amounts owed by such customers to the Company with respect to open
and/or future invoices. The conditions 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. The Company may also consider
other factors, including the facilitation of slow-moving inventory and other
market factors.  Management must make estimates of potential future
product returns and price protection related to current period revenues.
Management estimates the amount of future returns and price protection for
current period revenues utilizing industry and historical experience and
information regarding inventory levels and the demand and acceptance of the
Company’s games by the end consumer. 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 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.




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
December 31, 2008 and June 30, 2008, accounts receivable allowances consisted of
the following:




December
      31, 2008
            
            
            June
      30,
              2008Sales
      returns
            
            $
            47,930
            
            
            $
            155,652Price
      protection
            
            
            4,488,623
            
            
            
            823,085Defective
      items
            
            
            78,841
            
            
            
            107,559Doubtful
      accounts
            
            
            841,414
            
            
            
            22,169Total
      allowances
            
            $
            5,456,808
            
            
            $
            1,108,465






5




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.
Summary of Significant
Accounting Policies, continued





Inventories





Inventories
are stated at the lower of cost (first-in, first-out) 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.





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.




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 six 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.





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.




6




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.
Summary of Significant
Accounting Policies, continued




Beginning
upon the related games release, capitalized intellectual property license costs
are amortized to “cost of sales-intellectual
property licenses” based on the ratio of current revenues for the specific game
to total projected revenues for all games in which the licensed property will be
utilized. 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.





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 condensed 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 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 management regularly reviews 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.
  7
 
  SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 (UNAUDITED)
 
 1.
Summary of Significant
Accounting Policies, continued
 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 distributing 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.
  Revenue
Recognition




The
Company recognizes revenue from the sale of video games upon the transfer of
title and risk of loss to the customer, and once any performance obligations
have been completed.  Revenue from the sale of video games is
recognized after deducting the estimated allowance for sales returns and price
protection.




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 sale 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 ratably over an
estimated service period. In addition, the Company defers the costs of sales for
this game to match revenues. Cost of sales includes: manufacturing costs,
software royalties and amortization, and intellectual property
licenses.





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 and collection of the related receivable must be
probable.




8




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.Summary
of Significant Accounting Policies, continued





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.
01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor’s Products) (“EITF No. 01-09”).  In
accordance with EITF No. 01-09, 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.





Third-party
licensees in Europe distribute Gamecock’s video games under license agreements
with Gamecock. The licensees paid certain minimum, non-refundable, generally
recoupable guaranteed royalties when entering into the licensing agreements.
Upon receipt of the recoupable advances, the Company defers their recognition
and recognizes the revenues in subsequent periods as these advances are recouped
by the licensees. As the licensees pay additional royalties above and beyond
those initially advanced, the Company recognizes these additional royalties as
revenues.





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 and collection of the
related receivable must be probable.





Stock-Based
Compensation




The
Company accounts 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 statement of
operations.





Stock-based
compensation expense recognized in the condensed 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.





Earnings (Loss)Per Common Share





Basic
earnings (loss) per share is computed by dividing net income (loss) available 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) available to common shareholders by the weighted average
number of common 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.




9




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.Summary
of Significant Accounting Policies, continued





Recently
Issued Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS
No. 157”).  SFAS No. 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities.  In
February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement
No. 157” which defers the implementation for certain non-recurring, nonfinancial
assets and liabilities from fiscal years beginning after November
15, 2007 to fiscal years beginning after November 15, 2008, which will be the
Company’s fiscal year 2010.  In October 2008, the FASB issued FSP FAS
157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active” which clarifies the application of FAS 157 in a market that
is not active. FSP FAS 157-3 is effective upon issuance, including prior periods
for which financial statements have not been issued.  The statement
provisions effective as of July 1, 2008, did not have a material effect on the
Company’s results of operations, financial position or cash
flows.  The Company is evaluating the impact, if any, that the
adoption of the remaining provisions will have on its consolidated results of
operations, financial position or cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings. The
Company adopted this statement on July 1, 2008 and did not make this election
for any of its existing financial assets and liabilities. As such, the adoption
of this statement did not have any impact on its consolidated results of
operations, financial position or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007) (“SFAS No. 141(R)”),
“Business Combinations”, which requires the recognition of assets acquired,
liabilities assumed, and any noncontrolling interest in an acquiree at the
acquisition date fair value with limited exceptions. SFAS No. 141(R) will change
the accounting treatment for certain specific items and includes a substantial
number of new disclosure requirements. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. SFAS No. 141(R) is effective for the Company for acquisitions closing
subsequent to June 30, 2009.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51”, which
establishes new accounting and reporting standards for noncontrolling interests
(e.g., minority interests) and for the deconsolidation of a subsidiary. SFAS No.
160 also includes expanded disclosure requirements regarding the interests of
the parent and its noncontrolling interests. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company does not expect the adoption of SFAS No.
160 to have a material impact on its consolidated financial
statements.





In
December 2007, the FASB ratified the EITF consensus conclusion on EITF No.
07-01, “Accounting for Collaborative Arrangements”. EITF No. 07-01 defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. Under this conclusion, a
participant to a collaborative arrangement should disclose information about the
nature and purpose of its collaborative arrangements, the rights and obligations
under the collaborative arrangements, the accounting policy for collaborative
arrangements, and the income statement classification and amounts attributable
to transactions arising from the collaborative arrangement between participants
for each period an income statement is presented. EITF No. 07-01 is effective
for interim or annual reporting periods in fiscal years beginning after
December 15, 2008 and requires retrospective application to all prior
periods presented for all collaborative arrangements existing as of the
effective date. While the Company has not yet completed its analysis, the
Company does not anticipate the implementation of EITF No. 07-01 to have a
material impact on its consolidated financial statements.






10




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





1.Summary
of Significant Accounting Policies, continued





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of SFAS No. 133”. SFAS No. 161 requires
enhanced disclosures about an entity’s derivative and hedging activities,
including how an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not expect the adoption of SFAS No. 161 to
have a material impact on its consolidated financial statements.





In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”).  FSP 142-3 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” (“SFAS No. 142”). This change is intended
to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS No. 141R and other GAAP. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure
requirements must be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. The Company does not expect the
adoption of this statement to have a material impact on its consolidated results
of operations, financial position or cash flows.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with GAAP for nongovernmental
entities.  SFAS No. 162 is effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.”  The Company does not expect the adoption
of this statement to have a material impact on its consolidated results of
operations, financial position or cash flows.





In June
2008, the FASB ratified the EITF consensus on EITF No. 07-5, “Determining
whether an instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”
(“EITF No. 07-5”) that discusses the determination of whether an instrument is
indexed to an entity’s own stock.  The guidance of this issue shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this issue is initially applied. EITF No. 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years. The Company is evaluating the impact, if any;
the adoption of this statement will have on its consolidated results of
operations, financial position or cash flows.





In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (“FIN”) 46
(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (“FSP SFAS 140-4
and FIN 46 (R)-8”).  This disclosure-only FSP is intended to provide
greater transparency to financial statement users about a transferor’s
continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying
SPEs. FSP SFAS 140-4 and FIN 46 (R)-8 is effective for reporting periods (annual
or interim) ending after December 15, 2008. The Company adopted this statement
for the quarter ended December 31, 2008, and the adoption did not have a
material impact on its consolidated results of operations, financial position or
cash flows.





2. 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
(the “Agreement”) with Vid Agon, LLC (the “Seller”) and Vid Sub, LLC (the
“Member”). The Member is a wholly-owned subsidiary of the Seller and owner of
approximately 96% of Gamecock’s outstanding membership interests which consisted
of 100% of the Company's outstanding preferred interests.  Pursuant to
the terms of the Agreement, the Company acquired all of the outstanding
membership interests of the Member in exchange for aggregate consideration of 7%
of the future revenue 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.




