Frontier Developments Year End Results

4^th September 2014

 

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 2014.

 

David Braben, Chief Executive of Frontier Developments, commented:

 

"We started the current financial year as we expected and are now executing the transition of our business to its next stage. I believe that the continued delivery of our plan will result in greater opportunity and return"

 

Operational Highlights

 

·      We successfully raised £4.7m to assist the funding of our transition plan from our IPO and pre IPO activity in the year, bringing the total raised to £5.8m before associated costs since May 2013.

·      In anticipation of improved returns beginning in the subsequent financial year we began a transition towards increasing our proportion of self-published revenue by investing £4.1m in the development and promotion of Elite:Dangerous and associated COBRA technology, which caused an expected and temporary operating loss of £1.7m.

·      Cash raised from self published games and pre orders of Elite:Dangerous represented 13% of cash received from revenue.  Deferred income stood at £2.5m at the year end (2013: £1.3m).

·      The proportion of non-publisher work recognised increased to 19% from 6%.

·      We diversified our publisher revenue by starting two contracts for a new global publishing partner in the year, each of which was based on original IP created by Frontier.

 

Financial Highlights

 

·      Underlying revenue down 24% to £9.2m

·      Operating result at a loss of £1.7m

·      Adjusted EBITDA down 76% to 0.9m

·      Adjusted loss per share down to 3.0p

·      Deferred income at £2.5m at the year end

·      Cash at 31 May 2014 at £8.6m

 

Recent developments

 

·      Elite: Dangerous backers reached approximately 100,000 backers and £6.0m raised. Released first phase of Elite:Dangerous Beta development

·      Elite:Dangerous due for release Q4

·      Extended contract with Microsoft

 

 

 

 

 

 

Enquiries:

 

Frontier Developments	+44 (0)1223 394 300
David Braben, CEO
David Walsh, COO
Neil Armstrong, CFO Jo Cooke, Head of Marketing
Canaccord Genuity	+44 (0) 207 523 8000
Simon Bridges/Cameron Duncan
Finncap	+44 (0) 20 7220 050
Malar Velaigam

Tulchan Communications                                       +44 (0) 207 353 4200

James Macey White / Tom Buchanan

 

 

 

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.

 

Our Games

We have a reputation for developing high quality, innovative titles in a variety of game genres for a variety of platforms. We also have consistently excelled at creating compelling experiences using new technology, whether it be LostWinds and Kinectimals for the motion control of Wii and Kinect (and, in the case of LostWinds, touch screen devices), Zoo Tycoon for Xbox One, or now virtual reality, 3D and ultra high resolution displays with Elite:Dangerous.

 

Our Technology Platform

COBRA is our proprietary game development technology platform and has undergone continual development since 1988. It allows us to deliver industry-leading gameplay innovations and take advantage of efficient multi-platform development.

 

COBRA also has a sophisticated framework that enables rapid development of powerful tools. These tools offer the ability for all those on the development team including artists, animators, sound designers, musicians, modellers and producers to view, tweak and review changes to the resources of all types in-game on the target device, in a live game session that is running on that platform, without the intervention of a programmer. Such iteration is one of the keys to developing high quality games.

 

Most recently, we have added significant online capability to COBRA. This facilitates extensive analytic features such as play through tracking, sophisticated A-B tests, player segmentation and friends lists as well as the usual leaderboard and achievement functionality, and is based on commodity cloud-based servers.

 

Our Evolution

With a talented team of developers and experienced managers we have successfully navigated three exciting decades of rapidly changing technology environment for mass‑market gaming platforms.

 

We are now transitioning from being primarily a developer of video games for major external publishers into a business that leverages its proven skills via an increasing proportion of self-published projects alongside those published by major publishers and the further development and exploitation of its proprietary enabling technology.

 

To facilitate this evolution we are investing in our own games titles and building out key elements of a digital publishing organisation such as marketing and e-commerce.

 

Our Growing publishing capability

To maximize our returns from self‑publishing Elite: Dangerous and future titles we are growing an efficient digital publishing capability.

 

We are building a team to manage e-commerce, web development, event management, customer support, PR, community management and worldwide promotion.

Adding an effective publishing capability to our world-class game development organisation will allow Frontier to successfully promote its products to consumers in the global digital marketplace.

 

Incubating new IP

We have a well-established process for incubating new game IP that has already served us very well by creating a successful franchise with 8 million customers (LostWinds) which was awarded 'Best New IP' at the 2008 Develop Industry Excellence awards; enabling two significant as-yet-unannounced projects that are currently being developed in conjunction with a major global publishing partner; and contributing to several other projects over the years.

 

This process allows anyone in the Company to propose a new game idea, have it peer reviewed and ultimately take part in the development team, should it proceed to production.

 

We already have a strong fund of ideas, and we expect to be able to use some of the best of these and new ideas in future to continue to generate compelling new IP releases for the Company. We find that the fact of such an incubation process helps to maximize people's engagement with the company's projects.

 

Chief Executive's introduction to the Strategic Report

 

Our investment programme in self-published titles and associated technology will benefit and facilitate better and more cost effective results for our games. The high graphical quality and very efficient development we achieved with Zoo Tycoon and the high quality of, and positive early response to Elite: Dangerous are both great demonstrations of this.

Elite: Dangerous will be sold directly to customers through our own e-commerce platform and through third parties. Indeed the Alpha, Premium Beta and Beta have already been made through this channel, as are various supporting merchandise for this game. At the end of August we had received approximately £6m from our backers.

 

We are in a transitional period and we have so far not issued financial guidance on the business. Revenues from publishers are generally paid during development, whereas with self-funded titles, even though the expected total revenue is greater, it generally does not come until close to or after the release of the title. Taking the novel approach of going for crowd-funding and then paid Alpha and Beta phases has reduced this gap, but inevitably has resulted in a dip in revenue during the financial year we are reporting. The exact timing of this income will critically affect the revenue that falls into each accounting period, hence we feel the lack of guidance is reasonable.

 

As we continue to build up the size and number of franchises we would expect this critical dependence on the timing to become less of an issue, and put us in a position to reduce the range of possible outcomes.

 

We started the current financial year as we expected and are now executing the transition of our business to its next stage.  Overall, despite the expected reduction in headline revenue and EBITDA over the transition, I believe that the continued delivery of our plan will result in much greater opportunity and returns, which we are already beginning to see since the end of this financial year.

 

Strategic Report

 

We are leveraging our resources and strengths - including our skills as game creators, our game creation technology and our reputation and relationships - to increase the proportion of self-published revenue and deliver innovative, high quality games to a wide audience via our own and others distribution channels. This will maximise their contribution to our finances and increase shareholder value. This is being achieved through talented people and exceptional teamwork, and will allow us to retain and attract top talent in all areas of the Company.

 

By delivering innovative, high quality games to a wide audience we will maximise their contribution to our finances and increase shareholder value.

 

Key Performance Indicators

 

Measure of growth: Adjusted (underlying) revenue

 

£'000                            2014     2013     2012

Underlying Revenue        9,192    12,046  10,124

 

Measure of profitability: Adjusted EBITDA

 

£'000                            2014     2013     2012

Adjusted EBITDA            872       3,624    3,235

 

Investment in self publishing and technology

 

Man Months                   2014     2013     2012

Self Published                933       376       202

Technology                    301       190       161

 

Diversifying revenue streams

 

% of revenue by segment           2014     2013     2012

Publishing                                  81%      94%     95%

Self-Published                            5%       4%       2%

Royalties and other income         14%      2%       3%

 

Further COBRA technology developments

We completed the adaption of our COBRA software technology to work with Nintendo's WiiU and Google's Android smartphone and tablet OS, which continues to extend our coverage of the major gaming devices. Coaster Crazy was the game used to drive the port, and this game was subsequently released on Nintendo's WiiU and Amazon's Kindle tablets (which run an Android variant called FireOS) under the name Coaster Crazy Deluxe. This new Deluxe variant was also released on Apple's iOS.

 

This was a noteworthy achievement as Coaster Crazy makes heavy use of COBRA's own physics system, and delivering the required high mathematical precision in a consistent manner is a significant undertaking on such different processing devices. Each of the three versions of the game also used the same COBRA server system running on our commodity servers. This enabled players from the Nintendo, Amazon (Android) and Apple ecosystems to share data between players within the same game, providing another proof point of the cross-eco-system abilities of COBRA.

 

We also extended COBRA networking capabilities to support the Microsoft Xbox One Zoo Tycoon project, allowing co‑operative play where one player can edit a Zoo, even while another player's game character is standing in the Zoo, watching it happen.

 

Elite: Dangerous

 

Alpha process

Development of the self-published Elite: Dangerous title continued during the year, which included the successful start and completion of the 'Alpha' section of the process. The process was designed to front-load the key development risks in order to minimise the overall risk on the project. Hence 'Alpha' was split into four phases, each one addressing an important development risk:

 

The 'Alpha 1' phase covered the key requirement of moment-to-moment gameplay fun, by providing a single-player combat test - whereby the player flew missions against computer controlled/simulated opponents - which used several novel mechanics including heat-based gameplay. It was vital that this 'moment to moment' gameplay was satisfying and worked reliably, as otherwise the game would not be compelling. It also included support for Oculus Rift - a prototype virtual reality headset display system made by a new crowd-funded company that was subsequently purchased by Facebook for $2 billion. 'Alpha 1' also supported stereoscopic 3D TVs and the TrackIR head-tracking system.

 

The 'Alpha 2' phase added a test version of online multi-player play. This introduced and proved significant new code systems both on the game client and server using a novel hybrid server-based peer to peer system, now supported by COBRA. Elite: Dangerous was already known to work well on a Local Area Network (LAN) in office conditions, but having such a multi-player system operate successfully in the non-optimal 'real-world' conditions of the global internet with network quality and performance distinctly variable across different players machines and different countries was a significantly greater achievement.

 

The 'Alpha 3' phase introduced an embryonic true 'game loop' to the game including docking in a star port, a second playable ship to buy with in-game money and a choice of weapons and other systems with which to outfit the ships. This meant that players could use in-game money their missions earned them to upgrade their ships.

