Year end results

RNS Number : 9825S
Frontier Developments PLC
14 November 2013
 



14 November 2013

 

Frontier Developments plc

Year end results

Frontier Developments plc (AIM: FDEV; "Frontier" or the "Group"), a leading independent developer of video games with studios in Cambridge, UK and Halifax, Canada, has published its full year results for the year to 31 May  2013.

 

Financial highlights

 

·      Underlying revenue up 19% to £12.0m

·      Adjusted EBITDA up 12% to £3.6m

·      Like for like operating profit up 27% to £1.8m

·      Adjusted EPS up 27% to 7.3p

·      Cash at 31 May 2013 at £7.2m (31 May 2012: £1.7m)

·      Raised £2.7m via pre-IPO placing over May and June

·      £3.0m provided by revolving credit facility 

·      Raised £1.55m for development of Elite: Dangerous through Kickstarter crowd funding site

·      Listed shares on AIM in July 2013, raising £4.0m

 

Operational highlights

 

·      Opened studio in Halifax, Nova Scotia

·      Completed adaption of proprietary Cobra software technology to work with 64-bit CPU architectures

·      Completed development and released new game IP, Coaster Crazy

 

Recent developments

 

·      Development of Xbox One launch title based on Microsoft Zoo Tycoon franchise

·      Continued partnerships with key industry players including Microsoft, Apple, Nintendo, Amazon and Atari

·      Elite: Dangerous Alpha testing phase starts December 2013

·      Elite: Dangerous backers reach 35,138 (8,304 added through Frontier's own website), and more being added daily with support nearing £2.0m.

 

David Braben, Chief Executive of Frontier Developments, commented:

 

"We are currently in a period of transition following the listing of our shares on AIM and our crowd funding exercise for the development of Elite: Dangerous. We are evolving from being primarily a developer of video games for major external publishers into a business which also manages its routes to market, by developing and licensing key technology and services to support games, both for major external publishers, other developers and our own self-published game titles.

 

"Our progress in the current year is encouraging. We have announced releases with key partners whilst continuing the development of Elite: Dangerous."

 

 

Enquiries:

 

Frontier Developments

+44 (0)1223 394 300

David Braben, CEO


David Walsh, COO


Neil Armstrong, CFO




Canaccord Genuity

+44 (0) 207 523 8000

Simon Bridges/Cameron Duncan




College Hill

+44 (0) 20 7457 2020

Kay Larsen/Adrian Duffield


 

 

Overview

 

Frontier Developments is a leading developer of video games with studios in Cambridge, UK and Halifax, Canada. Frontier has a proven track record of software technology development and innovation spanning several decades of rapid technological change.  The Group has leveraged its technology to develop innovative video games across a wide variety of different game genres and platforms, and has established relationships with globally renowned partners.

 

Frontier's proprietary Cobra software technology, developed since 1988, was initially conceived as a solution for the problem of easily porting the same game across different target hardware devices. Cobra today supports multi-core CPU and GPU architectures of PC, console, tablet and smartphone with a modular, high performance system offering of state of the art efficiency and visual fidelity that is applicable across a wide range of game genres.  

 

Cobra incorporates a framework which enables rapid development of powerful game creation tools, which offer the ability to view, tweak and review changes to content (e.g. animations, audio, 3D models etc.) on target platforms in a live game session running on that platform, without the intervention of a programmer. 

 

The year to 31 May 2013 and the current financial year are transitional years for Frontier.  The Group concluded a very successful crowd-funding programme to support the development of Elite: Dangerous. Since year end Frontier has also completed the listing of the Group's shares on AIM by way of an initial public offering (IPO).

 

Frontier is making good progress from being primarily a developer of video games for major external publishers into a business which develops and licenses technology to support games for major external publishers, other developers and Frontier's own self-published game titles.

 

To fund this transition Frontier raised £9.7m in three tranches; £2.7m came via a pre-IPO placing over May and June; £4.0m from institutions that subscribed for new shares in the IPO; and £3.0m has been provided by the Group's bankers through a revolving credit facility. 

 

The Group's investment programme in its platform technology will benefit and facilitate better and more cost effective results for its third party publisher games, like Zoo Tycoon, and will also improve Frontier's own self-published offering with Elite: Dangerous and other games going forwards. The high graphical quality and very efficient development Frontier has achieved with Zoo Tycoon is a great demonstration of this capability.

 

Elite: Dangerous will be sold directly to customers through Frontier's own e-commerce platform and through third parties.

 

Frontier is in transition as its publishing activity with Elite: Dangerous and the associated new services ramp up.  Although the opportunities and scope for Elite: Dangerous to grow and develop are very substantial and the potential financial rewards significant, particularly given how fast the Group's markets grow and change, it is very difficult for the Board to know exactly how quickly it will be taken up. For example, some PC online games (Elite: Dangerous is a PC online game) that have caught the public's imagination such as Minecraft and World of Tanks have reached estimated revenues of over £100m per annum over a small number of years. Others have not grown quite so quickly, but on the additional platforms the levels of success could be higher still.

 

Frontier expects Elite: Dangerous revenues to grow gradually in a similar way to other PC online games, but also that it will hit a quality resonance at which point revenues would increase significantly, as it did for those other titles.

 

In the financial year to 31 May 2013, Frontier saw a 19% underlying increase in revenue and a 12% rise in EBITDA. Headline revenue decreased by 14%, and reported EBITDA showed an 11% reduction. This was the result of pass-through revenue booked in 2012 that did not apply in 2013. Like-for-like operating profit and adjusted earnings per share also grew.   

 

 

Operational review

 

In addition to Frontier's strong financial performance in the year ended 31 May 2013, the Group saw a number of operational highlights during the financial year:

 

Studio in Halifax, Nova Scotia

Frontier opened its first overseas studio, in Halifax, Nova Scotia, Canada in August 2012. North America is a strategically important region for the games industry. The Group selected Nova Scotia due to the attractiveness of the province's Digital Media Tax Credit program, its geographic location and the new talent pool offered by the existing healthy ICT sector and local universities.

 

Further Cobra technology developments

Frontier completed the adaption of its proprietary Cobra software technology to work with 64-bit CPU architectures, which will allow the Group to continue to extract maximum performance from the new generation of CPUs starting to appear in console, smartphone and tablet hardware.  Frontier now has a proven, mature solution for taking full advantage of 64-bit multi-core processor systems as used in key new hardware target platforms such as the Xbox One, PlayStation 4, iPhone 5S and iPad Air.

 

Coaster Crazy

Frontier completed development and released a new game IP, Coaster Crazy.  The game was based on Frontier's cross-platform Cobra technology and incorporated very sophisticated rollercoaster construction techniques, which are based on the Group's experience as a world leading rollercoaster game creator.

 

Coaster Crazy was Frontier's first game with a cloud-based server backend.  The game achieved a maximum of over 500,000 concurrent users with Frontier's server technology performing well.  The Group released Coaster Crazy on iOS devices, and as with LostWinds and LostWinds2 on iOS, the game received significant promotion from Apple. In addition Frontier promoted it via in-game cross-selling in the Group's own LostWinds iOS games and used third party marketing channels.

 

Crowd-funding for Elite: Dangerous

In November 2012 the Group started a 60-day crowd-funding campaign using both Kickstarter.com and Frontier's own website.  When the Kickstarter campaign closed on 4 January 2013 Frontier had raised £1.55m, exceeding the Group's 'ask' of £1.25m. This was the highest crowd-funding target ever successfully achieved on Kickstarter.  In total, 26,834 individuals backed the project, and a further 8,304 have since participated through Frontier's own website.

 

The scale of the response clearly demonstrates the viability of the Elite: Dangerous project.  Frontier had previously been running the project in order to develop the key innovative technologies necessary to deliver the game's vision, and this additional funding has allowed the Group to put it into full production.  Frontier continues to successfully communicate with the large customer/stakeholder community that has provided this funding, and this close dialogue and engagement will continue to the initial launch of the game and beyond.

 

Key industry partnerships

The Group also continued its close working relationship with Microsoft, starting development of an Xbox One launch title based on Microsoft's popular Zoo Tycoon franchise, providing experience on the new console hardware early. This is in addition to working with other important partners such as Apple, Nintendo, Amazon, and Atari.

 

Recent developments

Frontier has continued working with Microsoft on Zoo Tycoon, planned for commercial release in November 2013 alongside the Xbox One launch, as one of the five full disc-based games to be released by Microsoft Studios at the launch of Xbox One.

 

The Group also announced Coaster Crazy Deluxe for the Nintendo WiiU - this game is an extension of the Coaster Crazy title and will use more new online functionality.  Frontier has taken advantage of partnering opportunities with Nintendo to promote the game.

 

The Group also announced a new relationship with Atari at the end of October, whereby Frontier's e-commerce strategy is accelerated. The Group now has the rights to publish Atari games, as well as the possibility of releasing Roller Coaster Tycoon 3 on other platforms.

 

In October, the Group also announced that the Alpha testing phase for Elite: Dangerous will begin in December 2013, and that the Group is planning to support the Oculus Rift virtual reality headset in the game.

 

 

Financial review

 

The Group's underlying trading performance was improved from the prior year. The Group is now entering an investment phase up to the launch of Elite: Dangerous and associated technology development and licensing.

 

Revenue

Frontier delivered 19% growth in underlying revenue after excluding sub contract costs recharged to customers at nil margin.

 

Underlying Revenue £'000

2012-3

2011-2

%

Headline Revenue

12,072

14,157

(15%)

Sub contract pass through

(26)

(4,033)

(99%)

Underlying Revenue

12,046

10,124

19%

 

 

The launch of Coaster Crazy and recognition of Elite: Dangerous revenues enabled the Group to show growth in self-published revenues of 58%. Growing the Group's self-published revenue stream is one of Frontier's strategic aims.

 

The Group recognised an element of revenue for Elite: Dangerous from the crowd-funding raise on commencement of delivery of pledges, and sold £0.02m of merchandise in the year. The LostWinds iOS titles continued to sell at 88% of their prior year level.

 

Publishing revenue was lower, as Frontier did not work on any game titles that required significant sub contract pass through revenues. The Group worked on three projects for a key client, two of which are due to be released in the financial year 2013-14.

 

Intangible investment and R & D

Investment in Frontier's own IP capitalised in the year was up 27% at £1.7m, reflecting Frontier's commitment to a strategic software development programme in respect of the Group's Cobra technology and self published titles.

 

A good proportion of the Group's investment is in Research and Development, representing £0.76m (2012: £0.73m) an increase of 4%. Research and Development expensed rose to £0.6m from £0.33m.  

 

Margins

The overall gross margin rose to 30% from 20%. On an underlying basis, after stripping out pass through recharges the improvement was 2%. This underlying improvement stemmed mainly from improved margins in the Publication business exceeding a lower margin for self published titles which are impacted by a cautious approach on capitalisation and amortisation in the relatively new mobile platform segment.

 

Frontier is in a state of transition, following its listing of the Group's shares on AIM in July 2013. As a consequence the Board monitors performance on an adjusted EBITDA basis. The adjusting items were primarily Share Based Compensation and funding costs associated with the IPO.

 

Operating profit was 24% lower at £1.05m and EBITDA 11% lower at £2.85m.

 

Compared to the previous financial year on a like-for-like basis, without the one-off funding costs and share based compensation, operating profit rose 27%.  Adjusted EBITDA rose 12% to £3.62m.

 

The reconciliation is as follows:

 


2012-13

2011-12

%

£'000

£'000






Operating profit

1,052

1,390

(24%)

Depreciation

151

185


Amortisation

1,650

1,623


EBITDA

2,853

3,198

(11%)

Share based compensation

416

-


Funding costs

308

-


Dilapidations provision

37

37


Canada set up fees

10

-


EBITDA adjusted

3,624

3,235

12%

 

 

Tax base

The charge in the year remained low, mainly comprising a rebate on overseas tax of £5,735 and UK tax on finance income of £3,716. The Group recorded a deferred tax liability of £27,793 for overseas tax due to the timing difference over which R&D tax relief and a local Digital media tax rate operate. The holding company continues to hold unused tax losses of £3.69m to set against future taxable profits generated in the UK.

 

Earnings per share

Basic earnings per share reduced to 4.2 pence per share from 5.7 pence based on a weighted average number of shares of 25.0m (2012: 24.7m).

 

On a diluted basis, earnings per share dropped to 5.5 pence from 4.1 pence based on a weighted average number of shares of 25.5m (2012: 25.5 m).

 

The adjusted earnings per share rose to 7.3 pence from 5.8 pence per share on an undiluted basis (a 25% increase), as a result of the improved adjusted EBITDA figure.

 

Dividends

The Directors are not recommending the payment of a dividend (2012: £nil).

 

Balance sheet summary

The Group received convertible loans to the value of £1.13m just prior to year end and increased net investment in intangibles to £3.5m.

 

Trade and other receivables decreased by £0.42m to £2.08m mainly as a result of receipt of contracted income from publication customers.

 

Trade and other payables increased by £2.19m to £3.06m. The main drivers for this increase were convertible loan notes of £1.13m, deferred income of £0.56m and funding cost accruals of £0.23m.

 

Deferred income constituted both crowd-funding 'pledges' expected to be delivered within one year for Elite: Dangerous and Publication contract revenue.

 

Cashflow

The Group's operating cashflow rose by £4.1m to £6.2m mainly driven by the working capital changes. These comprised a £1.56m raise from a successful Kickstarter campaign for Elite: Dangerous. In addition the Group raised £1.13m from the issue of convertible loan notes.

 

The Group invested £2.0m in non-current assets, up by £0.57m.

 

Non cash costs included share based compensation charges of £0.42m (2012: £nil)

Cash balances were also increased by the injection of £0.17m of share capital proceeds.

 

The overall impact was an increase of £5.47m in cash and cash equivalents to £7.16m, being a positive staging point for the Group's investment and growth plans.

 

 

Current trading and outlook

 

Frontier's progress in the current financial year is encouraging. The Group has announced several high profile releases with key partners, whilst the development of Elite: Dangerous is on track, with the Alpha testing phase due to begin in December 2013.

 

In the year to 31 May 2014, Frontier expects to further execute its plans to maintain its existing valued relationships, focus strongly on the development and launch of Elite: Dangerous, and continue to invest significant resources in the development of the Group's technology for third party use. Frontier expects revenues from its traditional publishing business to reduce whilst the Group invests in building the new elements required for the transition.

 

The Group is confident that other developers and/or publishers will take advantage of Frontier's sales portal and cross platform technology, and over time Frontier will cover an increasing number of games, platforms, new features and facilities.

 

 

 

Consolidated income statement

 


Notes

31 May 2013

£'000

31 May 2012

£'000





Revenue

4

12,072

14,157





Cost of sales


(8,375)

(11,259)





Gross profit


3,697

2,898





Administrative expenses


(2,645)

(1,508)





Operating profit


1,052

1,390





Finance income

19

19

10





Profit before tax

5

1,071

1,400





Income tax

20

(26)

(2)





Profit  for the period


1,045

1,398





 

All the activities of the Group are classified as continuing.

 

Earnings per share

21



Basic earnings per share


4.2p

5.7p

Diluted earnings per share


4.1p

5.5p

 

 

Consolidated Statement of Comprehensive Income

 


31 May 2013

£'000

31 May 2012

£'000

Profit  for the period

1,045

1,398

Other Comprehensive income:



Items that will be reclassified subsequently to the profit and loss



Exchange differences on translation of foreign operations

3

-

Total comprehensive income for the period attributable to the owners of the Group

1,048

1,398

 

 

 

Consolidated statement of financial position

 


Notes

31 May 2013

£'000

31 May 2012

£'000

Non-current assets




Intangible assets

6

3,450

3,331

Property, plant and equipment

7

299

185

Total non-current assets


3,749

3,516





Current assets




Inventories

11

-

75

Trade and other receivables

12

2,082

2,505

Cash and cash equivalents

13

7,155

1,686

Current assets


9,237

4,266





Total assets


12,986

7,782





Equity and liabilities




Equity




Share capital

14

127

12

Share premium account


1,847

1,794

Option reserve


643

263

Foreign exchange reserve


3

-

Retained earnings


5,775

4,694

Total equity


8,395

6,763





Liabilities




Current




Trade and other payables

17

3,060

867

Current tax liabilities


33

2



3,093

869

Non-current




Provisions

18

187

150

Deferred income

17

1,283

-

Deferred tax

10

28

-



1,498

150





Total liabilities


4,591

1,019

Total equity and liabilities


12,986

7,782





 

 

Consolidated statement of cash flows

 

 

 

Notes

31 May 2013

£'000

31 May 2012

£'000





Operating activities




Profit after tax


1,045

1,398

Adjustments

22

2,198

1,829

Net changes in working capital

22

2,923

(1,174)

Taxes (paid)/received


(5)

12

Cash flow from operating activities


6,161

2,065





Investing Activities




Purchase of property, plant and equipment


(251)

(28)

Expenditure on intangible assets


(1,783)

(1,433)

Interest received


19

10

Cash flow from investing activities


(2,015)

(1,451)





Financing activities




Proceeds from convertible loan notes


1,129

-

Proceeds from issue of share capital


168

-

Cash flow from financing activities


1,297

-





Net change in cash and cash equivalents from continuing operations


5,443

614





Cash and cash equivalents at beginning of period


1,686

1,064

Exchange differences on cash and cash equivalents


26

8





Cash and cash equivalents at end of period


7,155

1,686

 

 

Consolidated statement of changes in equity

 


Share capital

Share premium account

Option reserve

Foreign exchange reserve

Retained earnings

Total Equity


£'000

£'000

£'000

£'000

£'000

£'000








At 31 May 2011

12

1,794

364

-

3,195

5,365

Share based payment transfer

-

-

(101)

-

101

-

Transactions with owners

-

-

(101)

-

101

-

Profit for the year

-

-

-

-

1,398

1,398

Total comprehensive income for the year

-

-

-

-

1,398

1,398

At 31 May 2012

12

1,794

263

-

4,694

6,763

Increase in equity in relation to options issued

-

-

416

-

-

416

Share based payment transfer

-

-

(36)

-

36

-

Issue of share capital

Redenomination of Share Capital

1

114

167

(114)

-

-

-

-

-

-

168

-

Transactions with owners

115

53

380

-

36

584

Profit for the year

-

-

-

-

1,045

1,045

Other comprehensive income:

Exchange differences on translation of foreign operations

 

 

-

 

 

-

 

 

-

 

 

3

 

 

-

 

 

3

Total comprehensive income for the year

-

-

-

3

1,045

1,048

At 31 May 2013

127

1,847

643

3

5,775

8,395








 

 

 

Selected Notes to the financial statements

 

1.    Basis of Preparation and Statement of Compliance

 

The principal accounting policies applied in the preparation of this financial information are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

 

Basis of preparation

The financial information of Frontier Developments plc has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS.

 

The financial information has been prepared under the historical cost convention. The financial information is presented in Sterling, the presentation currency for the Group and all values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

 

The preparation of this financial information requires the Directors to make critical accounting estimates and judgements that affect the amounts reported in the financial statements and accompanying notes. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.

 

 

2.    Principal Accounting Policies

 

Basis of Consolidation

The consolidated financial statements incorporate those of the Group and all entities controlled by it, after eliminating internal transactions. Control is achieved where the Group has the power to control the financial and operating policies through its share ownership. Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is transferred out of the Group. The entities' results are adjusted, where appropriate, to conform to Group accounting policies.

 

a)         Business Combinations

Business combinations are accounted for using the acquisition method under the revised IFRS 3 Business Combinations (IFRS 3R). The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair value of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration agreement. Acquisition costs are expensed as incurred.

 

The Group recognises identifiable assets acquired and liabilities assumed, including contingent liabilities, in a business combination regardless of whether they have been previously recognized in the acquiree's financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values.

 

Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately.

b)         Intangible assets

Intangible assets are measured at historic cost and are amortised on a straight line basis over their expected useful economic life. They comprise three elements:

-    Development Tools

-    Software (self published games)

-    Software (third party)

 

An internally-generated intangible asset arising from the Group's development activities is recognised only if all of the following conditions are met:

·      Completion of the intangible asset is technically feasible so that it will be available for use in developing games (in respect to Development Tools) or for sale of games (in respect to self published software).

·      The Group intends to complete the intangible asset and has the ability to use or licence it as indicated above, thus generating probable future economic benefits.

·      The expenditure attributable to the intangible asset during its development, mainly salary costs, can be measured reliably.

·      The Group has adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

 

Internally-generated intangible assets, consisting of direct labour costs, other specific direct project costs and attributable project support costs, are amortised on a straight-line basis over their useful economic lives . The estimated useful lives of current development projects are between two and five years. Until completion the assets are subject to annual impairment testing. Amortisation commences upon completion of the asset, and is shown within cost of sales in the income statement.

 

Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.

 

c)         Impairment of property, plant and equipment and intangible assets

At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment and individual intangible assets for any indication that these assets have suffered an impairment loss.  Until the internally generated intangible assets are available for use when amortisation can be charged, the assets are subject to an annual impairment test.  Intangible assets already being amortised are also reviewed for any indication that the asset has suffered an impairment.  If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.  The recoverable amount is the higher of the fair value less costs to sell and value in use.

 

Fair value in use is measured for self published games by discounting future cashflows. For all other assets a review of the expected useful economic life is undertaken and compared to that implied in the amortisation rate.

 

d)        Financial liabilities

The Group's financial liabilities include trade and other payables, and convertible loan notes.

Financial liabilities are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method, except for financial liabilities designated at fair value through Profit and loss (FVTPL). All derivative financial instruments that are not designated and effective as hedging instruments are accounted for at FVTPL.

 

The Convertible Loan Notes issued in the year are recognised as financial liabilities rather than equity as their characteristics are more akin to debt rather than equity.

 

e)         Revenue recognition

Revenue represents amounts derived from the design, production and sale of computer games software and related technology which fall within the Group's ordinary activities, exclusive of value added tax and other similar sales taxes. Revenue is measured by reference to the fair value of consideration received or receivable.

 

Revenue includes income from the design and production of computer software contracted for customers, royalties from published games, income from the release of self published games, and crowd sourced funding pledges.

 

Revenues on project contracts are mapped against the expected profile of costs. In most circumstances these are closely correlated.

 

Where there is close correlation between the revenue and cost profile, the milestones within the project contracts are considered to approximate the stage of completion of the obligations under the contract and therefore recognition of revenue based on these milestones provides a sufficiently accurate approximation of recognition of revenue on a stage of completion basis, except for where there are significant acceptance requirements. Under such arrangements, revenue is recognised when the Group has substantially met all its performance obligations, and the customer has approved the relevant milestone.

 

Where there is less correlation between the revenue and cost profile, revenue from customer specific contracts, are recognised on the stage of completion of each assignment (milestone) at the period end date compared to the total estimated service based on the estimate of labour and other costs to be provided over the entire contract where the outcome can be estimated reliably. If a contract outcome cannot be estimated reliably, revenues are recognised equal to costs incurred, to the extent that costs are expected to be recovered. An expected loss on a contract is recognised immediately in the income statement.

 

Additionally project contracts may contain provision for the pass through of sub contract costs, these are recharged on a matching basis in the same period as the underlying cost.

 

Revenue earned from royalties under distribution agreements are recognised in the period that the sales to the end customer are made, estimated on an accruals basis as royalty reports are generally per calendar quarter.

 

Revenue from released self published titles is recognised on download of the game or part thereof (micro transaction) from the sales channel and/or distribution platform.

 

Revenue from crowd funding for self-published titles is normally recognised when the Group meets its performance obligations. Where there is no clear performance obligation, for example, membership of a development forum, this is taken as revenue over the expected development period of the game on a straight line basis.

 

f)          Share-based payment transactions

Share options are periodically granted to staff. Share Options are measured at fair value at the date of issue and recognised over the vesting period of the option.  Fair value is measured using the Black Scholes Option Pricing Model.  The expected life used in the model is the expiry date of the options prior to any public listing.  The share-based payment is recognised as an expense in profit or loss, together with a corresponding credit to a share-based payment reserve in equity. This expense is recognised on a straight-line basis based on the Group's estimate of the number of shares that will vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options, the proceeds received up to the nominal value of the shares issued are allocated to share capital with any excess, being recorded as share premium.

g)         Foreign currencies

Transactions denominated in a foreign currency are translated at the rate of exchange ruling at a month end rate in order to approximate to actual rate for the relevant transaction date.  Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the statement of financial position date.

 

Foreign exchange differences are charged to the income statement in the period in which they arise.

 

The assets and liabilities in the financial statements of foreign subsidiaries are translated at the rate of exchange ruling at the statement of financial position date. Income and expenses are translated at the actual exchange rate. The exchange differences arising from the retranslation of the opening net investment in subsidiaries are recognised in other comprehensive income and are accumulated in the foreign currency reserve in equity. On disposal of a foreign operation, the cumulative translation differences are transferred to the profit and loss as a reclassification adjustment as part of the gain or loss on disposal.

 

 

3.    Significant Accounting Estimates and Key Judgements

 

The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

a)         Intangible assets

The Group invests heavily in research and development.  The identification of development costs which meet the criteria for capitalisation is dependent on management's judgement and knowledge of the work done.  Development costs of software tools within a project that can be utilised generically are separately identified.  Judgements are based on the information available at each period end.  Economic success of any development is assessed on a reasonable basis but remains uncertain at the time of recognition as it may be subject to future technical problems and therefore a review for indicators of impairment is completed by product at each period end date.  The net book values of the Group intangible assets at May year end are: £3,449,515 (2012: £3,331,253).

 

Intangible assets are subject to amortisation and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For example a decision to suspend a self published title under development.

 

An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are reviewed by project for which there are separately identifiable cash flows. 

 

Games developed to be self published are reviewed for impairment based on the status at the end of each financial year and at the half year against a prudent level of the projected net earnings

 

b)         Trade receivables and recovery of work in progress

Trade receivables are stated net of any impairment for bad and doubtful debts, based on the Group's best estimate of the likelihood of recovery on a specific basis.  Recovery of work in progress is dependent on the successful completion of projects.  Judgement is therefore needed to be applied for projects which are in progress regarding the ability of the Group to complete and deliver the project in accordance with contractual terms.