11


SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





2. Acquisition, continued




The
acquisition allows the Company to broaden its portfolio of games by purchasing
games under development. Goodwill arises from the business combination due to
the acquired work force of Gamecock, and the expected synergies from the
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 and the payment is made.





The
preliminary 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
preliminary allocation of the purchase price below was based upon a preliminary
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
preliminary valuation of acquired assets and liabilities performed in part by an
unrelated third-party valuation firm is as follows:





AmountWorking
      capital, excluding inventories
            
            
            
            $
            827,287Inventories
            
            
            
            156,745Other
      current assets
            
            
            
            36,369Property
      and equipment
            
            
            
            209,441Estimated
      useful
              lifeIntangible
      assets:Royalty
      agreements (Advances on royalties)
            
            Less
      than 1 year
            
            3,317,000Game
      sequels
            
            5 –
      12 years
            
            1,037,000Non-compete
      agreements
            
            Less
      than 1 year
            
            200,000Distribution
      agreements
            
            3
      years
            
            50,000Goodwill
            
            Indefinite
            
            
            6,882,133Liabilities
            
            
            
            
            (10,932,811
            )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 December 31, 2008:





AccumulatedGross
            
            
            Amortization
            
            
            NetRoyalty
      agreements (Advances on royalties)
            
            $
            3,317,000
            
            
            $
            (758,236
            )
            
            $
            2,558,764Intangible
      assets, netGame
      sequels
            
            $
            1,037,000
            
            
            $
            —
            
            
            $
            1,037,000Non-compete
      agreements
            
            
            200,000
            
            
            
            (71,345
            )
            
            
            128,655Distribution
      agreements
            
            
            50,000
            
            
            
            (3,719
            )
            
            
            46,281Total
      intangible assets, net
            
            $
            1,287,000
            
            
            $
            (75,064
            )
            
            $
            1,211,936






12




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





2. Acquisition, continued





Intangibles
and goodwill are expected to be tax deductible. The estimated future decreases
to net income (loss) from the amortization of the finite-lived intangible assets
are the following amounts:





Year ending June
      30,
            
            Amount2009
      (remaining six months)
            
            $
            1,420,9852010
            
            
            1,296,0492011
            
            
            16,6662012
            
            
            —2013
            
            
            —Thereafter
            
            
            1,037,000





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 three months ended
              December
      31,
            
            
            For
      the six months ended
              December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Pro
      forma net revenues
            
            $
            17,472,058
            
            
            $
            5,214,371
            
            
            $
            26,505,788
            
            
            $
            25,510,833Pro
      forma net income (loss)
            
            
            940,575
            
            
            
            (1,246,614
            )
            
            
            (34,722,961
            )
            
            
            (704,031
            )Pro
      forma net income (loss) per share—basic
            
            
            0.03
            
            
            
            (0.04
            )
            
            
            (0.97
            )
            
            
            (0.02
            )Pro
      forma net income (loss) per share—diluted
            
            
            0.02
            
            
            
            (0.04
            )
            
            
            (0.97
            )
            
            
            (0.02
            )





As of
December 31, 2008 a total of $421,956 of the Gamecock Earn-Out has been achieved
and was added to goodwill in the consolidated balance sheets at the time the
contingency was resolved.





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 $18,888. 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. Fair
Value Measurements





On July
1, 2008, the Company adopted SFAS No 157, “Fair Value Measurements." In February
2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157”
which defers the implementation for certain non-recurring, nonfinancial assets
and liabilities from fiscal years beginning after November 15, 2007 to fiscal
years beginning after November 15, 2008, which will be the Company’s fiscal year
2010.  Therefore, the Company has adopted the provisions of SFAS No.
157 with respect to its financial assets and liabilities only. The adoption of
SFAS No. 157 did not have a material impact on the Company’s consolidated
results of operations, financial position or cash flows.




13




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





3. Fair
Value Measurements,
continued





SFAS No.
157 defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements.  Fair value is defined under SFAS No. 157 as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants on the measurement
date.  Valuation techniques used to measure fair value under SFAS No.
157 must maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS No. 157 establishes a three-tier hierarchy that draws
a distinction between market participant assumptions based on (1) observable
quoted prices in active markets for identical assets or liabilities (Level 1),
(2) inputs other than quoted prices in active markets that are observable either
directly or indirectly (Level 2), and (3) unobservable inputs that require the
Company to use other valuation techniques to determine fair value (Level
3).





The
following table summarizes the Company’s financial assets measured at fair value
on a recurring basis in accordance with SFAS No. 157 as of December 31,
2008:


Fair
      Value Measurements at Reporting Date UsingQuoted
      Prices inActive
      Markets
            
            Significantfor
      Identical
            
            Other
            
            SignificantFinancial
            
            Observable
            
            UnobservableInstruments
            
            Inputs
            
            InputsAs
      of December
              31,
      2008
            
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)
            
            
            Balance
              Sheet
              ClassificationAssetsMoney
      market funds
            
            $
            35,583
            
            
            $
            35,583
            
            $
            —
            
            $
            —
            
            
            
            Cash
      and cash equivalentsTotal
      assets at fair value
            
            $
            35,583
            
            
            $
            35,583
            
            $
            —
            
            $
            —





4.
Inventories




At
December 31, 2008 and June 30, 2008, inventories consist of the following:




December
      31,
              2008
            
            
            June
      30,
              2008Finished
      goods
            
            $
            5,060,787
            
            
            $
            6,239,060Purchased
      parts and components
            
            
            75,016
            
            
            
            299,584Total
            
            $
            5,135,803
            
            
            $
            6,538,644






14




SOUTHPEAK INTERACTIVE CORPORATION AND
SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





5.
Line of
Credit




The
Company has a $7.5 million revolving line of credit with a financial institution
set to expire on November 30, 2009. The line of credit bears interest at prime
plus 1⁄2%, which was 3.75% and 5.50% at December 31, 2008 and June 30, 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 $10,543,000 and
$13,629,000 at December 31, 2008 and June 30, 2008, respectively. The line of
credit is further collateralized by the personal guarantees, and pledge of
personal securities and assets by two shareholders. The agreement contains
certain financial and non-financial covenants. At December 31, 2008, the Company
was in compliance with these covenants.





At
December 31, 2008 and June 30, 2008, the outstanding line of credit balance was
$7,422,558 and $4,851,819, respectively. As of December 31, 2008 and June 30,
2008, the Company had $77,442 and $148,181, respectively, available under its
credit facility. For the three months and six months ended December 31, 2008,
interest expense relating to the line of credit was $55,571 and $86,703,
respectively. For the three months and six months ended December 31, 2007,
interest expense relating to the line of credit was $80,720 and $228,755,
respectively.




6.
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.




Due
to Shareholders




During
the year ended June 30, 2007, the Company received advances payable on demand
from a shareholder of the Company. Such advances were unsecured and bore
interest at the annual rate of 8%. At December 31, 2008 and June 30, 2008, the
amounts due to the shareholder were $-0- and $228,998,
respectively.  Interest expense under the advances for the three and
six months ended December 31, 2008 were $-0-, respectively. Interest expense
under the advances for the three and six months ended December 31, 2007 were
$15,545, respectively.




Due
to Related Parties




The
Company receives advances, which are payable on demand, from certain affiliated
entities of a shareholder of the Company. Such advances are non-interest bearing
and are not collateralized. At December 31, 2008 and June 30, 2008, the amounts
due to these entities were $25,769 and $15,658, respectively.