 

The 'Alpha 4' phase introduced three further major pillars of the game: trading, travel and a simulation of the 400 billion star systems of the Milky Way galaxy. Trading provides an online server-based simulation of the economies of a number of star systems. Players are faced with a commodity market and try to buy a cargo-hold full of goods at a favourable price in one system and haul it safely to another system in anticipation of selling at a profit. The Elite: Dangerous trading system implements a dynamic model of the economies of many different star systems and allows each player trade to influence the price of the traded commodity using supply and demand rules - in this way every trade influences the experience of every other player. Two faster-than-light travel mechanics, super-cruise for travel within a star system and hyperspace travel between systems, were also given their debut. Travel was restricted to five star systems, but Alpha 4 contained an accurate simulation of the whole Milky Way galaxy that is built from observed astronomical data of over 150,000 star systems and procedural generation of the rest of the galaxy, which will eventually be opened up to players for travel too.

 

Each 'Alpha' release was well received, with commentators remarking on the unusually high quality of each release for an early access product, and the major step forward taken by each. Elite: Dangerous is also well positioned with advanced consumer technologies such as Ultra High Definition/4K and Virtual Reality displays. We have continued to actively engage with our player community to a very high degree since the end of the 'Alpha' - in particular the super-cruise feature of the game was defined with substantial valuable assistance from the community. Such close dialogue and engagement will continue to the initial launch of the game and beyond.

 

Premium Beta starts

The Alpha phase ended on 30 May 2014, with the release of Premium Beta 1. The Alpha access price was £200 per player, Premium Beta £100 per player. Premium Beta 1 welcomed around 10,000 more players to the game, drawn from those who had backed at the appropriate level in the crowd-funding campaign and those who subsequently purchased early access, thus providing a further significant test of our network and server code.

 

Tie-in novels announced with Gollancz

We also announced a three-novel tie-in deal with the well-known book publisher, Gollancz (an imprint of the Orion Publishing Company) set in the world of Elite: Dangerous. Frontier received crowd-sourced funding for Elite: Dangerous via a successful campaign on the Kickstarter website and Gollancz contributed three of the twenty two book-related pledges, for over £13,000, to secure the rights to publish the three related books. All authors collaborated closely with Frontier to ensure continuity and reflect the evolving game world, which in turn aided the development of aspects of the game's fiction.

 

Elite sequel rights

On 6 May 2014 we acquired the assets of Professional Practice Automation LLP (PPA), a limited liability partnership in which David Braben is a controlling member, for £5.15 million through the allotment and issue to PPA, credited as fully paid, of 2,001,573 new ordinary 0.5 pence shares. The assets included the remaining franchise rights in respect of the Elite video game franchise. David Braben assigned these rights to the Company in June 2008 in return for a royalty based on Frontier's profits from the Elite video game franchise, the benefit of which was held by PPA.

 

Key industry partnerships

 

Zoo Tycoon

We continued our close working relationship with Microsoft by delivering an Xbox One launch title based on Microsoft's popular Zoo Tycoon franchise. This gave us early access to new console generation 64-bit processing hardware, and once again proved the benefits of our proprietary multi-platform COBRA technology, which facilitated a very efficient development and simultaneous delivery of both an Xbox One and an Xbox 360 version.

 

Contract extension

We also signed an agreement to undertake additional work under an existing development agreement with Microsoft.

 

The contract amendment has a value of US$1.75 million, bringing the total contract value to US$5.67.

The additional amount will be earned and recognised over development milestones spanning the financial years ending 31 May 2014 and 31 May 2015. In the year to 31 May 2014 US$2.1 million of revenue was recognised.

 

Two contracts with a major new publisher partner

We also signed two new development agreements with a major new global publishing partner. Both games are as yet unannounced and, are original new concepts generated through our company-wide 'game of the week' incubation programme.

 

Under the contracts, Frontier will deliver two exclusive original games using its proprietary COBRA technology which will drive support for the partner's own hardware and technology eco‑system. The contracts have a combined value of £3.75 million, which will be earned and recognised over development milestones spanning the financial years ending 31 May 2014 and 31 May 2015. In the year to 31 May 2014 £1.8 million of revenue was recognised.

 

This new relationship further diversifies our revenue streams.

 

Rights from Atari

We announced a new relationship with Atari, whereby our e-commerce strategy is accelerated. We now have non‑exclusive rights to distribute Atari games, as well as the rights to publish our RollerCoaster Tycoon 3 game on new platforms.

 

Management and staff

Over the last 16 months we have added over 50 staff to our organisation at all levels. We have focused on building capacity in server/online development, marketing and publishing as well as game development. We work closely with a number of universities both in the UK and Canada including the offering of intern positions and project mentoring for second year students.

 

 

Trading results

In the financial year ended 31 May 2014, Frontier Developments was undergoing a planned transitional period during which we only saw a 24% decline in underlying revenue to £9.2 million, adjusted EBITDA fell from £3.6 million to £0.9 million, we incurred an operating loss of £1.7 million versus an operating profit in the prior year of £1.1 million, and adjusted basic loss per share of 3.0 pence was set against adjusted earnings per share of 7.3 pence.

 

Group trading performance

The Group entered a planned transitional investment phase after its IPO to develop and launch Elite: Dangerous (expected Q4 calendar 2014), its first major large budget self-published title, and associated technology development.