 

c)         Deferred tax

A deferred tax asset is recognised where the Group considers it probable that future tax profits will be available against which the tax credit will be utilised in the future.  This specifically applies to tax losses and to outstanding vested share options at the statement of financial position date.  In estimating the amount of the deferred tax asset that should be recognised, the directors make judgements based on current forecasts about the amount of future taxable profits and the timings of when these will be realised. A deferred tax asset is currently not being recognised in full due to the unpredictability of future taxable trading profits.

d)         Revenue recognition

Significant management judgement is applied in determining the allocation and timing of the recognition of revenue on contracts. In this process management takes into account milestones, actual work performed and further obligations and costs expected to complete the work.  Management monitor the progress and have regular dialogue with customers to confirm the project status.

 

4.       Segment Information

 

The Group identifies operating segments based on internal management reporting that is regularly reviewed by the chief operating decision maker and reported to the board.  The chief operating decision maker is the Chief Executive Officer.

 

Management information is reported as a single operating segment being the design and production of computer software irrespective of platform or route to market. Resources are managed on the basis of the Group as a whole.

 

The Group's revenues from external customers are divided into the following geographical areas:

 


31 May 2013

£'000

31 May 2012

£'000

United Kingdom (country of domicile)

113

29

United States of America

11,684

13,905

Rest of the World

275

223


12,072

14,157

 

At May 2013 £72,574 of non-current assets are based in Canada, with the remainder in the UK. Up until August 2012 all non-current assets were based in the UK.

 

In 2013 and 2012 periods there was one customer whose revenue accounted for more than 10% of the group and Group's total revenue. The customer is based in United States of America and totals 94% (2012: 95%) of the annual revenue.

 

All material revenue is categorised as either 'self published', 'publishing' or royalties. The majority of the revenue is services provided, however, a small proportion of the 2012/13 revenue was for goods provided.

 


31 May 2013

£'000

31 May 2012

£'000

Publishing

11,355

13,499

Self published

511

323

Royalties

203

335

Other

3

-


12,072

14,157

 

EBITDA before material exceptional items is a key performance indicator for the Group and is also used by the Chief Executive Officer and is calculated as follows:

 


31 May 2013

£'000

31 May 2012

£'000

Operating profit

1,052

1,390

Depreciation

151

185

Amortisation

1,650

1,623

EBITDA

2,853

3,198

Share based compensation

416

-

Funding costs

308

-

Dilapidation provision

37

37

Canada set up fees

10

-

EBITDA adjusted

3,624

3,235

 

 

5.       Profit before tax

 

This is stated after charging/(crediting):

31 May 2013

£'000

31 May 2012

£'000




Amortisation and impairment on intangibles

1,650

1,623

Depreciation of owned property, plant and equipment:

151

185

Loss on disposal of fixed assets

-

1

Research and development costs expensed

603

333

Auditor remuneration:



Audit services - statutory audit

37

11

Non audit services - tax services

4

3

  - other services

133

10

Operating leases - land and buildings

495

415

Foreign exchange gain

(26)

(8)

 

 

6.       Intangible assets

Group

 

The Group's intangible assets comprise capitalised development tools and self published software from internal development activities and acquired software licences. The carrying amounts for the reporting periods under review can be analysed as follows:

 

 

 

Development tools

& licences

Self published software

Third party software

Total


£'000

£'000

£'000

£'000

Cost





At 31 May 2011

5,181

85

647

5,913

Additions

574

769

90

1,433

Disposals

(732)

-

-

(732)

At 31 May 2012

5,023

854

737

6,614

Additions

695

1,013

75

1,783

Disposals

(768)

-

-

(768)

Transfer to tangibles

-

-

(17)

(17)

Transfer from tangibles

-

-

14

14

Adjustment

-

(78)

-

(78)

At 31 May 2013

4,950

1,789

809

7,548






Amortisation and impairment





At 31 May 2011

1,979

5

408

2,392

Charge for the period

1,207

287

129

1,623

Disposals

(732)

-

-

(732)

At 31 May 2012

2,454

292

537

3,283

Charge for the period

1,093

446

111

1,650

Disposals

(768)

-

-

(768)

Transfer to tangibles

-

-

(1)

(1)

Transfer from tangibles

-

-

12

12

 Adjustment

-

(78)

-

(78)

At 31 May 2013

2,779

660

659

4,098






Net Book Value at 31 May 2013

2,171

1,129

150

3,450

Net Book Value at 31 May 2012

2,569

562

200

3,331

 

All amortisation charges, impairments (or reversals if any) are included within cost of sales.

 

7.       Property, plant and equipment

Group

 

 

 

Fixtures & Fittings

Computer Equipment

Leasehold Improvements

Total


£'000

£'000

£'000

£'000

Cost





At 31 May 2011

258

1,035

4

1,297

Additions

-

28

-

28

Disposals

(1)

(108)

-

(109)

Reversals

(36)

-

-

(36)

At 31 May 2012

221

955

4

1,180

Additions

19

6

251

Disposals

-

(5)

-

(5)

Transfer from Intangibles

-

17

-

17

Transfer to Intangibles

-

(14)

-

(14)

At 31 May 2013

240

1,179

10

1,429





Depreciation





At 31 May 2011

113

801

4

918

Charge for the period

54

144

-

198

Disposals

(1)

(107)

-

(108)

Reversals

(13)

-

-

(13)

At 31 May 2012

153

838

4

995

Charge for the period

33

1

151

Disposals

-

(5)

-

(5)

Transfer from intangibles

-

1

-

1

Transfer to intangibles

-

(12)

-

(12)

At 31 May 2013

186

939

5

1,130






Net Book Value at 31 May 2013

54

240

5

299

Net Book Value at 31 May 2012

68

117

-

185

 

 

Depreciation charges (or reversals if any) are apportioned to the income statement as follows:

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000

Charge



Cost of sales (including reversals)

89

144

 

Administration expenses

62

41

Total

151

185

 

 

8.       Operating leases as lessee

 

At each period end the future minimum operating lease payments were as follows:

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000




Minimum lease payments due within one year

535

469

Minimum lease payments due within one to five years

801

947

Total

1,336

1,416

Group lease payments recognised as an expense during the year ended May 2013: £495,269 (May 2012: £414,983).

 

The lease payments relate to the rental contracts for the office buildings, which expire April 2015, and August 2015. The lease signed in October 2012 for the Canadian subsidiary expires September 2017.

 

The Group's operating lease agreements do not contain any contingent rent clauses. None of the operating lease agreements contain renewal or purchase options or escalation clauses or any restrictions regarding dividends, further leasing or additional debt.

 

9.       Financial assets and liabilities

The carrying amounts presented in the Statement of Financial Position relate to the following categories of financial assets and liabilities:

 


Consolidated year ended

Financial assets

31 May 2013

£'000

31 May 2012

£'000




Loans and receivables



   Trade and other receivables

1,808

2,362

   Cash and cash equivalents

7,155

1,686

Total

8,963

4,048

 


Consolidated year ended

Financial liabilities

31 May 2013

£'000

31 May 2012

£'000

Financial liabilities measured at amortised cost



Current



   Trade and other payables

1,122

585

Designated at fair value through profit and loss



   Convertible Loan Notes

1,129

-

Total

2,251

585

The financial liability associated with the Convertible loan notes comprised interest cashflows payable at 8% and an embedded derivative liability to convert to a variable number of shares. Given that the loan note was issued near the period, the liability is based on the net proceeds received. The loan notes converted to equity on the Admission to AIM.

