Game sales missed 38 Studios' forecast

WILMINGTON, Del. (WPRI) - Executives from 38 Studios acknowledged Tuesday sales of its debut game failed to live up to their expectations, as they answered questions about the bankrupt company under oath while meeting with its creditors in a Delaware courthouse.

38 Studios was represented at the hearing by William Thomas, who was its president and chief operating officer, and Richard Wester, who became its chief financial officer in February 2010. Curt Schilling, who founded 38 Studios and moved it to Rhode Island in exchange for a $75 million taxpayer-guaranteed loan, didn't attend.

Wester said 38 Studios received no cash from sales of its first game, "Kingdoms of Amalur: Reckoning," which was released in February, because the company had to repay $28.7 million advanced by distributor Electronic Arts to fund the game's development. 38 Studios gets 30% of "Reckoning" royalties and EA gets the remaining 70% under the terms of their deal.

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Wester estimated "Reckoning" has sold 1.3 million copies so far, which he said failed to meet 38 Studios' internal projections even though it beat Electronic Arts' more conservative forecast. Each copy sold for an average of about $50, and the company spent $30 million developing the game over 30 months, Thomas said.

"I don't believe the company would see any more cash" from future sales of "Reckoning," Wester said. "If it gets up around 2 million, then I think you're at a point where [38 Studios] potentially will start to see some cash come in." Most games achieve 80% of their all-time sales during their first three months on the market, Thomas added.

The executives' comments shed more light on why Gov. Lincoln Chafee told reporters the first game had been "a flop," a comment that Schilling tried to rebut by saying the game surpassed Electronic Arts' expectations.

Thomas echoed Schilling by blaming Chafee - without referencing him by name - for scaring off potential investors in China and South Korea when he said in May the company could be insolvent. "The Asian investors and potential strategic partners, when insolvency was even hinted at, became very reluctant to continue discussions," Thomas said. "That became a serious weight around our neck."

38 Studios also had a letter of intent from game developer FireForge in May to get $3.75 million by selling its Helios platform, but was unable to get the state to sign off, Thomas said.

A wealthy Providence-area resident was ready to invest $15 million as late as the morning of the bankruptcy filing, but refused when the state failed to approve tax credits, Wester said. "It always seemed like there was something to kind of pursue and finalize and basically keep going," he said.

However, Thomas admitted 38 Studios' cash concerns emerged long before that, saying executives determined shortly after the Rhode Island loan deal closed in late 2010 that they needed to raise another $30 million to $50 million. They hired investment bankers from UBS in early 2011 who unsuccessfully tried to raise funds.

38 Studios continued to discuss potential investments by Asian game companies, wealthy individuals and top game firms including EA and Sony, he said. The company was projecting that its forthcoming second game, "Project Copernicus," would bring in more than $100 million a year once it got released next June, Wester said.

"Instead of a positive domino effect we had a negative domino effect, and things just didn't happen," Thomas said. "Nothing happened that we had anticipated would happen from a fundraising perspective, which put us in a position of needing to file for bankruptcy," Thomas said.

The low-key meeting lasted nearly three hours in a drab second-floor conference room at the federal courthouse in downtown Wilmington. There was little evidence of how the saga has rocked Rhode Island, though reporters outnumbered creditors at the meeting. The questions ranged from game distribution logistics to how former employees will get their W2 tax forms.

38 Studios listed more than 1,000 creditors it owes more than $150 million, led by Rhode Island taxpayers, in its June 7 bankruptcy filing. Thomas and Wester said they haven't returned to the company's One Empire Plaza headquarters since the bankruptcy filing.

The company is now being liquidated by Jeoffrey Burtch, a trustee appointed by Delaware U.S. Bankruptcy Court Judge Mary Walrath. He visited Providence last month to tour 38 Studios' empty headquarters at One Empire Plaza and take stock of its assets. Thomas said "Project Copernicus" was about 75% done as of May.

"We had extremely good feedback [about the game] from independent third parties," he said.

One creditor who attended Tuesday's meeting was Patricia Herron, managing partner of the Providence-based temp firm Silverman McGovern Staffing, who said her company is owed $80,000 for wages paid to contractors it provided 38 Studios. She expressed little hope about getting any money back.

38 Studios "started slipping" in its payments to Silverman McGovern around April, though the company found the money to meet its obligations after a meeting with the temp firm's leaders, Herron said. "We had a really good relationship with them," she said. "The people there were wonderful."

Before reaching the deal with Rhode Island, 38 Studios received inquiries about relocating in exchange for tax incentives from a number of jurisdictions including Louisiana, Montreal, Vancouver, Seattle, Iowa and one of the Carolinas, according to Thomas.

Another topic discussed at the meeting included what assets 38 Studios left behind that could be sold off to help pay back Rhode Island taxpayers and its other creditors.

The company's Baltimore subsidiary, formerly Big Huge Games, was working on other projects in addition to "Reckoning," including a handheld game based on its previous release "Rise of Nations" that was about 90% finished at the time of the bankruptcy filing, Thomas said.

Wester turned in his 38 Studios laptop during the meeting. His lawyer said the computer was the only remaining property belonging to the company that wasn't already in the bankruptcy trustee's possession.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi