Why’d the EDC demand $1.125M from 38 Studios now, anyway?May 16th, 2012 at 5:00 am by Ted Nesi under Nesi's Notes, On the Main Site
It’s pretty clear at this point what happened to 38 Studios over the past two weeks that caused such consternation.
For some reason – likely a shortage of cash, though we don’t know for sure – 38 Studios failed to make a $1.125 million payment to the R.I. Economic Development Corporation that was due on May 1. That put the company in technical default of its bond agreement, sending the company scrambling to find other sources of funds.
As I explained Tuesday, the $1.125 million is an “Annual Guaranty Fee” (based on the percentage of the outstanding loan) that 38 Studios is supposed to pay the EDC annually on May 1. Based on EDC documents, it doesn’t look like the fee is to cover bond payments or anything like that; it’s just money the EDC gets to keep.
That raises the question of why the EDC is charging such a fee at all, and especially how it ever expected 38 Studios to have $1.125 million lying around before the game it’s funding has even been released. Startups are notoriously short of cash, almost by definition - they’re spending money but not making it (yet). Expecting 38 Studios to have more than $1 million available without “Copernicus” on sale was always a recipe for trouble.
Still, if 38 Studios has burned through all of the nearly $50 million it’s gotten from the $75 million loan without “Copernicus” anywhere near ready for release, it raises serious questions about whether the company is undercapitalized. Now the EDC board must decide if Rhode Island doubles down to salvage its original investment.
Update: Just before noon – three hours after the EDC board meeting began – Governor Chafee’s spokeswoman confirmed that the group was “ordering lunch and settling in.” Schilling and 38 Studios executives are at the meeting to brief them about the situation.
(photo: city of Providence)