 

10.     Deferred tax assets and liabilities

 

Deferred taxes arising from temporary differences can be summarised as follows:

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000

Accelerated capital allowances

520

533

Short term temporary differences

(39)

(36)

Tax losses (restricted)

(453)

(497)

Total liability

28

-




Balance b/fwd

-

-

Effect of tax rate change on opening balance

-

-

Movement in year  

28

-

Balance c/fwd Liability

28

-

 

No deferred tax asset at 31 May 2013 has been recognised in the statement of financial position for the Group. The deferred tax liability at 31 May 2013 is £27,793 (2012: £nil) being wholly attributable to the Canadian entity.

 

The table below summarises the deferred tax assets for the Group which have not been recognised in the financial statements as only a proportion of the tax losses are anticipated to crystallise or be able to be used in the foreseeable future.  Total UK tax losses available at 31 May 2013 amount to £3,694,177 (2012: £3,729,030).

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000

Deferred tax asset not provided



   Losses

(397)

(398)

 

11.       Inventories

 

Inventories recognised in the statement of financial position can be analysed as follows:

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000




Work in progress

-

75

 

There is no material difference between the replacement cost of inventory and the amounts stated above.

 

For the year ended 31 May 2013 a total of £94,366, (May 2012: £183,687) was included in profit and loss as an expense/(credit) to cost of sales.   

 

 

12.     Trade and other receivables

 

Trade and other receivables recognised in the Statement of Financial Position can be analysed as follows:

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000




Trade receivables, gross

1,580

2,153

Allowances for credit losses

-

-

Trade receivables, net

1,580

2,153




Other receivables

228

209

Financial assets

1,808

2,362




Prepayments

230

88

VAT and taxation

44

55

Non-financial assets

274

143




Trade and other receivables

2,082

2,505

 

All amounts are short-term.  The net carrying value of trade receivables is considered a reasonable approximation of fair value.

 

Group

 


Total

Neither past due

nor impaired

Past due but not impaired


0 - 90 days

>90 days


£'000

£'000

£'000

£'000






May 2013

1,580

1,580

-

-

May 2012

2,153

2,153

-

-

 

No other receivables are past their due date.

 

A reconciliation of the allowances for credit losses provision for trade receivable is provided below:


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000




Brought forward provision

-

2,169

Debts written off in period

-

(2,169)

Carried forward provision

-

-

 

13.     Cash and cash equivalents

 

Cash and cash equivalents include the following components

 


Consolidated year ended


31 May 2013

£'000

31 May 2012

£'000




Cash at bank and in hand



·    GBP

5,411

1,671

·    USD

1,218

5

·    EUR

22

10

·       CAD

504

-




Financial assets

7,155

1,686

 

Cash at bank earns interest at a floating rate based on the length of deposit at standard commercial terms. The net carrying value of cash and cash equivalents equates to fair value.

14.     Equity Share Capital

 

Group movements in share capital

 

Movements in Ordinary Shares is as follows:

Number

Value


'000

£'000




At 1 June  2011 and 31 May 2012

Ordinary Shares of 0.1p

12,364

 

12

 

Shares issued on option exercises

253

1

Shares re-denominated to 0.5p

12,617

114

At 31 May 2013

25,234

127

 

During the period to 30 November 2012 252,691 Ordinary shares of 0.1p were allotted as fully paid at a premium of 65.9 pence per share.

 

On the 21 December 2012 the company re-organised into a plc and bonus shares were issued on a 9 to 1 basis out of share premium, on the same day the Ordinary shares were re-denominated to 0.5p per share. The combined effect of these changes resulted in the addition of 12,617,023 shares and a transfer from share premium of £113,553.

 

 

15.     Employee remuneration

 

Expenses recognised for employee benefits (including Directors) are analysed below:

 

Staff costs for all employees, including Directors, consist of:

31 May 2013

£'000

31 May 2012

£'000




Wages & salaries

7,517

7,248

Social security costs

774

764

Pension costs

-

3

Share based compensation

416

-


8,707

8,015

 

Included in the above payroll costs for the year ended 31 May 2013 is £1,621,571, (2012: £1,251,545) capitalised within intangible fixed assets (note 7). Pension costs relate to contributions to one employee's private pension plan.

 

The average number of employees, including Directors, during the period were:

£'000

£'000




Research and development

212

209

General and administrative

14

6


226

215

 

 

Remuneration of Directors

 

£'000

£'000




Directors' emoluments

318

273

Non-executive fees

25

8

 

Emoluments of highest paid director

 

£'000

£'000




Emoluments

99

81

 

 

Remuneration of key management personnel

 

£'000

£'000




Short-term employee benefits:

Salaries including bonuses

 

755

 

573

Social security

101

72

Total short-term employee benefits

856

645

Non executive fees

25

8

 

Share based compensation charge

183

-

 

 

Key management of the Group are the Board and senior management (functional heads).

 

Number of key management personnel, including directors at the statement of financial position date

11

8

 

A total of 648,000 share options were issued in the year to key management including directors. The number of options exercised for Ordinary Shares from the December 2002 EMI grant was 449,060 (restated after redenomination).

16.     Share options

 

The Group has an employee share option scheme (EMI scheme), under which options may be granted to employees (including directors) to subscribe for ordinary shares in the Group.  The scheme was approved by shareholders in a general meeting. The 2012 Number and Option price has been restated in the respect to the redenomination of share capital *.