 

Revenue

Moving resources to Elite: Dangerous self-published work in progress had consequence of exchanging early revenue from publisher work for expected revenue from future sales, as a result there was a 24% reduction in underlying revenue after excluding sub-contract costs recharged to customers at nil margin, reconciled as follows:

 

Underlying revenue £'000            2014                 2013                 %         2012

Headline revenue                       9,541                12,072           (21%)      14,157 

Sub-contract pass through          (349)                (26)              1,242%     (4,033)

Underlying revenue                     9,192                12,046           (24%)      10,124

 

We continued to recognise an element of revenue for Elite: Dangerous on release of  'Alpha' and 'Beta' phases from the early backers, and to receive new revenue by additional players paying to enter in the year. Our earlier LostWinds and Coaster Crazy iOS titles continued to sell. We released Coaster Crazy Deluxe versions on a number of platforms after using it as a test vehicle for COBRA platform coverage expansion and cross-platform data sharing via servers running COBRA code.

 

Publishing revenue was lower. We worked on five projects of varying sizes for our two key clients, and two of these games were released in the financial year 2013-14.

 

Royalty income was positively impacted by Atari Interactive Inc. (Atari) coming out of Chapter 11 in December 2013 and thus releasing an element of pre-petition funds (to January 2013) not recorded in the prior year. These income streams from Atari originate from our RollerCoaster Tycoon 3 development and IP license agreement. We received £0.6m of royalty income from sales to May 2014 of Kinect Disneyland Adventures post year end. This was our first royalty receipt from this title.

 

Revenue mix £'000         2014                 2013                 %         2012

Publishing                      7,707                11,355           (32%)      13,499

Self-published                465                   511                (9%)       323

Royalities                       1,366                203                 573%      335

Other                            3                      3                      -         -        

                                    9,541                12,072           (21%)      14,157

 

 

Gross margin and contribution

 

The overall gross margin slipped from 31% to 17% offsetting gains from higher royalty income, where gross margins received are in excess of 65%. This reduction stemmed from lower margins in the Publication business and negative margins in the self published business impacted by an impairment charge offsetting gains from higher royalty income, where gross margins received are in excess of 65%. Frontier took an impairment charge of £0.3m on the Coaster Crazy franchise. The Group gained valuable experience and proved its technology with the game, but the monetisation level of the free to play game has not been as quick and successful as had been expected and subsequent versions were released later than planned. Additionally marketing spend is expensed within cost of sales - our publication and marketing function was established in the financial year 2014.

 

Profitability and adjusted EBITDA

Frontier is in a state of planned 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, intangible asset impairment and funding costs associated with the IPO. It has also been decided to include fair value adjustments as a separate item.

As expected in our transitional period we incurred a significant temporary shift in profitability. Operating result was a loss of (£1.7 million) compared to an operating profit of £1.1 million. EBITDA was £0.3 million compared with £2.9 million in the prior year. Adjusted EBITDA reduced to £0.9 million from £3.6 million.

 

The reconciliation is as follows:

2014                 2013                             2012

£'000                £'000                %         £'000     

Operating result                         (1,705)              1,052           (262%)      1,390

Depreciation                              225                   151                               185

Amortisation and impairment       1,806                1,650                            1,623           

EBITDA                                      322                   2,853           (89%)        3,198

Share based compensation         286                   416                               -

Fair value adjustments                32                     -                                 -

Gain on sale of investment          (21)                  -                                 -

Funding costs/listing expenses     217                   308                               -

Dilapidations provision                36                     37                                 37

Canada set-up fees                    -                     10                                 -

Adjusted EBITDA                        872                   3,624            (76%)       3,235

 

 

Finance income

Interest receivable from the Group's cash resources increased to £0.06 million from £0.02 million as a result of increased cash balances from the equity raise, but remains at low levels due to the current interest rate environment worldwide.

 

Income tax

The Group recorded a current tax charge in its Canada operation of £0.04 million plus a deferred tax liability of £0.07 million for 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 £6.7 million to set against future taxable profits generated in the UK.

 

Earnings per share

The basic loss per share for 2014 was (5.8) pence compared to earnings per share of 4.2 pence for 2013 based on a weighted average number of shares of 33.3 million (2013: 25.0 million).

 

On a diluted basis the loss per share is reported as the same amount at (5.8) pence compared to diluted earnings per share in the prior year of 4.1 pence based on a weighted average number of shares of 33.3 million (2013: 25.5 million).

 

The adjusted loss per share was (3.0) pence compared to the prior period's adjusted earnings per share of 5.8 pence.

 

Dividend

The Directors are not recommending the payment of a dividend (2013: £nil).

 

Intangible assets and research and development expenditure

Investment in our own IP capitalised in the year was up 136% in line with our transition plans at £4.0 million reflecting Frontier's commitment to a strategic software development programme in respect of Elite: Dangerous and our COBRA technology. Including the acquired rights the £8.3 million of self-published net book value is represented by the Elite: Dangerous title.

 

A good proportion of our investment is in research and development, representing £0.79 million (2013: £0.76 million) an increase of 4%. Research and Development expensed was lower at £0.4 million from £0.6 million.

 

Share issues

A convertible loan was issued towards the end of the prior year granting shares at a discount of 15% to the IPO flotation price. The amount received in June 2014 was £1.6 million (2013: £1.1 million). Upon listing in July 2013 the convertibles converted into 2.5 million shares at £1.0795 per share. A further 0.1 million shares were issued pre-IPO in June 2013 at £0.95 per share.