15




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





6.
Related Party
Transactions,continued





Accrued
Expenses - Related Party




Accrued
expenses due to related parties as of December 31, 2008 and June 30, 2008
consisted of:




As
      of
              December
      31, 2008
            
            
            As
      of
              June
      30, 2008Balance at beginning of
      period
            
            $
            4,182
            
            
            $
            650,889Expenses
      incurred:Consulting
      fees
            
            
            —
            
            
            
            920,930Commissions
            
            
            264,138
            
            
            
            433,370Less:
      amounts paid
            
            
            (268,320
            )
            
            
            (2,001,007
            )Balance
      at end of period
            
            $
            —
            
            
            $
            4,182





The
Company incurred fees for office space and staff services under an informal
arrangement to an entity partially owned by two shareholders of the
Company.  Fees for the three and six months ended December 31, 2008
were $-0-, respectively. Fees for the three and six months ended December 31,
2007 were $570,715 and $920,930, respectively.  These amounts are
included in the general and administrative expenses in the accompanying
consolidated statements of operations.  The consulting fee for the
period July 1, 2007 through December 31, 2007 was based on the actual costs the
entity incurred in providing the office space and staff services.





The
Company incurred sales commissions for the marketing and sale of video games
with two affiliates of a shareholder of the Company.  Sales
commissions for the three and six months ended December 31, 2008 were $116,539
and $264,138, respectively. Sales commissions for the three and six months ended
December 31, 2007 were $232,059 and $385,721, respectively. These amounts are
included in sales and marketing expenses in the accompanying consolidated
statements of operations.





The
Company incurred fees for broadband usage to an entity partially owned by
shareholders of the Company.  Broadband usage fees for the three and
six months ended December 31, 2008 were $20,850 and $41,700, respectively.
Broadband usage fees for the three and six months ended December 31, 2007 were
$32,000, respectively. These amounts are included in general and administrative
expenses in the accompanying consolidated statements of operations.





7.
Commitments




A summary
of annual minimum contractual obligations and commercial commitments as of
December 31, 2008 is as follows:


SoftwareDevelopers
            
            
            Marketing
            
            
            Leases
            
            
            TotalFiscal
      years ending June 30,Remainder
      of 2009
            
            $
            6,959,066
            
            
            $
            167,167
            
            
            $
            63,852
            
            
            $
            7,190,0852010
            
            
            3,782,784
            
            
            
            —
            
            
            
            127,704
            
            
            
            3,910,4882011
            
            
            —
            
            
            
            —
            
            
            
            82,454
            
            
            
            82,4542012
            
            
            —
            
            
            
            —
            
            
            
            37,204
            
            
            
            37,2042013
            
            
            —
            
            
            
            —
            
            
            
            18,604
            
            
            
            18,604Thereafter
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            10,741,850
            
            
            $
            167,167
            
            
            $
            329,818
            
            
            $
            11,238,835






16




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





8.
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 to officers, directors, employees and consultants. The 2008 Plan expires
in May 2018. Shares available for future grant as of December 31, 2008 were
3,876,000 under the 2008 Plan.




Stock
awards and shares are generally granted at prices which the Company’s Board of
Directors believes 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 is required to recognize compensation costs for the stock-based payments
to employees, based on the fair value at their grant-date. The fair value is
determined using the Black-Scholes option pricing model. 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 three months ended December 31, 2008
              
              
              For
      the six months ended December 31, 2008Risk-free
      interest rate
              
              2.87%
              
              
              2.87-4.01%Weighted-average
      volatility
              
              57.56%
              
              
              57.56%Expected
      term
              
              6
      years
              
              
              5.5-6 yearsExpected
      dividends
              
              0.0%
              
              
              0.0%Estimated
      forfeiture rate
              
              5.0%
              
              
              5.0%





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 three months ended December 31,2008
            
            
            For
      the six months ended December 31,2008Marketing
      and sales
            
            $
            37,734
            
            
            $
            75,468General
      and administrative
            
            
            132,790
            
            
            
            267,037Stock-based
      compensation expense
            
            $
            170,524
            
            
            $
            342,505





As of
December 31, 2008, the Company’s unrecognized stock-based compensation was
approximately $1.3 million and will be recognized over a weighted average of 2.2
years.




17




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Consolidated Financial Statements


(UNAUDITED)





8.  Stock-based
Compensation, continued





The
following table summarizes the Company’s stock option activity for the six
months ended December 31, 2008:




Options
            
            
            
            Weighted-Average
      Exercise Price
            
            
            Weighted-Average
      Remaining Contractual Term
              (in
      years)
            
            
            
            Aggregate
      Intrinsic ValueOutstanding
      as of June 30, 2008
            
            
            —
            
            
            $
            —
            
            
            —
            
            
            $
            —Activity
      for the six months ended December 31, 2008Granted
            
            
            1,103,000
            
            
            
            2.28Exercised
            
            
            —
            
            
            
            —Forfeited,
      cancelled or expired
            
            
            (30,000
            )
            
            
            2.30Outstanding
      as of December 31, 2008
            
            
            1,073,000
            
            
            $
            2.22
            
            
            
            9.52
            
            
            $
            —Exercisable
      as of December 31, 2008
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —





The
aggregate intrinsic value represents the total pre-tax intrinsic value based on
the Company’s closing stock price as of December 31, 2008, which would have been
received by the option holders had all option holders exercised their options as
of that date.





The
following table summarizes the Company’s restricted stock activity for the six
months ended December 31, 2008:





Options
            
            
            Weighted-Average
      Exercise PriceOutstanding
      as of June 30, 2008
            
            
            —
            
            
            $
            —Activity
      for the six months ended December 31, 2008Granted
            
            
            109,000
            
            
            
            2.27Exercised
            
            
            —
            
            
            
            —Forfeited,
      cancelled or expired
            
            
            (5,500
            )
            
            
            —Outstanding
      as of December 31, 2008
            
            
            103,500
            
            
            $
            2.27Exercisable
      as of December 31, 2008
            
            
            —
            
            
            
            —





9.
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
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 preferred stock in an amount equal to .5% of the
aggregate amount invested by such holder of Series A 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 an estimated liability for
liquidating damages and interest totaling $110,000 for the period ended December
31, 2008.






18





SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





10.
Income
Taxes




The
Company is required to estimate its income taxes in each of the tax
jurisdictions in which it operates prior to the completion and filing of tax
returns for such periods.  This process involves estimating actual
current tax expense together with assessing temporary differences in the
treatment of items for tax purposes versus financial accounting purposes that
may create net deferred tax assets and liabilities.  The Company
accounts for income taxes under the asset and liability method, which requires,
among other things, that deferred income taxes be provided for temporary
differences between the tax bases of the Company’s assets and liabilities and
their financial statement reported amounts. In addition, deferred tax assets are
recorded for the future benefit of utilizing net operating losses, and temporary
differences.





The
Company records a valuation allowance to reduce its deferred tax assets to the
amount the Company believes is more likely than not to be
realized.  Because of the uncertainty of the realization of the
deferred tax assets, the Company has recorded a full valuation allowance against
its domestic and foreign net deferred tax assets.





In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”).  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statement
with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No.
109”), and prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  The Company adopted the
provisions of FIN 48 effective July 1, 2007.





At the
adoption date of July 1, 2007 and at December 31, 2008 and 2007, the Company had
no unrecognized tax benefits which would affect its effective tax rate if
recognized.




In
accordance with FIN 48, the Company classifies interest and penalties as a
component of tax expense.  As of December 31, 2008 and June 30, 2008,
the Company had no accrued interest or penalties related to uncertain tax
positions. The tax years 2005-2008 remain open to examination by both the
Federal government and by other major income taxing jurisdictions to which the
Company is subject.





11.
Restructuring





The
Company has implemented an organizational restructuring as a result of the
acquisition described in Note 2. This organizational restructuring is to
integrate different operations to create the streamlined organization of 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 acquisition.