 

Date of Grant

Scheme Type

Period when exercisable

Price in pence*

2013 Number

2012 Number

(Restated)*







12 November 2002

2002 EMI Scheme

2003-2012

33p

-

926,000

06 December 2005

2002 EMI Scheme

2006-2015

67p

843,800

943,800

30 July 2012

2012 EMI Scheme

2013-2011

89p

1,214,000

-

30 January 2013

Unapproved

2014-2023

89p

100,000

-

15 May 2013

2012 EMI Scheme

2014-2023

95p

240,000

-

15 May 2013

Unapproved

2014-2023

95p

20,000

-





2,417,800

1,869,800

 

 

Movements in the number of share options outstanding and their related weighted average exercise price, as restated for the Share re-denomination in December 2012 are as follows:

 


Group year ended


May 2013

May 2012 (restated)*


Number

Average exercise price in pence

Number

Average exercise price in pence






Opening balance

1,869,800

50.2

2,303,800

52.2p

Granted

1,626,000

90.0

-

-

Exercised

(505,382)

33.0

-

-

Forfeited

(572,618)

44.0

(434,000)

61.2p

Closing balance

2,417,800

82.0

1,869,800

50.2p






Exercisable at the year end

843,800

67.0

1,869,800

50.2p

 

There was no weighted average share price at the date of exercise of the share options, as the company was not quoted. The share options at the end of May 2013 have a weighted average contractual life as follows:

 



Group year ended



May 2013

May 2012 (restated)*


Exercise price

per share

Options

Weighted average remaining contractual life

Options

Weighted average remaining contractual life

Expiry date

Pence

Number

Months

Number

Months

November 2012

33   

-

-

926,000

6

December 2015

67

843,800

31

943,800

43

July 2022

89

1,214,000

108

-

-

January 2023

89

100,000

116

-

-

May 2023

95

260,000

120

-

-

Total


2,417,800

83

1,869,800

25

 

Under the rules of the share option schemes, options are not normally exercisable until one year from the date of the grant.  Options are valued at date of grant using the Black Scholes Option Pricing Model. There are no performance conditions attaching to the options.

 

The significant inputs into the model were calculated share price at the grant date, exercise price volatility of 20% and expected option life of 10 years and given that the company was not listed at date of grants, an annual risk free interest rate of 3.87% - 4.15%. The volatility used is based on similar companies. The only vesting condition is continued service in the company.

 

 

17.     Trade and other payables

 

Trade and other payables recognised in the statement of financial position can be analysed as follows:

 


Consolidated year ended


31 May 2013
£'000

31 May 2012
£'000




Trade payables

183

40

Other taxation and social security

284

188

Accruals and deferred income

1,464

639

Convertible loan note

1,129

-

Total trade and other payables

3,060

867

 

Trade and other payables are due within one year and with the exception of the Convertible loan note are non-interest bearing. The Convertible loan note carries an interest rate of 8% per annum. The loan notes are convertible into ordinary shares on an AIM IPO at a discount rate of 15% of the listing price. The carrying values of trade and other payables are considered to be a reasonable approximation of fair value.

 

Payable over more than one year

Consolidated year ended


31 May 2013
£'000

31 May 2012
£'000




Deferred income

1,283

-

 

Deferred income payable over one year represent crowd sourced income recognised where the expected pledge level to which it relates is not expected to be delivered until after one year.

 

18.     Provisions for dilapidations


Consolidated year ended


31 May 2013
£'000

31 May 2012
£'000




Opening balance

Provided for in period

150

37

113

37

At period end

187

150

 

The dilapidation provision relates to the rental contracts for two office buildings (included within note 8).  These leases expire April 2015 and August 2015.  This is when the majority of this expenditure is expected to be incurred.  The provision is based on the estimated costs of work to be performed to bring the buildings back to a state of repair and condition, similar to the start of the lease. The lease of the premises in Canada has no repair conditions.

 

 

19.     Finance income

 

Finance income may be analysed as follows for the reporting periods presented:

 


May 2013
£'000

May 2012
£'000




Interest income from cash and cash equivalents

19

10

 

 

20.     Taxation on ordinary activities

 

(a)        Analysis of the charge in the period:

 


May 2013
£'000

May 2012
£'000




UK Corporation Tax based on the results for the year

4

2

Overseas Tax on the results for the period

(6)

-

Deferred Tax

28

-




Tax on profit on ordinary activities

26

2

 

(b)        Factors affecting tax expenses:

 

The tax assessed on the profit on ordinary activities for the year differs from the effective tax rate of corporation tax 24.1% (2012: 24%) as follows:

 


31 May 2013

£'000

31 May 2013

£'000

Profit on ordinary activities before taxation

1,071

1,400




Tax on profit on ordinary activities at standard rate

258

336




Factors affecting tax expense for the year:






Adjustment on transition to IFRS

-

(124)

Expenses not deductible for tax purposes

215

-

Adjustments for opening deferred tax average rate

16

-

Deferred tax not provided

(1)

13

Research and development tax credits

(397)

(223)

Exercise of share options

(65)

-

Total amount of tax

26

2

 

 

Factors that may affect future tax charges 

 

The Group takes advantage of the enhanced tax deductions for research and development expenditure in the UK and expects to continue to be able to do so. From 1 April 2013 the Video Games Tax Relief becomes available and the Group expects that some of its work will qualify for this relief.

 

21.     Earnings per Share

 

The calculation of the basic earnings per share is based on the profits attributable to the shareholders of Frontier Developments plc divided by the weighted average number of shares in issue during the year. Separate calculations have been performed to a profit taking out the adjusted items in note 4 Adjusted EBITDA computation.

 


May 2013

May 2012




Profit attributable to shareholders (£'000)

1,045

1,398

Weighted average number of Shares

25,014,043

24,728,664

Basic earnings per share (pence)

4.2

5.7

 

The calculation of the diluted earnings per share is based on the profits attributable to the shareholders of Frontier Developments plc divided by the weighted average number of shares in issue during the year as adjusted for diluted share options.

 


May 2013

May 2012




Profit attributable to shareholders (£'000)

1,045

1,398

Weighted average number of Shares

25,495,040

25,572,937

Diluted Basic earnings per share (pence)

4.1

5.5

 

The reconciliation of average number of ordinary shares used for basic and diluted earnings per share is as follows:

 

Weighted average number of ordinary shares

May 2013

May 2012




Ordinary shares

25,014,043

24,728,664

Under option

480,997

844,273

Diluted average number of shares

25,495,040

25,572,937

 

 

The calculation of the adjusted earnings per share, as calculated by external analysts, is based on the profit after tax, adjusted for acquired intangible assets. Separate calculations have been performed to a profit taking out the adjusted items:

 


May 2013

May 2012

Adjusted Profit attributable to shareholders (£'000)

1,816

1,435

Weighted average number of Shares

25,014,043

24,728,664

Adjusted Basic earnings per share (pence)

7.3

5.8




Weighted average number of Shares (diluted)

25,495,040

25,572,937

Adjusted diluted earnings per share (pence)

7.1

5.6

 

Adjusted profit

May 2013

May 2012


£'000

£'000

Profit attributable to shareholders

1,045

1,398

Share based compensation

416

-

Funding costs

308

-

Dilapidations provision

37

37

Set up of Canadian Subsidiary

10

-

Adjusted profit

1,816

1,435

 

22.     Cash flow adjustments and changes in working capital

 

The following non-cash flow adjustments and adjustments for changes in working capital have been made to profit before tax to arrive at operating cash flow:

 

Group adjustments and changes

 

Adjustments:

May 2013

£'000

May 2012

£'000

Depreciation, amortisation and impairment

1,801

1,808

Adjustment of cost of property, plant and equipment (see note 8)