 

3.2 million shares were issued under the IPO at £1.27 per share. The Company also issued 0.4 million of warrants as part of the process.

 

Employees converted 0.3 million share options into ordinary shares post-IPO up to the end of May 2014; exercise proceeds were £0.3 million. The Group granted 0.4 million share options in the year (2013: 1.6 million).

 

A further 2.0 million shares were issued as non-cash consideration for the purchase of the assets of Professional Practice Automation LLP, a limited liability partnership under the control of David Braben, in May 2014.

 

Non-current assets

Investment in intangibles was focused on developing self‑published titles (mainly Elite: Dangerous, scheduled for release Q4 2014) and further multi-platform work on COBRA.

The Group maintained prudent amortisation rates to reflect the dynamic changing nature of the video games sector.

 

Current assets

Trade and other receivables increased by £0.9 million to £3.0 million mainly as a result of deferred royalty income due from Atari SA as part of the distribution agreement signed in October 2013 and Microsoft for Kinect Disneyland adventures. Investments held for sale include shares in Atari SA provided as part of the Chapter 11 creditor agreement for pre-petition balances; these were sold post year end.

 

Current liabilities

Trade and other payables decreased by £1.9 million to £1.2 million, £1.1 million was due to convertible loan notes being converted to equity. The Group's Canadian subsidiary received an interest free loan from the federal-backed Atlantic Canada Opportunities Agency of £0.2 million.

Deferred income was £2.5 million (2013: £1.3 million in non‑current liabilities). Deferred income constituted both crowd‑funding 'pledges' and pre-orders on our e-commerce site expected to be delivered within one year for Elite: Dangerous and publication contract revenue, computed under revenue recognition rules.

 

Non-current liabilities

The Group fully offset UK deferred tax liabilities with deferred tax assets that were available. An overseas deferred tax liability of £0.1 million was provided against federal investment tax credits due. Prior year balances for deferred income were moved to current liabilities.

 

Cash and cashflow

The Group's operating cashflow was £0.3 million.Share capital proceeds from pre-IPO and IPO raised £5.7 million. The Group invested £4.4 million in non-current assets. The Group incurred £0.4 million of unrealised foreign currency losses as it held currency balances in anticipation of increased worldwide marketing activity.

 

The overall impact was an increase of £1.8 million in cash and cash equivalents to £8.6 million, continuing to support the Group's investment and growth plan.

 

Current trading and outlook

 

The Board believes the Group to be well placed to emerge from its transition period as a stronger and better-balanced business.

 

We are planning to launch Elite: Dangerous in the fourth calendar quarter of 2014.The current feedback to the game is such that we expect to continue with a planned development roadmap for further expansions to incrementally add major new features such as landing on planets, and player-character based gameplay within and outside spaceships.

 

We will also start development on other projects to further build our revenue pipeline that make full use of our established expertise and pool of IP.

 

Deliveries of our contractual milestones to external publishers continue to be met.

 

 

 

Consolidated Income Statement

for the year ended 31 May 2014

 

	Notes	31 May 2014 £'000	31 May 2013 £'000
Revenue	5	9,541	12,072
Cost of sales		(7,914)	(8,375)
Gross profit		1,627	3,697
Administrative expenses		(3,332)	(2,645)
Operating (loss)/profit		(1,705)	1,052
Finance income	23	63	19
(Loss)/Profit before tax	6	(1,642)	1,071
Income tax	24	(112)	(26)
(Loss)/Profit for the period attributable to the equity holders of the parent		(1,754)	1,045
All the activities of the Group are classified as continuing
Earnings per share	25
Basic (loss)/earnings per share		(5.8)p	4.2p
Diluted (loss)/earnings per share		(5.8)p	4.1p

 

 

Consolidated statement of comprehensive income

for the year ended 31 May 2014

	31 May 2014 £'000	31 May 2013 £'000
(Loss)/Profit for the period	(1,754)	1,045
Other comprehensive income:
Items that will be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations	(30)	3
Total comprehensive income for the period attributable to the equity holders of the parent	(1,784)	1,048

 

  

 

Consolidated Statement of Financial Position

for the year ended 31 May 2014 (Registered No: 02892559)

 

	Notes	31 May 2014 £'000	31 May 2013 £'000
Non-current assets
Intangible assets	7	10,962	3,450
Property, plant and equipment	8	328	299
Total non-current assets		11,290	3,749
Current assets
Inventories	12	15	-
Trade and other receivables	13	2,964	2,082
Other short-term assets	14	106	-
Cash and cash equivalents	15	8,612	7,155
Total current assets		11,697	9,237
Total assets		22,987	12,986
Equity and liabilities
Equity
Share capital	16	167	127
Share premium account		13,805	1,847
Option reserve		790	643
Foreign exchange reserve		(30)	3
Retained earnings		4,160	5,775
Total equity		18,892	8,395
Liabilities
Current
Trade and other payables	19	1,207	3,060
Deferred income	20	2,456	-
Other short-term financial liabilities	21	14	-
Current tax liabilities		-	33
Total current liabilities		3,677	3,093
Non-current
Provisions	22	223	187
Financial liabilities	21	121	-
Deferred income	20	-	1,283
Deferred tax	11	74	28
Total non-current liabilities		418	1,498
Total liabilities		4,095	4,591
Total equity and liabilities		22,987	12,986

Consolidated Statement of Cashflows

for the year ended 31 May 2014

 

	Notes	31 May 2014 £'000	31 May 2013 £'000
Operating activities
(Loss)/Profit after tax		(1,754)	1,045
Adjustments	26	2,446	2,198
Net changes in working capital	26	(413)	2,923
Taxes (paid)		(1)	(5)
Cashflow from operating activities		278	6,161
Investing activities
Purchase of property, plant and equipment		(254)	(251)
Expenditure on intangible assets		(4,182)	(1,783)
Proceeds from disposal of non-derivative financial assets		21	-
Interest received		63	19
Cashflow from investing activities		(4,352)	(2,015)
Financing activities
Proceeds from convertible loan notes		1,580	1,129
Proceeds from interest free loan		175	-
Proceeds from issue of share capital		4,145	168
Cashflow from financing activities		5,900	1,297
Net change in cash and cash equivalents from continuing operations		1,826	5,443
Cash and cash equivalents at beginning of period		7,155	1,686
Exchange differences on cash and cash equivalents		(369)	26
Cash and cash equivalents at end of period		8,612	7,155

 

 

Consolidated Statement of Changes in Equity

for the year ended 31 May 2014

	Share capital £'000	Share premium account £'000	Option reserve £'000	Foreign exchange reserve £'000	Retained earnings £'000	Total equity £'000
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	1	167	-	-	-	168
Re-denomination of share capital	114	(114)	-	-	-	-
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
Increase in equity in relation to options issued	-	-	286	-	-	286
Share-based payment transfer	-	-	(139)	-	139	-
Issue of share capital less expenses	40	11,958	-	-	-	11,998
Transactions with owners	40	11,958	147	-	139	12,284
(Loss) for the year	-	-	-	-	(1,754)	(1,754)
Other comprehensive income:   Exchange differences on translation of foreign operations	-	-	-	(33)	-	(33)
Total comprehensive income for the year	-	-	-	(33)	(1,754)	(1,787)
At 31 May 2014	167	13,805	790	(30)	4,160	18,892

 

 

Selected Notes to the Financial Statements

 

1. Corporate information

Frontier Developments plc ("the Group") develops non-game applications and video games for the interactive entertainment sector.

The address of its registered office is 306 Science Park, Milton Road, Cambridge CB4 0WG.

The Group's operations are based in the UK and a subsidiary, Frontier Developments Inc, based in Canada.

 

2. 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 4.

 

Going concern basis

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, support the conclusion that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than twelve months from the date of approval of these financial statements. The Group therefore continues to adopt the going concern basis in preparing its financial statements. Having listed on AIM in the financial year and acquired a revolving credit facility to support its plans, the Group remains cash positive.

 

3. Principal accounting policies

 

Basis of consolidation and business combinations

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 recognised 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 categories:

 

·      development tools;

·      software (self-published games) and royalty rights acquired in connection with jointly held IP

·      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 of development tools) or for sale of games (in respect of 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; and

·      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. When a self published game is intended for release on multiple platforms without material content change, amortisation is based on the aggregated number of months expected on each platform prior to any planned substantive sequel with a limit of up to four years. The limit of four years is a prudent estimate of the expected active selling lifetime of the platforms, for example consoles. Until completion the assets are subject to annual impairment testing. In most circumstances amortisation commences upon completion of the asset and is shown within cost of sales in the income statement, for certain projects that include a pre funded element a significant accounting estimate is made (see note 4.)

 

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. 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 or value in use.

Fair value 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 instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its financial liabilities. Equity instruments do not include a contractual obligation to deliver cash or other financial assets to another entity. Any instrument that does have the obligation to deliver cash or another financial asset to another entity is classified as a financial liability.

Financial liabilities are presented under liabilities on the statement of financial position.

 

Financial assets

Financial assets comprise assets trade receivables, other receivables and cash and cash equivalents.

Trade and other receivables are recognised initially at fair value and measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the income statement.

Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write down is determined as the difference between the assets carrying amount and the present value of estimated future cashflows discounted at the financial assets original effective interest rate.

 

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. All the convertible loan notes converted to ordinary shares upon listing on AIM.

 

Fair value measurements recognised in the balance sheet

Financial instruments that are measured subsequent to initial recognition at fair value have been classified using a fair value hierarchy that reflects the significance of the inputs used in measuring the fair value of those instruments. The fair value hierarchy has the following levels:

>>Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

>>Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

>>Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable market inputs).

 

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 subcontract 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 an estimate of the likely average expiry date of the options by reference to the current rate of exercise by employees. 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 re-translation 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.

 

4. 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 that 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 including rights acquired at 31 May 2014 are £10,961,795 (2013:  £3,449,515).

 

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 cashflows.

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.

 

In respect to amortisation, normally self published titles are amortised on completion of the game, however an exception to this occurs when project funding is obtained via innovative crowd-funded platforms, such as Kickstarter. Such funding is generally seen as 'contributing to make the game happen' and requires the group to set up a number of pledge levels which include a donation element. When 'donation and intangible' elements of pledge levels are recognised as revenue an equivalent amount of amortisation charged reflecting this 'contribution element'. The pledge levels also include delivery of a number of 'early versions' of the game, an estimated and prudent cost of sale is applied as amortisation, in the case of Elite:Dangerous 75% was used. In the financial year to May 2014 £271,143 of amortisation was recognised for these elements of Elite:Dangerous (May 2013 £145,280).

 

b) 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 monitors the progress and has regular dialogue with customers to confirm the project status.

Where self published titles have an element of pre funded development costs obtained through crowd funding sources, recognition is made by reference to delivery of individual pledge levels. Revenue stemming from the sale of 'early versions' of a game are recognised from the date of release of the 'early version' to the expected date of full game release on a straight line basis.

 

5. 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 2014 £'000	31 May 2013 £'000
United Kingdom (country of domicile)	1,807	113
United States of America	7,470	11,684
Rest of the world	264	275
	9,541	12,072

 

At 31 May 2014: £43,342 of non-current assets are based in Canada (2013: £72,574), with the remainder in the UK.

 

In 2014   there were two customers whose revenue accounted for more than 10% of the Groups total revenue. Both customers are based in the United States of America, one of these customer's accounts for 70% of revenue (2013: 94%) and the other customer accounts for 18% of revenue (2013: 0%).

All material revenue is categorised as either 'self-published', 'publishing' or royalties.

 

	31 May 2014 £'000	31 May 2013 £'000
Publishing	7,707	11,355
Self-published	469	511
Royalties	1,362	203
Other	3	3
	9,541	12,072

 

 

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

 

	31 May 2014 £'000	31 May 2013 £'000
Operating (loss)/profit	(1,705)	1,052
Depreciation	225	151
Impairment of intangible assets	276	-
Amortisation	1,526	1,650
EBITDA	322	2,853
Share-based compensation	286	416
Funding costs/Listing expense	217	308
Dilapidation provision	36	37
Fair value adjustments	32	-
Gain on investment	(21)	-
Canada set up fees	-	10
Adjusted EBITDA	872	3,624

 

6. (Loss)/Profit before tax

	31 May 2014 £'000	31 May 2013 £'000
This is stated after charging/(crediting):
Amortisation and impairment of intangibles	1,802	1,650
Depreciation of owned property, plant and equipment:	225	151
Research and development costs expensed	371	603
Auditor remuneration:
Audit services        - statutory audit	30	37
Non-audit services - tax services	6	4
- other services	67	133
Operating leases   - land and buildings	527	495
Foreign exchange loss/(gain)	336	(26)

7. Intangible assets

Group

The Group 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 and licences £'000	Self-published software £'000	Third party software £'000	Total £'000
Cost
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
Additions - arising from internal development	1,214	2,821	147	4,182
Additions - acquired separately	-	5,148	-	5,148
Disposals	(1,637)	-	-	(1,637)
Adjustment	-	(16)	-	(16)
Impairment	-	(276)	-	(276)
At 31 May 2014	4,527	9,466	956	14,949
Amortisation and impairment
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
Charge for the period	883	506	137	1,526
Disposals	(1,637)	-	-	(1,637)
At 31 May 2014	2,025	1,166	796	3,987
Net book value at 31 May 2014	2,502	8,300	160	10,962
Net book value at 31 May 2013	2,171	1,129	150	3,450

 

8. Property, plant and equipment

Group

	Fixtures and fittings £'000	Computer equipment £'000	Leasehold improvements £'000	Total £'000
Cost
At 31 May 2012	221	955	4	1,180
Additions	19	226	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
Additions	34	220	-	254
Disposals	(1)	-	-	(1)
At 31 May 2014	273	1,399	10	1,682
Depreciation
At 31 May 2012	153	838	4	995
Charge for the period	33	117	1	151
Disposals	-	(5)	-	(5)
Transfer from intangibles	-	1	-	1
Transfer to intangibles	-	(12)	-	(12)
At 31 May 2013	186	939	5	1,130
Charge for the period	45	179	1	225
Disposals	(1)	-	-	(1)
At 31 May 2014	230	1,118	6	1,354
Net book value at 31 May 2014	43	281	4	328
Net book value at 31 May 2013	54	240	5	299

 

 

9. Operating leases as lessee

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

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Minimum lease payments due within one year	487	535
Minimum lease payments due within one to five years	271	801
Total	758	1,336

 

Group lease payments recognised as an expense during the year ended 31 May 2014: £526,599 (2013: £495,269).

The lease payments relate to the rental contracts for the office buildings, which expire April 2015 and August 2015; negotiation for new leases to replace these has commenced. The lease signed in October 2012 for the Canadian subsidiary expires September 2017.

 

The lease payments relate to the rental contracts for the office buildings, which expire April 2015, August 2015. 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.