Since the
consummation of the 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 liabilities in the
consolidated balance sheet at December 31, 2008:





FacilitiesSeverance(1)
                
                costs(1)
                
                TotalRestructuring
      charges (charges to expenses)
                
                $
                540,827
                
                
                $
                19,979
                
                
                $
                560,806Utilization
      (cash paid or otherwise settled) (2)
                
                
                (349,150
                )
                
                
                (19,979
                )
                
                
                (369,129
                )Balance
      at December 31, 2008
                
                $
                191,677
                
                
                $
                —
                
                
                $
                191,677






19




SOUTHPEAK
INTERACTIVE CORPORATION AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(UNAUDITED)





11.
Restructuring,
continued





(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 ($349,150 of severance and $19,979 of facility
      costs).




12.
Subsequent
Events





On
January 30, 2009, the Company purchased a 3,746 square foot office building in
Grapevine, Texas for $625,000.  Acquisition costs for the property
were funded with new mortgage debt totaling $500,000.  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 interest rate on the
mortgage adjusts daily to prime plus 1.0%.  The mortgage is secured by
the land and building. One of the Company’s stockholders has personally
guaranteed the mortgage note.




20


Item 2.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 condensed consolidated
financial statements and related notes that appear elsewhere in this report and
in our annual report on Form 10-K for the year ended June 30, 2008.




This
report includes forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can be identified by the use of words such as
“anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” “will,”
“should,” “seeks” or other similar expressions. Forward-looking statements
reflect our plans, expectations and beliefs, and involve inherent risks and
uncertainties, many of which are beyond our control. You should not place undue
reliance on any forward-looking statement, which speaks only as of the date
made. 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 of Part II.




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 leading gaming and entertainment hardware platforms, including Sony’s
PLAYSTATION®3, or PS3, and PlayStation®2, or PS2, computer entertainment
systems; Sony’s PSP® (PlayStation®Portable) system, or PSP; Microsoft’s Xbox
360® videogame and entertainment system, or Xbox 360, Nintendo’s WiiTM, or Wii,
DSTM, or DS, and Game Boy® Advance, or GBA, and for the PC and Games for
Windows®. Our portfolio of videogames extends across a variety of consumer
demographics, ranging from adults to children and hard-core videogame
enthusiasts to casual gamers.




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 acquisition of SouthPeak herein as
the “Acquisition.”




We
operate in a growing industry with highly favorable industry dynamics. Videogame
hardware sales reached an all-time high in 2008, driving strong growth in
software and predictions are for continued growth into 2009. 2007 marked a year
of transition and growth in videogame sales based on the introduction of the
next generation of videogame consoles in 2005 and 2006 and the expanding
demographic of videogame users.
Particularly, the introduction of Microsoft’s Xbox 360, Sony’s PS3 and
Nintendo’s Wii consoles are driving demand for new videogames with increasing
sophistication and graphics given the enhanced functionality of the consoles
including high definition capability and the ability to access the internet. New
handhelds, such as Nintendo’s DS and Sony’s PSP, are also driving demand for new
content.




Our
strategy is to capitalize on the growth of the videogame market, particularly
the expanding demographics of videogame players, and focus on creating premium
quality videogames and successful franchises for which we can create sequels. We
are developing a portfolio of exciting proprietary software content for the
major hardware platforms in a wide range of genres including action, adventure,
strategy, role-playing, sports and racing.  In October 2008, we
acquired Gone Off Deep, LLC, doing business as Gamecock Media Group, or
Gamecock, an independent videogame publisher based in Austin,
Texas.  The acquisition of Gamecock provided us with videogames that
were partially developed and thereby enabled us to bring more videogames to
market faster.  We intend to identify and acquire additional companies
which would either expand our portfolio of proprietary software content, provide
access to new customers or markets, or both.




Sources
of Revenue




Our
business model is primarily based on utilizing a network of third-party software
developers and independent studios to develop our products, and obtaining
marketing and selling rights to certain titles for
specific territories from large videogame publishers. We are
positioned as an “indie” label videogame developer and publisher, working with
independent developers to create and publish our videogames. We have cultivated
relationships with independent videogame studios and developers in the United
States, Western Europe, Eastern Europe, Scandinavia, Australia and Asia, that
provide us with innovative and compelling videogame concepts.




We
generate revenue by selling 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 fixed costs accordingly. Although software
development costs as well as the development cycle for next-generation platforms
have increased compared to prior-generation platforms, the impact is partially
offset by the higher selling prices on next-generation
software.


21


We
maintain operations in the US and in the United Kingdom. For the six months
ended December 31, 2008 and 2007, international operations contributed
approximately 6% and 21%, respectively, to consolidated net revenues. We sell
our videogames directly to retailers and distributors in North America. In
Europe, Asia and Australia, we primarily sell our videogames directly to
distributors. We operate in one business segment, interactive videogame
publishing.




Second
Quarter 2009 Releases




We
released the following videogames in the three month period ended December 31,
2008:




Title
                            
                            Platform
                            
                            Date ReleasedNinjatown
                            
                            NDS
                            
                            10/16/08Bella
      Sara
                            
                            NDS,
      PC
                            
                            10/21/08My
      Baby Boy
                            
                            NDS
                            
                            10/21/08My
      Baby Girl
                            
                            NDS
                            
                            10/21/08Legendary
                            
                            X360,
      PS3, PC
                            
                            11/10/08Mushroom
      Men
                            
                            NDS,
      Wii
                            
                            11/26/08Rise
      of the Argonauts
                            
                            X360,
      PS3, PC
                            
                            12/12/08


Consolidated
Financial Statements




Our
consolidated financial statements include the accounts of SouthPeak Interactive
Corporation and its subsidiaries SouthPeak Interactive, L.L.C., SouthPeak
Interactive, Ltd., Vid Sub, LLC, Gone Off Deep, LLC and Gamecock Media Europe
Limited.  All intercompany accounts and transactions have been
eliminated in consolidation.




The
following are the primary components of our consolidated statements of
operations:




Net Revenues. Our revenue is
derived from publishing and selling videogames. We work with independent
developers and/or development studios to develop proprietary videogames and also
license rights to properties from third parties. We focus on providing high
quality videogames that command prices that are similar to those obtained by our
major competitors in the front-line/premium videogame market ($39.95 to $59.95),
that are featured prominently “on the shelf” of major retailers, and not on
focusing on lower-priced “value games,” that generally are found in “budget game
bins” in retail outlets (usually priced between $9.99 and $14.99). The
future growth of our revenues is dependent upon our ability to continue
providing highly desirable, high quality videogames to the market.




Cost of Goods
Sold. 
Cost of goods sold consists of royalty payments to third party developers,
license fees to videogame manufacturers, and manufacturing costs of the
videogame discs, cartridges or similar media. Proprietary console manufacturers
approve and manufacture each videogame for their platform. 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 proprietary console 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 platform proprietors 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. This
normally results in expensing the majority of prepaid royalties based
upon the first and, on occasion, the second lot of shipments of the videogame.
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.


22


Gross Profit. Our gross
profit is positively impacted by our strategy of using cost-efficient, external
third party developers to develop our videogames, rather than directly employing
videogame developers or maintaining a costly development studio. Additionally,
we are often able to attract high quality developers willing to work for
lower costs because of the creative flexibility and focused attention provided
by us. Gross profits are positively impacted by titles that perform better
than our budgeted forecasts, since manufacturing, royalties and licensing
costs are faster recouped and economies of scale occur as the incremental
sales of a videogame produce greater profitability. In addition since we utilize
a variety of third-party developers, our royalty payments and obligations are
different for each title thereby impacting our gross profit. Gross profits are
negatively impacted by costs written off from abandoned projects, videogames
that do not meet our sales expectations, and by videogames that require more
significant royalty payments to developers.




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 US 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. The largest
component of this expense relates to certain customer marketing allowances. 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 selling 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, professional fees, consulting and professional fees,
and various other expenses. Professional and consulting fees 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 expenses
also are included in general and administrative expenses.




Interest and Financing Costs.
Interest and financing costs are attributable to SouthPeak’s line of credit and
financing arrangements that are used to fund development of videogames with
third parties, which often takes 12-18 months. Additionally, such costs are used
to finance the accounts receivables prior to payment by customers.




Critical
Accounting Policies and Estimates




This
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the US. 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 is discussed throughout
management’s discussion and analysis of financial condition and results of
operations where such policies affect our reported and expected financial
results.




In Item 7
(“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”) of our Annual Report on Form 10-K for the year ended June 30, 2008,
which was filed with the SEC on October 6, 2008 (the “Annual Report”), we
included a discussion of the most significant accounting policies and estimates
used in the preparation of our financial statements. There has been no material
change in the policies and estimates used in the preparation of our financial
statements since the filing of our Annual Report.







23




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 by a
certain amount and, when granted and applicable, allows customers a credit
against amounts owed by such customers to the Company with respect to open
and/or future invoices. The conditions 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. The Company may also consider
other factors, including the facilitation of slow-moving inventory and other
market factors. Management must make estimates of potential future product
returns and price protection related to current period revenues. Management
estimates the amount of future returns and price protection for current period
revenues utilizing historical experience and information regarding inventory
levels and the demand and acceptance of the Company’s games by the end
consumer. 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 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.




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.





Inventories. Inventories
are stated at the lower of cost (first-in, first-out) 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.





Advances
on Royalties. The
Company utilizes independent software developers to develop its games and makes
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.




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 six months or less.




24


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.





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 games release, capitalized intellectual property license costs
are amortized to “cost of sales - intellectual property licenses” based on the
ratio of current revenues for the specific game to total projected revenues for
all games in which the licensed property will be utilized. 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 rights holder’s 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.




25


Revenue
Recognition The
Company recognizes revenue from the sale of video games upon the transfer of
title and risk of loss to the customer, and once any performance obligations
have been completed.  Revenue from the sale of video games is
recognized after deducting the estimated allowance for sales returns and price
protection.




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 sale 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 ratably over an
estimated service period. In addition, the Company defers the costs of sales for
this game to match revenues. Cost of sales includes: manufacturing costs,
software royalties and amortization, and intellectual property
licenses.




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 and collection of the related receivable must be
probable.
 
 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.
01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor’s Products) (“EITF No. 01-09”).  In
accordance with EITF No. 01-09, 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.
 
 Third-party
licensees in Europe distribute Gamecock’s video games under license agreements
with Gamecock. The licensees paid certain minimum, non-refundable, generally
recoupable guaranteed royalties when entering into the licensing agreements.
Upon receipt of the recoupable advances, the Company defers their recognition
and recognizes the revenues in subsequent periods as these advances are recouped
by the licensees. As the licensees pay additional royalties above and beyond
those initially advanced, the Company recognizes these additional royalties as
revenues.
 
 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 and collection of the related receivable must be
probable.
 
 Stock-Based
Compensation. The
Company accounts 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 statement 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.
 
 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.
 
 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.
 26
 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 Assets.Current accounting standards require that we 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
our condensed 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, our estimated fair
value is dependent upon predicting which of our products will be successful.
This success is dependent upon several factors, which are beyond our control,
such as which operating platforms will be successful in the marketplace, market
acceptance and competing products. Also, our revenue and earnings are dependent
on our ability to meet our 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. Our reporting units are
determined by the components of our operating segments that constitute a
business for which both (1) discrete financial information is available and (2)
segment information management regularly reviews 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, 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.




Consolidated
Results of Operations




The following table sets forth our
results of operations expressed as a percentage of net
revenues:




For
      The
                  Three Months Ended
                  December 31,
                
                
                For
      The
                  Six Months Ended
                  December31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of goods sold:Product
      costs
                
                
                40.1
                %
                
                
                18.1
                %
                
                
                48.1
                %
                
                
                34.6
                %Royalties
                
                
                8.6
                %
                
                
                26.5
                %
                
                
                9.0
                %
                
                
                23.2
                %Intellectual
      property licenses
                
                
                0.4
                %
                
                
                0.0
                %
                
                
                0.4
                %
                
                
                0.0
                %Total
      cost of goods sold
                
                
                49.1
                %
                
                
                44.6
                %
                
                
                57.5
                %
                
                
                57.8
                %Gross
      profit
                
                
                50.9
                %
                
                
                55.4
                %
                
                
                42.5
                %
                
                
                42.2
                %Operating
      expenses:Warehousing
      and distribution
                
                
                1.6
                %
                
                
                2.1
                %
                
                
                1.9
                %
                
                
                1.4
                %Sales
      and marketing
                
                
                22.1
                %
                
                
                14.8
                %
                
                
                22.3
                %
                
                
                13.7
                %Restructuring
      costs
                
                
                3.2
                %
                
                
                0.0
                %
                
                
                2.2
                %
                
                
                0.0
                %Transaction
      costs
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %General
      and administrative
                
                
                16.7
                %
                
                
                28.6
                %
                
                
                17.0
                %
                
                
                9.6
                %Total
      operating expenses
                
                
                43.6
                %
                
                
                45.5
                %
                
                
                43.4
                %
                
                
                24.7
                %Operating
      income (loss)
                
                
                7.3
                %
                
                
                9.9
                %
                
                
                (0.9
                )%
                
                
                17.5
                %Interest
      expense
                
                
                0.6
                %
                
                
                3.3
                %
                
                
                0.6
                %
                
                
                1.3
                %Net
      income (loss)
                
                
                6.7
                %
                
                
                6.6
                %
                
                
                (1.5
                )%
                
                
                16.2
                %Deemed
      dividend related to beneficial conversion feature on Series A convertible
      preferred stock
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                4.4
                %
                
                
                0.0
                %Net
      income (loss) attributable to common shareholders
                
                
                6.7
                %
                
                
                6.6
                %
                
                
                (5.9
                )%
                
                
                16.2
                %


27


Three
Months Ended December 31, 2008 and 2007


Net Revenues.  Net
revenues for the three months ended December 31, 2008 were $17,312,781, an
increase of $13,063,665, or 307%, from net revenues of $4,249,116 for the
comparable period in 2007.  The increase in net revenues was primarily
driven by several new releases during the quarter, including My Baby Boy/Girl, Legendary and Ninjatown.  For the three months
ended December 31, 2008, the number of videogame units sold increased to
approximately 885,000 units, an increase of 648,000 units from units sold for
the comparable period in 2007.  Average net revenue per videogame unit
sold increased 9%, from $17.93 to $19.56 for the three month periods ended
December 31, 2007 and 2008, respectively. This average increase in price is
mainly due to the large number of games released in this quarter as compared to
the comparable period last year. For the quarter ended December 31, 2008,
we have been aggressive in providing price protection (sales markdowns) to our
customers to end the quarter at desirable field inventory levels.




Cost of Goods
Sold.  Cost of goods sold for the three months ended December
31, 2008 increased to $8,499,550, up $6,603,598, or 348%, from $1,895,952 for
the comparable period in 2007.  The cost of royalty expense for the
three months ended December 31, 2008 increased 33% from the cost of royalty
expense for the three months ended December 31, 2007.  The increase is
due to the additional units sold compared to the same period in
2007.




Gross Profit.  For
the three month periods ended December 31, 2008 and 2007, gross profit increased
to $8,813,231 from $2,353,164, or 275%, and gross profit margin decreased to
approximately 51% from 55%, or 4%. The increase in gross profit is largely due
to an increase in net revenue and a decrease in royalties as a percentage of net
revenues. Our gross profit margins have generally increased during each
year of our operations due to deeper engagement in the creative process of
publishing videogames over time.




