In a week that has been nothing but bad news for THQ, I’m sure that investors thought they could take refuge in a weekend devoid of trading. Unfortunately, in a notification of late filing of form 10-Q sent to the SEC, another bombshell has dropped. THQ has received notice from lender Wells Fargo of default on their $50,000,000 revolving line of credit. $21 million of that has been drawn according to the second quarter results released earlier this week, which sent the publisher’s stock into a tailspin.

Form 10-Q is a mandatory document that must be submitted to the SEC every quarter. It reports financial performance and relevant disclosures that impact how investors value the company. The notice of late filing is filled with information we already know, like the uDraw tablet failure and, more recently, the delays of three key titles slated for early 2013. It appears that the filing was strategically delayed to ensure release after the close of the financial markets on Friday, giving investors the weekend to cool down from the bad news.

This section from the filing says it all,

In connection with the Company’s Credit Agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”), which was amended pursuant to Amendment Number One dated July 23, 2012 (collectively, as so amended, the “Credit Facility”), on November 7, 2012, the Company was informed by Wells Fargo that loan availability on the Credit Facility was less than 12.5% of the maximum revolver amount on one or more occasions as of and after the fiscal quarter ended September 30, 2012, and accordingly, one or more events of default have occurred under the terms of the Credit Facility, including the failure to comply with financial covenants for the fiscal quarter ended September 30, 2012.

The document goes on to indicate that THQ is in negotiations to repair the credit line. Were it to disappear, the publisher’s cash flow would be severely impacted. Additionally, they don’t have the funds to repay the credit right now. No other lender is going to bail them out, either. Were this to happen, bankruptcy seems like the only reasonable outcome.

I had the opportunity to speak with analyst Kevin Dent regarding his interpretation of this turn of events.

“Wells Fargo has THQ in a corner. They can either show leniency and grant an extension or call in the loan. Given that THQ is already in technical default, it’s unlikely they’ll be able to negotiate for more money or time,” Dent told me. “It’s like a bicycle playing chicken with a truck. It’s not going to end well for the guy on the bicycle.”

This week already saw an enormous drop in the stock value, with a 50% drop evidenced between close of business on Monday November 5, 2012, and the following day. The stock managed to stay above $1.00, but according to Dent,

“I expect material news by Friday of next week.”

As for the future, it is unlikely that a competitor will purchase any of the franchises that have been the foundation of THQ’s survival to this point. There is a lot of value in the Saints Row franchise, for instance. EA, or another publisher, will simply swoop in if bankruptcy is declared and pick up the IP for relatively little. It’s the same thing that WB did when Midway went out of business.

One thing that Dent shared was about how licensed arrangements typically work. In many cases, should a publisher declare bankruptcy, the developers involved will be entitled to any funds paid and retain possession of the code already developed. If this is the case here, should a publisher wish to continue the work on South Park: The Stick of Truth or use the existing framework for a new WWE title, they’ll not only need to negotiate with the license-holders, but the developers as well.

This tale seems to be winding to a close. We can only hope that those employees that may be affected find work quickly and the titles we love end up in loving homes. If you are interested in the full filing, it can be downloaded here.

 Melissia wrote:
So they're going down like Cavedog did, a good company with good IPs going down because of financial mismanagement?

 Compel wrote:
From what I've read about THQ it generally speaking wasn't mismanagement, it was just a streak of underperforming games. Not outright bad games, just a string of things that never quite sold well enough.

For example, I think the big thing that would supposed to have save them was Darksiders 2 being a smash hit, instead, like a lot of other games before (and some drawing tablet thingy), it was 'ok but not groundbreaking.'

It is basically a foregone conclusion now I think.

 Compel wrote:
From what I've read about THQ it generally speaking wasn't mismanagement, it was just a streak of underperforming games. Not outright bad games, just a string of things that never quite sold well enough.

For example, I think the big thing that would supposed to have save them was Darksiders 2 being a smash hit, instead, like a lot of other games before (and some drawing tablet thingy), it was 'ok but not groundbreaking.'

It is basically a foregone conclusion now I think.

 LordofHats wrote:

Do we know is mismanagement? I mean, I can see THQ's death as the simple result of bleeding money over the past decade by never being able to make quite enough money from its products.

Palindrome wrote:
Read this article. Its quite long but it speaks volumes, indirectly at least, about why THQ is now in serious trouble. The Udraw debacle really didn't help either.

I think they expanded too fast, they tried to be one of the big boys but they ended up with a string of dubious games and it looks very much like they will soon be dead.

Hopefully CoH2's new publisher will drop its price

 Melissia wrote:
Saint's row a poor man's GTA?

Hell no. Saint's Row is metric fethtonnes better than the most recent GTAs, which are running more on name recognition than actual quality at this point...

I didn't think the latest Red Faction game was all that great myself, mind you. Certainly it really should have followed more on the formula of Guerilla than on generic sci-fi movies.

 SoloFalcon1138 wrote:
Guess if this ever happened to GW, the villagers would be lighting the torches?

 LordofHats wrote:

 Melissia wrote:
Saint's row a poor man's GTA?

Hell no. Saint's Row is metric fethtonnes better than the most recent GTAs, which are running more on name recognition than actual quality at this point...

I didn't think the latest Red Faction game was all that great myself, mind you. Certainly it really should have followed more on the formula of Guerilla than on generic sci-fi movies.

I mean in a financial sense. GTA is established and a power house. Saints Row meanwhile just isn't packing the same punch. Red Faction is a good example though a decent series of games that just doesn't have enough selling power.

 Melissia wrote:
I rather liked saint's row 3, myself. Darksiders 2 really could have used some work though.

 Testify wrote:
Does this mean the rights for 40k games could pass to another company or what?

 Compel wrote:
From what I've read about THQ it generally speaking wasn't mismanagement, it was just a streak of underperforming games. Not outright bad games, just a string of things that never quite sold well enough.

 Melissia wrote:
I rather liked saint's row 3, myself.

 Ma55ter_fett wrote:

I'm not entirely sure as I'm no lawyer and I have no idea what kind of contract GW made with THQ.