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Schilling’s 38 Studios may get more aid from R.I.

Beleaguered game developer makes $1.1m payment

TONY AVELAR/BLOOMBERG/FILE 2010

Curt Schilling, the former Red Sox pitcher and founder of 38 Studios LLC, denied reports that implied he used state funds to repay some of the personal money he has poured into 38 Studios.

Rhode Island, which has provided $75 million to former Red Sox pitcher Curt Schilling’s troubled video game firm, may be on the hook for millions more in subsidies to the company, Governor Lincoln Chafee revealed Friday.

Schilling’s firm, 38 Studios LLC, has qualified for state tax credits available to film companies and video game makers, and, Chafee said, Rhode Island may have no choice but to pay them, no matter how shaky the venture’s outlook seems. So far 38 Studios has qualified for $2.1 million in credits for 2011 and has applied for another $6.5 million that the state is now reviewing.

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The company’s deteriorating finances have put Chafee in a bind. He has long opposed the $75 million state-guaranteed loan his predecessor arranged to lure 38 Studios from Massachusetts to Rhode Island but now is struggling to protect the state’s investment by helping 38 Studios stay afloat without putting additional tax money at risk.

“My energies are devoted entirely to the conflict of making sure that 38 Studios are solvent and protecting the hard-earned taxpayer dollars,’’ Chafee said. “We’re in deep.’’

Chafee also revealed that 38 Studios finally brought its loan up to date Friday with a belated $1.1 million payment that was originally due May 1. In an embarrassing turn of events that underscored the company’s financial woes, 38 Studios earlier this week asked for more state money after missing the May 1 payment, and then wrote a check for the amount Thursday evening - a check the company admitted it didn’t have the money to cover.

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38 Studios also told state officials it would not be able to make payroll this week.

The company did not return repeated calls and e-mails seeking comment on Friday.

However, Schilling took to Facebook on Friday morning to deny online reports that implied he used state funds to repay some of the personal funds he has poured into 38 Studios.

“That is not true,’’ Schilling wrote. He also expressed confidence that his fledgling firm would survive.

The company has disclosed that state funds were used to pay off a $2.5 million credit line 38 Studios took out with a private lender and which Schilling had personally guaranteed.

While Schilling has said he invested $30 million of his own money in the company, it appears he has trouble persuading many others to join him in doing so. Chafee also said on Friday that the 38 Studios troubles may rest in part on its inability so far to raise additional funds from private investors.

“Their excuse is no private capital has materialized,’’ Chafee said.

Meanwhile, 38 Studios is burning through cash. It has used up all the funds available to it currently under the Rhode Island loan, and is spending $4 million a month in Providence developing an elaborate new online video game, nicknamed Copernicus. It addition to 307 workers in Rhode Island, 38 Studios has 106 in Maryland, where it bought video game company Big Huge Games in 2009.

Copernicus is a so-called massively multiplayer online game, a kind of product that experts in the industry say is notoriously difficult to make because it requires so much time, money, and testing.

“It’s a very risky category,’’ Billy Pidgeon, senior analyst for M2 Research, a market research and strategic consulting company. “A burn rate is not uncommon because there’s a lot of overhead.’’

Completing the game also appears to have taken longer than expected, creating a further drain on the company’s treasury; Chafee disclosed that it won’t be ready for another year. A June 2013 release is expected.

Schilling’s firm recently told investors it hoped to find a publisher who could provide an advance payment to complete the game. 38 Studios’ first video game, Kingdoms of Amalur: Reckoning, was released in February 2012 to favorable reviews and decent though not blockbuster sales.

Under the terms of the Rhode Island subsidy, companies receive $1 in state tax credits for every $4 they spend making movies or producing games in the state. Recipients can convert the credits into cash by reselling them. Chafee said 38 Studios has qualified for $2.1 million in credits. In addition to the $6.5 million application that is now under review, the company has indicated it may seek another $12 million in state tax credits for this year’s expenses.

Chafee indicated the state is probably legally obligated to provide the additional tax credits under current law. However, on Friday he proposed legislation that would bar companies from getting tax credits if their work was subsidized with other state funds. The governor said he also opposed giving 38 Studios any additional taxpayer aid other than the money to which it is already legally entitled.

The remarkable turn of events this week appears to have crippled hopes that luring Schilling’s company to Rhode Island would trigger a prosperous new business sector the state desperately needs to overcome massive economic problems, including an unemployment rate of 11.2 percent.

Donald Carcieri, former governor, used a generous package of state aid to convince Schilling to relocate 38 Studios from Maynard and create 450 jobs, in the hopes that other video game makers would follow.

The low point in this week’s drama may have been Thursday night when state officials rejected the $1.1 million check from 38 Studios for insufficient funds. Rhode Island criminal law bars people from knowingly delivering a bad check with the intent to defraud, with penalties that can include prison time.

But in this case, the governor’s office said 38 Studios was upfront about the insufficient funds, and the check was never accepted.

“Clearly, there was no intent to defraud,’’ said Andrew Horwitz, a professor at the Roger Williams University School of Law who specializes in criminal law. Meanwhile, Needham gaming company Turbine Inc., which also makes multiplayer online games and has more than 50 job openings, took advantage of 38 Studios’ woes by scheduling a recruiting event in its backyard, the Hotel Providence, Tuesday night.

Schilling, after a week in which he was apparently unable to pay his employees, sought to exhort them on with a second message on Facebook.

“To all the prayers and well wishes to the team and families at 38,’’ Schilling wrote, “God Bless and thank you! We will find a way, and the strength, to endure.’’

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack. Globe correspondent Gail Waterhouse contributed to this report.
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