Warehousing and Distribution
Expenses. For the three months ended December 31, 2008 and 2007,
warehousing and distribution expenses were $268,980 and $87,308, respectively,
resulting in an increase of 208%. This increase is due primarily to the increase
in net revenues.  As a percentage of net revenues, warehousing and
distribution costs were 1.6% of net revenues, compared to 2.1% in the same
period in 2007.




Sales and Marketing
Expenses.  For the three months ended December 31, 2008, sales
and marketing expenses increased 506% to $3,823,149 from $630,460 for the
comparable period in 2007. This increase is primarily due to larger average
marketing budgets for games released in 2008 and the higher volume of different
video game titles released in 2008.  Advertising 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 the quarter ended December 31, 2008, we incurred
$372,733 in marketing costs for future game releases which are included in
marketing expenses.  Included in sales and marketing expenses for the
three months ended December 31, 2008 is a noncash charge of $37,734 for stock
options granted to vendors during the period.




General and Administrative
Expenses.   For the three months ended December 31, 2008,
general and administrative expenses increased 138% to $2,883,401 from $1,213,998
for the comparable period in 2007. Wages included in general and administrative
expenses increased from $251,234 for the three months ended December 31, 2007 to
$944,549 for the three months ended December 31, 2008, an increase of 276%. In
addition to employees, for the comparable prior period a consulting fee was
incurred by us in payment for staff related expenses, occupancy costs,
telephones and communications expenses, and office supplies. This consulting fee
totaled $570,715 for the three months ended December 31, 2007 and $0 for the
three months ended December 31, 2008.  Professional fees increased
962% from $42,517 for the three months ended December 31, 2007 to $451,719 for
the three months ended December 31, 2008 as a result of the Gamecock acquisition
and increased costs associated with being a public company. Travel and
entertainment expenses were $108,864 for the three months ended December 31,
2007, increasing 18% to $124,896 for the three months ended December 31, 2008.
General and administrative expenses as a percentage of net revenues decreased,
to 16.7% for the three months ended December 31, 2008 from 28.6% for the same
period in fiscal year 2008 as we realized economies of scale. In
addition, for the three months ended December 31, 2008, general and
administrative expenses include a $132,790 charge for noncash compensation
related to employee stock options and restricted stock granted.




As a
result of the Acquisition, it is anticipated that staffing will continue to
increase, partly to comply with financial and accounting reporting requirements
of a public company. In addition it is expected, as additional sales territories
are added and more videogames are offered for sale, that sales will increase. It
is anticipated that staffing will increase to support the increased sales
volume.




Restructuring Costs: For the
three months ended December 31, 2008, we incurred $560,806 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 a restructuring of Gamecock's
operations.




Transaction Costs.  For
the three months ended December 31, 2008, we incurred $10,295 in costs related
to the Acquisition. These costs relate to internal costs for travel and other
expenses related to the Acquisition.




28


Operating Income
(Loss).   For the three months ended December 31, 2008, our
operating income was $1,266,600 versus an operating income of $421,398
in the prior year period. The increase in operating income is principally due to
the volume of videogame units sold in the quarter compared to the quarter ended
December 31, 2007.  For the three months ended December 31, 2008,
operating income as a percentage of net revenue was 7.3%.




Interest and Financing
Costs.   For the three months ended December 31, 2008, interest
and financing costs decreased to $100,055 from $140,486 for the prior year
period due to a decrease in average borrowings as a result of the increase in
working capital provided by the sale of preferred stock in
2008.  Also, the interest rate on the line of credit decreased in
2008.




Net Income (Loss). For
the three months ended December 31, 2008, we generated net income of $1,166,545
as compared to a net income of $280,912 in the same period of the prior
year.




Six
Months Ended December 31, 2008 and 2007




Net Revenues.  Net
revenues for the six months ended December 31, 2008 were $25,704,392, an
increase of $3,158,814, or 14%, from net revenues of $22,545,578 for the
comparable period in 2007.  The increase in net revenues was primarily
driven by the increased volume of units sold.  For the six months
ended December 31, 2008, the number of videogame units sold increased to
approximately 1,312,000 units, a 490,000 increase from 822,000 units sold for
the comparable period in 2007.  Average net revenue per videogame unit
sold decreased 40%, from $27.43 to $19.59 for the six month periods ended
December 31, 2007 and 2008, respectively. This decrease is due to a
higher volume of Nintendo DS games sold in the period which have a lower
sales price than Xbox 360 or Playstation 3 games. This is also attributed
to our sales of Two
Worlds on the next generation Xbox 360 platform in the prior comparable
period and higher reserves required at December 31, 2008 to end the quarter at
desirable field inventory levels.




Cost of Goods
Sold.  Cost of goods sold for the six months ended December 31,
2008 increased to $14,778,005, up $1,743,390, or 13%, from $13,034,615 for the
comparable period in 2007.  The cost of royalty expense for the six
months ended December 31, 2008 decreased 56% from the cost of royalty expense
for the six months ended December 31, 2007.  The decrease is a result
of the successful launch of Two Worlds on the Xbox 360
platform in which the high profit margin resulted in increased royalty expense
to the third party game developer.




Gross Profit.  For
the six month periods ended December 31, 2008 and 2007, gross profit increased
to $10,926,387 from $9,510,963, or 15%, and gross profit margin increased to
approximately 43% from 42%.  The increase in gross profit is largely
due to an increase in net revenue.  The increase in gross profit
margin is primarily due to decrease in royalties paid. In 2007, Two Worlds had very high royalties due to the
volume of sales of the game, therefore triggering additional royalties due to
the developer. Our gross profit margins have generally increased
during each year of our operations due to deeper engagement in the creative
process of publishing videogames over time.




Warehousing and Distribution
Expenses. For the six months ended December 31, 2008 and 2007,
warehousing and distribution expenses were $476,563 and $310,363, respectively,
resulting in an increase of 54%. This increase is due primarily to increase in
units shipped and units currently being held at our third party warehouse when
compared to 2007.




Sales and Marketing
Expenses.  For the six months ended December 31, 2008, sales
and marketing expenses increased 85% to $5,721,603 from $3,093,859 for the
comparable period in 2007. This increase is primarily due to the increased
number of titles in fiscal year 2009 when compared to 2008.  Advertising
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 the six months ended
December 31, 2008, we incurred $782,381 in marketing costs for future game
releases which are included in marketing expenses.  Included in sales
and marketing expenses for the six months ended December 31, 2008 is a noncash
charge of $75,468 for stock options granted to vendors during the
period.


29


General and Administrative
Expenses.   For the six months ended December 31, 2008, general
and administrative expenses increased 102% to $4,365,015 from $2,158,553 for the
comparable period in 2007. Wages included in general and administrative expenses
increased from $439,597 for the six months ended December 31, 2007 to $1,772,553
for the six months ended December 31, 2008, an increase of 303%. In addition to
employees, for the comparable prior period a consulting fee was incurred by us
in payment for staff related expenses, occupancy costs, telephones and
communications expenses, and office supplies. Such consulting fee totaled
$920,930 for the six months ended December 31, 2007 and $0 for the six months
ended December 31, 2008.  Professional fees increased 457% from
$123,574 for the six months ended December 31, 2007 to $688,320 for the six
months ended December 31, 2008 as a result of the Gamecock acquisition and
increased costs associated with being a public company. Travel and entertainment
expenses were $247,457 for the six months ended December 31, 2007, decreasing
15% to $209,499 for the six months ended December 31, 2008. General and
administrative expenses as a percentage of net revenues increased, to
approximately 17% for the six months ended December 31, 2008 from 10% for the
same period in fiscal year 2008.  In addition, for the six months
ended December 31, 2008, general and administrative expenses include a $267,037
charge for noncash compensation related to employee stock options and restricted
stock granted.




As a
result of the Acquisition, it is anticipated that staffing will increase, partly
to comply with financial and accounting reporting requirements of a public
company. In addition it is expected, as additional sales territories are added
and more videogames are offered for sale, that sales will increase. It is
anticipated that staffing will increase to support the increased sales
volume.




Restructuring Costs: For the
six months ended December 31, 2008, we incurred $560,806 in restructuring costs
related to the Gamecock acquisition. These
primarily consist of salaries and severance for Gamecock employees who seperated
from service after the Gamecock acquisition as part of restructuring Gamecock's
operations .




Transaction Costs.  For
the six months ended December 31, 2008, we incurred $28,675 in costs related to
the Acquisition. These costs included professional fees to accounting firms, law
firms and advisors.




Operating Income
(Loss).   For the six months ended December 31, 2008, our
operating loss was $226,275 versus operating income of $3,948,188 in the prior
year period, which was a result of the successful launch of Two Worlds. For the six months ended December
31, 2008, operating loss as a percentage of net revenue was (0.9)%.




Interest and Financing
Costs.   For the six months ended December 31, 2008, interest
and financing costs decreased to $158,934 from $290,310 for the prior year
period due to a decrease in average borrowings as a result of the increase in
working capital provided by the sale of preferred stock in
2008.  Also, the interest rate on the line of credit decreased in
2008.




Net Income
(Loss).   For the six months ended December 31, 2008, we
generated a net loss of $385,209 as compared to net income of $3,657,878 in the
same period of the prior year.




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




Historically, we have met our capital
needs through our operating activities, our line of credit and, prior to the
Acquisition, loans from related parties and our stockholders. Our cash and cash
equivalents were $212,647at December 31, 2008 and
$4,095,036 at June 30, 2008. Our cash is and was used principally for
working capital purposes, including milestone payments for advances on
royalties.




We expect
continued volatility in the use and availability of cash due to fluctuations in
receivables collections and quarterly working capital needs necessary to finance
our business and growth objectives. During the fourth quarter of fiscal year
2008 and the first quarter of 2009, we sold preferred stock which provided
additional liquidity to fund our continued growth through investment in
videogame development. As of December 31, 2008, our operating activities
combined with the preferred stock sold funded our working capital
needs.




Although
there can be no assurance, our management believes that there will be sufficient
capital resources from our operations, our line of credit and the sale of
additional preferred stock to finance our requirements for development,
production, marketing, the purchases of equipment, and the acquisition of
intellectual property rights for future products for at least the next 12
months. Furthermore, as a result of the Acquisition, SouthPeak has enhanced its
ability to finance future operations and future growth through access to the
public securities markets.


30


Line of Credit. SouthPeak has
a revolving loan due to a financial institution, with a maximum outstanding
amount of $7.5 million at December 31, 2008. The loan bears interest at prime
plus 1⁄2%, which was 3.75% and 7.75% at December 31, 2008 and 2007, respectively.
The outstanding loan amount cannot exceed 65% of eligible accounts receivable
from North American operations. Payments received on such accounts are processed
by the financial institution as payments on the revolving loan. The line is
collateralized by gross accounts receivable of
approximately $10,543,000and
$5,122,000at December,
2008 and 2007, respectively. The line of credit is further collateralized by the
personal guarantees, and pledge of personal securities and assets, by two of our
stockholders. The note contains certain financial and non-financial covenants,
and at December 31, 2008 and 2007, we were in compliance with the
covenants.




At
December 31, 2008 and June 30, 2008, the outstanding line of credit balance
was $7,422,558and
$4,851,819, respectively, and the remaining available under the line of credit
amounted to $77,442and $148,181,
respectively. In the future, we may elect to increase the maximum outstanding
amount on the line of credit as our business grows and our gross margins
continue improving in the ordinary course of business. Our management believes
that the line of credit will be renewed and potentially expanded in the
normal course of business.




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 recoups these costs, incremental net revenues typically will directly and
positively impact cash flows.




For the
six months ended December 31, 2008, we had net cash used in operating activities
of $6,400,299 compared to a net cash flow of $6,141,056for the six
months ended December 31, 2007. Although there is a large decrease in net income
between the periods, there are other factors that have led to the negative cash
flow from operations, which include a large amount of inventory on hand at
December 31, 2008, large accounts receivable balances as a result of sales for
both periods, large amounts expended for royalty advances, and the pay-off of
certain Gamecock liabilities incurred prior to the acquisition. The largest
increase in cash provided by operating activities for the six months ended
December 31, 2008 was a decrease in accounts receivable of $2,001,549.
Generally, when new videogames are launched, there is a large amount of payables
and receivables on the books to account for the cost of manufacturing the
videogames, and from the large sales volume.




The cash
used in investing activities for the six months ended December 31, 2008 and 2007
was $891,068and $329,863,
respectively. The cash used in investing activities for both periods primarily
related to the purchase of office and computer equipment and the Gamecock
acquisition for the six months ended December 31, 2008.




During
the six months ended December 31, 2008, financing activities resulted in net
cash provided of $3,589,922 and during the six months ended December 31, 2007,
financing activities resulted in net cash used of $4,469,714. For the six months
ended December 31, 2008, available cash for the period went in part to pay down
the line of credit. Conversely, for the six month period ended December 31,
2007, we had additional borrowings on the line of credit to fund cash needs for
the launch of Two
Worlds on the Xbox 360 platform.




We are
able to meet a substantial portion of our capital needs through operating cash
flows, our line of credit and the sale of additional preferred stock.
Additionally, 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 assumed
the liabilities of Gamecock.  We expect the revenue derived from
Gamecock videogames will provide sufficient cash flow in 2009 and 2010 to offset
this strain.  Although there can be no assurances, our management
believes that we have sufficient capital resources from our operations, our line
of credit, and the sale of preferred stock to finance our operations and
growth.




Item 3.Quantitative and Qualitative
Disclosures about Market Risk




For
quantitative and qualitative disclosures about market risk, see Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” of our annual
report on Form 10-K for the year ended June 30, 2008. Our exposures to
market risk have not changed materially since June 30, 2008.


31


Item 4T.Controls and
Procedures




Evaluation
of Disclosure Controls and Procedures




Based on
the evaluation of our disclosure controls and procedures (as defined in the
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective to ensure that the information required to be disclosed by us in
this quarterly report on Form 10-Q was recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and Form 10-Q 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




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected.  Our management, including our Chief
Executive Officer and Chief Financial Officer, has concluded that our disclosure
controls and procedures are designed to provide reasonable assurance of
achieving their objectives.




Changes
in Internal Controls




There
were no changes in our internal controls over financial reporting that occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.




PART II




Item 1.Legal
Proceedings




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 financial positions, operating results or cash
flows.




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
which 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 business
in general, may also impair our business operations. If any of the following
risks or uncertainties actually occurs, our business, financial condition and
operating results would likely suffer.




“Item 1A.
Risk Factors” of our annual report on Form 10-K for the year ended June 30,
2008 includes a discussion of our risk factors. The information presented below
updates, and should be read in conjunction with, the risk factors and
information disclosed in our annual report on Form 10-K for the year ended
June 30, 2008. Except as presented below, there have been no material changes
from the risk factors described in our annual report on Form 10-K for the
year ended June 30, 2008.




We
may be subject to claims for rescission or damages from our stockholders because
we did not dissolve following our failure to complete a business combination
within the specified time period.