-

36

Finance income

(19)

(10)

Loss on disposal of fixed assets and available for sale assets

-

1

Share based payment expenses

416

-

Taxation

26

2

Foreign exchange

(26)

(8)

Total adjustments

2,198

1,829




Net changes in working capital:



Change in inventories

75

184

Change in trade and other receivables

464

(373)

Change in trade and other payables

1,064

(1,022)

Change in non-current liabilities

1,320

37

Total changes in working capital

2,923

(1,174)

 

 

23.     Related party transactions

 

Two Shareholders receive ongoing royalties or commission as a percentage of royalty sales for some of the Group's video games' launched in prior periods

 


Consolidated year ended

Connected party

Expense paid

May 2013

Creditor balance May 2013

Expense paid

May 2012

Creditor balance May 2012


£'000

£'000

£'000

£'000






Chris Sawyer - Royalties

53

6

76

18

Marjacq Micro Limited - Sales Commission

27

-

29

6






 

One Director was granted an interest free qualifying loan for the purchase of Shares under the Group's Share Option Plan in April 2010. The loan value was £8,000 at 31 May 2013.  The loan was repaid to the Company in June 2013.

 

David Braben has assigned his rights to the Elite franchise to the Company pursuant to an assignment agreement dated 1 June 2008. The Company has agreed to pay a royalty of 10% of the profits in respect of Elite sequels, including Elite Dangerous. There is no royalty currently due payable under this agreement (2012: £nil).

 

24.       Financial instrument risks

 

Risk management objectives and policies

 

The Group is exposed to various risks in relation to financial assets and liabilities.  Financial assets and liabilities by category are summarised in note 9. The main types of risks are credit risk, currency risk and liquidity risk.

 

The Group's risk management is coordinated in close cooperation with the board of directors, and focuses on actively securing the Group's short to medium-term cash flows.

 

The Group does not actively engage in the trading of financial assets for speculative purposes. The most significant financial risks to which the Group is exposed are described below.

 

24.1     Credit risk

The Group's exposure is limited to the carrying amount of financial assets and cash and cash equivalents recognised at the year end date (as summarised in note 9).

 

The Group's management consider all financial assets, not impaired, for each reporting date are of good credit quality, including those past due.  In respect of trade and other receivables the Group is exposed to significant credit risk for a single counterparty.

 

The Group considers it has minimal credit risk for liquid funds and other short term financial assets as cash is held with reputable UK and Canadian banks.

 

At the year end none of the Group's financial assets are secured by collateral or other credit enhancements.

 

 

24.2     Foreign currency risk

The Group's reporting currency is pounds sterling (GBP). Exposure to currency exchange rates arises where transactions are in a currency other than the functional currency of the entity, primarily Canadian dollars (CAD), US dollars (USD) and Euro (EUR).

 

The Group does not enter into forward exchange contracts to mitigate the exposure to foreign currency risk as the Group's currency transactions are not considered significant enough to warrant this. However the Group does seek to maintain the same level of working capital in both its Canadian Subsidiary and in the UK parent, measured in calendar months.

 

The carrying amounts of the Group's Canadian Dollar, US Dollar and Euro denominated monetary assets outside the functional currency of the entity at the reporting date is as follows: 

 


Consolidated year ended


31 May 2013

31 May 2012


CAD$

US $

€uro

US $

€uro


£'000

£'000

£'000

£'000

£'000

Assets

169

2,758

25

8

12

 

In addition some of the Group's revenue and overhead transactions are completed in a foreign currency. Transaction exposure is hedged through the use of currency bank accounts.

 

Foreign Currency Sensitivity analysis

 

The following table details the Group's sensitivity to a 5% increase or decrease in the Sterling exchange rate against all relevant currencies, albeit the main exposures are US$ and  CAD. An increase in Sterling would lead to a decrease in income and a decrease in equity.

 


Consolidated year ended


May

2013

May

2012


£'000

£'000

Effect of a 5% change in relevant exchange rate on:



Income Statement

100

32

Equity

105

32

 

24.3     Liquidity risk analysis

 

Liquidity risk is the risk arising from the Group not being able to meet its obligations as they fall due. The Group manages its liquidity needs by carefully monitoring forecast cash inflows and outflows due in day-to-day business. Net cash requirements determine headroom or any shortfalls over the medium term. This analysis shows if there is a need to seek external funding or the need for securing finance from its shareholder base.

 

 

The Group's financial liabilities have contractual maturities as summarised below:


Current

Non-Current


Within 6 months

Between 6 and  12 months

Between 1 and 5 years

Later than 5 years


£'000

£'000

£'000

£'000

As at 31 May 2013





Trade and other payables

564

479

79

-






As at 31 May 2012





Trade and other payables

164

282

139

-

 

The convertible loan notes have no contractual redemption rights.

 

Financial assets used for managing liquidity risk

 

Cash flows from trade and other receivables are contractually due within six months.

 

Cash is generally held in accounts with immediate notice. Where surplus cash deposits are identified these are placed in accounts with access terms of no more than one year.

 

24.4.    Interest rate sensitivity

 

The Convertible loan carries a fixed rate of 8% per annum. The Group has no other borrowings through which it is subject to interest rate risk.

 

The risk associated with interest earned on cash balances is low given low level of interest currently being earned worldwide.

 

 

25.       Capital management policies and procedures

 

The Group's capital management objective is to ensure the Group's ability to continue as a going concern by securing sufficient funding through equity or debt.

 

The Group sets the amount of capital in proportion to its overall financing structure, i.e. equity and financial liabilities. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the strategic plans of the business over a rolling three year forecast. In order to maintain or adjust the capital structure and provide funds to support the planned growth, the Group may issue new shares or raise other funds through debt. The Group undertook a public listing on AIM in July 2013 to meet this objective.

 

At each balance sheet date the Group had no borrowings except for the convertible loan note. The Group is not subject to externally imposed capital requirements.

 

Capital for the reporting period under review is summarised as follows:

 


Consolidated year ended


31 May 2013

31 May 2012


£'000

£'000




Total equity

8,395

6,763

Convertible Loan

1,129

-

Less cash and cash equivalent

(7,155)

(1,686)


2,369

5,077

 

 

Key financial risks

 

The principal financial risks are those of liquidity and currency.

 

Liquidity risk is considered in respect of projected revenues from self published titles being slower to materialise than expected, particularly in respect to Elite: Dangerous. The successful crowd-funding campaign and post year IPO raise and revolving credit facility have significantly mitigated these risks.

 

As the Group expands its revenue sources the amount of revenue originating in non sterling currencies will increase. The cost base of the Canadian operation is also likely to become material.  The company currently holds contracts in US$ which is seen as a natural hedge for the Canadian operational costs over the next 2 years. The currency exposure is monitored closely.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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