The decision has been made that Terraria Otherworld, the Terraria spin-off that has been in development for three years, will be cancelled. More than that, it had to be cancelled, because the quality wasn't living up to what Re-Logic wanted, and rather than wait or push out a substandard product, they've cut their losses.
We know that the cancellation of Terraria: Otherworld will not be happy news to anyone. It is FAR from a happy moment for us either, when we look at all the time/effort/resources that we poured into the project. However, we feel strongly that we owe it to our community and loyal customers to uphold the standards that both you and we expect and to focus on delivering the best possible games that we can for you all to play. Come whatever may, quality is simply not something we are willing to compromise on to make a quick buck. It may be painful in the short term, but our sincere hope is that it will pay off for everyone in the long term in regard to our future games. T:OW will never come to pass, but its lessons learned and ideas generated will absolutely yield dividends for everyone.
They further went on to explain that, whilst we'll never see Otherworld, there are ideas in the code that they're going to look into implementing in other titles. They are also still hard at work on Terraria version 1.3.6, and that any future game announcements will be when the game is ready, rather than beforehand.