The
prospectus issued in connection with our initial public offering stated that if
we did not complete a business combination within 18 months after the completion
of our initial public offering, or within 24 months if certain extension
criteria were satisfied, we would liquidate our trust account, cancel our Class
B common stock, dissolve and distribute any remaining assets to the holders of
our common stock.  Because we did not dissolve following our failure
to complete a business combination within the specified time period, some of our
stockholders may have securities law claims against us for rescission (under
which a successful claimant would have the right to receive the total amount
paid for his or her securities pursuant to an allegedly deficient prospectus,
plus interest and less any income earned on the securities, in exchange for
surrender of the securities) or damages (compensation for loss on an investment
caused by alleged material misrepresentations or omissions in the sale of the
security). In general, a claim for rescission must be made by a person who
purchased shares pursuant to a defective prospectus or other representation, and
within the applicable statute of limitations period. A successful claimant for
damages under federal or state law could be awarded an amount to compensate for
the decrease in value of his or her shares caused by the alleged violation
(including, possibly, punitive damages), together with interest, while retaining
the shares.  We cannot predict whether stockholders will bring such
claims, how many might bring them or the extent to which they might be
successful.


32


We
may be subject to discipline pursuant to Section 14 of the Securities Exchange
Act of 1934 based on our failure to file a proxy statement with the SEC and to
provide proper stockholder notice for the filing of our certificate of
designation or the amendment to our certificate of incorporation.




Pursuant
to Section 14 of the Securities Exchange Act of 1934, we are required to furnish
a publicly-filed preliminary and/or definitive written proxy statement to any
stockholder whose vote shall be solicited in connection with any proposed
corporate action requiring a stockholder vote. We are also required to file such
proxy statements with the SEC.  Certain exemptions may apply which
allow us to furnish stockholders with an information statement, as opposed to a
proxy statement, which must also be filed with the SEC.




We were
required to notify our stockholders and file an information statement prior to
filing our certificate of designations and the amendment to our certificate of
incorporation with the State of Delaware in May 2008.  Although such
actions were approved by the holders of the majority of our outstanding shares
such actions should not have been effectuated without the filing of the
information statement. Because we failed to file such information statement in a
timely manner, we may be subject to discipline by the SEC as a result of our
violation of Section 14 of the Securities and Exchange Act.




We
may not be able to realize the benefits we anticipate from the acquisition of
Gamecock Media Group.




We
acquired Gamecock in October 2008 with the expectation that the acquisition
would both grow and enhance our product pipeline. We may not realize these
benefits, as rapidly as, or to the extent, anticipated by our management.
Operations and costs incurred in connection with the integration of Gamecock
with our operating subsidiary could have an adverse effect on our business,
financial condition and operating results. If these risks materialize, our stock
price could be materially adversely affected. The acquisition, as with all
acquisitions, involves numerous risks, including:




●
            difficulties
      in integrating operations, technologies, products and personnel of
      Gamecock;




●
            diversion
      of financial and management resources from existing
      operations;




●
            potential
      loss of key employees of Gamecock;




●
            integrating
      personnel with diverse business and cultural
  backgrounds;




●
            preserving
      the development, distribution, marketing and other important relationships
      of Gamecock; and




●
            inability
      to generate sufficient revenue and cost savings to offset acquisition
      costs.




The
acquisition of Gamecock may also cause us to:




●
            make
      large and immediate one-time write-offs and restructuring and other
      related expenses;




●
            become
      subject to litigation; and




●
            create
      goodwill or other intangible assets that could result in significant
      impairment charges and/or amortization
expense.




As a
result, if we fail to properly execute and integrate the Gamecock acquisition,
the acquisition may result in our not achieving its anticipated benefits. As a
result, our business and prospects may be seriously harmed.




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.


33


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 adversely affected.




Item 2.Unregistered Sales of Equity
Securities and Use of Proceeds.




On
November 4 and 18, 2008, we issued two warrants, each to purchase 50,000 shares
of our common stock, to two consultants in consideration for services rendered
to us in connection with the acquisition of Gamecock.  The warrants
have an exercise price of $1.50 per share and are exercisable on or prior to May
31, 2013.  The warrants contain a cashless exercise provision, certain
anti-dilution provisions, piggy-back registration rights, and other customary
provisions. The warrants were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended.








On
December 4, 2008, we issued three warrants to purchase an aggregate of 50,000
shares of our common stock, to former officers of Gamecock in connection with
their separation from Gamecock.  The warrants have an exercise price
of $1.50 per share and are exercisable on or prior to December 3, 2011, subject
to the achievement of certain revenue targets. The warrants contain a
cashless exercise provision, certain anti-dilution provisions, and other
customary provisions. The warrants were issued in reliance upon the exemption
set forth in Section 4(2) of the Securities Act of 1933, as
amended.




The
foregoing description is qualified in its entirety by reference to the
full text of the warrant, a copy of which is attached to this Quarterly Report
on Form 10-Q as Exhibit 4.2.




On
December 31, 2008, we issued 100,000 of our Class Y warrants, or the Warrants,
to an investors pursuant to the purchase agreement for the sale of Series A
preferred stock entered into by us on May 12, 2008, or the Purchase
Agreement. The Warrants were issued in exchange for 100,000 of our Class W
warrants. The 100,000 Class W warrants were tendered to our transfer agent and
cancelled as of December 31, 2008. The warrants were issued in reliance upon the
exemption set forth in Section 4(2) of the Securities Act of 1933, as
amended.  In exchange for investment banking services related to the
Purchase Agreement, we shall pay HCFP/Brenner Securities LLC a fee
consisting of, (a) cash in an amount equal to 6.5% of the gross proceeds
received by us, including the conversion of indebtedness, (b) warrants with an
exercise price of $1.00 to purchase a number of shares of common stock equal to
10% of the total number of shares of Series A preferred stock issued by us, and
(c) one Warrant for every ten Class Y warrants issued pursuant to the Purchase
Agreement.




Item 6.Exhibits




ExhibitNumber
            
            Exhibit3
            .1(1)
            
            Amended
      and Restated Certificate of Incorporation.3
            .2(1)
            
            Amended
      and Restated Bylaws.4
            .1(2)
            
            Form
      of Warrant issued in connection with the acquisition of Gamecock Media
      Group.4
            .2*
            
            Form
      of Warrant issued to the Gamecock Media Group Founders.31
            .1*
            
            Certification
      of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a), promulgated under the Securities Exchange Act of
      1934, as amended.31
            .2*
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and
      Rule 15d-14(a), promulgated under the Securities Act of 1934, as
      amended.32
            .1*
            
            Certification
      of Chairman and 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 Securities and Exchange Commission on May 15,
      2008.(2)
            
            Incorporated
      by reference to an exhibit to Amendment No. 1 to the Registration
      Statement on Form S-1 filed with the Securities and Exchange Commission on
      November 25, 2008.




34


SIGNATURES




Pursuant
to the requirements 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
      Mroz
                President
      and Chief Executive Officer
                (Principal
      Executive Officer)




By:
              /s/ Andrea
      Gail JonesAndrea
      Gail Jones
                Chief
      Financial Officer
                (Principal
      Financial and Accounting Officer)


Date: February
17, 2009


35


INDEX
TO EXHIBITS





ExhibitNumber
            
            Exhibit3
            .1(1)
            
            Amended
      and Restated Certificate of Incorporation.3
            .2(1)
            
            Amended
      and Restated Bylaws.4
            .1(2)
            
            Form
      of Warrant issued in connection with the acquisition of Gamecock Media
      Group.4
            .2*
            
            Form
      of Warrant issued to the Gamecock Media Group Founders.31
            .1*
            
            Certification
      of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a), promulgated under the Securities Exchange Act of
      1934, as amended.31
            .2*
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and
      Rule 15d-14(a), promulgated under the Securities Act of 1934, as
      amended.32
            .1*
            
            Certification
      of Chairman and 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 Securities and Exchange Commission on May 15,
      2008.(2)
            
            Incorporated
      by reference to an exhibit to Amendment No. 1 to the Registration
      Statement on Form S-1 filed with the Securities and Exchange Commission on
      November 25, 2008.




36