American McGee's Shanghai development studio has made a significant loss on its Japanese-folklore inspired Diabloesque, Akaneiro: Demon Hunters.
In a grim Kickstarter update, McGee confessed that the free-to-play game has made just $300,000 to date, including the $204,680 from its Kickstarter campaign, in-game purchases and Steam buy-ins.
Since the company has spent $2 million on development so far - about 360 man-months since early 2011, with a team of about 15 staff - the project is $1.7 million in the red.
"Given this situation, we now have no choice but to radically alter the approach we're taking to maintaining and improving the game. The core development team has been reduced in size to just two people," MeGee said.
The two remaining team members will squash bugs and make general improvements, but progress much more slowly towards larger goals like multiplayer and tablet support.
"Depending on the success of our other remaining title, The Gate, we may one day find ourselves in a position to throw greater resources at Akaneiro. We certainly hope that will be the case," McGee added.
Citing "truly painful internal decisions and adjustments", McGee said Spicy Horse has undergone downsizing so that resources can be channeled into The Gate, "the one game that offers the greatest chance of bringing much-needed stability to our studio".
"Life as an independent developer is filled with the constant threat of failure. This isn't the first time in our eight year history we've faced this sort of challenge," he added.
"It's not the first time we've had to reduce staff on one of our games. It is different because of the demand for transparency that comes with being a part of Kickstarter. In providing transparency like this, I am asking for your understanding and I am hoping for your support."
Spicy Horse was founded in 2007. Its first game was episodic adventure Grimm, but it is best known for the only traditional triple-A game it has produced to date - Alice: madness returns, a sequel to American McGee's Alice published by EA in 2011. Its other works include Crazy Fairies and BigHead Bash, and it has a strong interest in non-traditional models such as free-to-play, social and cross-platform.