 

10. 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
	31 May 2014 £'000	31 May 2013 £'000
Financial assets
Loans and receivables
Trade and other receivables	2,259	1,808
Cash and cash equivalents	8,612	7,155
Total	10,871	8,963

 

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Financial liabilities
Financial liabilities measured at amortised cost
Current
Trade and other payables	951	1,122
Designated at fair value through profit and loss:
Interest free loan	135	-
Convertible loan notes	-	1,129
Total	1,086	2,251

 

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. The loan notes converted to equity on the admission to AIM. During the year the Group received CD$301,530 in 0% interest funding from the Atlantic Canada Opportunities Agency ("ACOA"). Further funding can be claimed next financial year up to a maximum of borrowing of CD$500,000. The funding is scheduled to be repaid over 60 months beginning in March 2015 at a stated monthly payment of CD$8,334.

 

 

11. Deferred tax assets and liabilities

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

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Accelerated capital allowances	503	520
Short-term temporary differences (restricted)	(429)	(39)
Tax losses (restricted)	-	(453)
Total liability	74	28
Balance brought forward	28	-
Effect of tax rate change on opening balance	-	-
Effect of exchange rate on opening balance	1		-
Movement in year	45	28
Balance carried forward liability	74	28

 

No deferred tax asset at 31 May 2014 has been recognised in the Statement of Financial Position for the Group. The deferred tax liability at 31 May 2014 is £73,781 (2013: £27,793), 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 2014 amount to £6.7m (2013: £3.7m). Total UK based short-term temporary differences available at 31 May 2014 amount to £632,210 (2013: £69,000)

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Deferred tax asset not provided
Short-term temporary differences	(125)	-
Losses	(996)	(397)
Total	(1,121)	(397)

 

12. Inventories

Inventories recognised in the Statement of Financial Position can be analysed as follows:

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Work in progress	3	-
Merchandise	12	-
Total inventory	15	-

 

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

 

For the year ended 31 May 2014 a total of £16,061 was expensed for Merchandise (2013: £nil); for work in progress and amount of (£3,339) was (credited) in profit and loss cost of sales, (2013: £94,366 expensed).

 

 

13. 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 2014 £'000	31 May 2013 £'000
Trade receivables, gross	953	1,580
Intercompany receivable	-	-
Trade receivables, net	953	1,580
Other receivables	1,306	228
Financial assets	2,259	1,808
Prepayments	532	230
VAT and other taxes	173	44
Non-financial assets	705	274
Trade and other receivables	2,964	2,082

 

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

 

Within Other receivables is an amount due from Atari S.A. for royalties arising from a distribution agreement. The terms of this agreement allow recoup as a commission from the Group distributing the product on its own e-commerce site or via non PC platforms. This receivable has been determined to be level 3 in the hierarchy by applying a net discounted cash flow against expected incomes and costs to completions. As a result of this review an expense of £62,630 has been recognised in the income statement. An amount of £629,502 was recorded within other receivables being royalties due from Microsoft under the game agreement for Kinect Disneyland Adventures, these were received in August 2014.

 

 

Group

	Total £'000	Neither past due nor impaired £'000		Past due but not impaired
				0-90 days £'000	>90 days £'000
May 2014	953	953		-	-
May 2013	1,580	1,580		-	-

 

No receivables are past their due date and the balances comprise of receivables from highly credit rated customers.

 

14. Other short-term assets

 

Other short-term financial assets comprise:

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Investment in shares	33	-
Software applications	6	-
Current tax assets	67	-
Other short-term assets	106	-

 

The investment in shares was acquired via an agreement with Atari S.A. (quoted on the Paris Stock Exchange) in respect to balances owing under their Chapter 11 administration process. Fair value has been applied by using Level 1 of the hierarchy in respect to the share price ruling at balance sheet date, resulting in an expense to the income statement of £22,646.

 

Software applications were acquired under the asset acquisition from Professional Practice Automation LLP, the Group is in discussions to sell these applications to third parties.

 

15. Cash and cash equivalents

Cash and cash equivalents include the following components:

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Cash at bank and in hand
GBP	5,410	5,411
USD	1,170	1,218
EUR	38	22
CAD	1,994	504
Financial assets	8,612	7,155

 

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.

 

16. Equity

Share capital

Group movements in share capital

Movements in ordinary shares as follows:

	2014 Number  '000	Value £'000	2013 Number '000	Value £'000
At 1 June 2012 and 31 May 2013
Ordinary shares of 0.5 pence (0.1 pence)	25,234	127	12,364	12
Shares issued on option exercises	338	1	253	1
Shares issued pre IPO	132	1	-	-
Shares re-denomination in December 2013	-	-	12,617	114
Shares issued upon listing on AIM	5,678	28	-	-
Shares issued as non cash consideration	2,002	10	-	-
At 31 May 2014	33,384	167	25,234	127

 

During the year to 31 May 2014 the following share issues were made:

 

On 6 June 2013 131,580 ordinary shares of 0.5 pence were issued as fully paid at a premium of 94.5 pence per share.

 

On 15 July 2013 the Group listed on AIM and issued 3,169,292 ordinary shares of 0.5 pence were issued as fully paid at a premium of 126.5 pence per share. At the same time 2,509,504 ordinary shares of 0.5 pence were issued as fully paid in respect to the convertible loan notes at a premium of 107.45 pence.

 

The equity issue related costs expensed to the Share premium account as part of the listing to AIM were £273,888.

 

From 16 July 2013 to 31 May 2014 337,802 ordinary shares of 0.5 pence were allotted as fully paid at an average premium of 76.3 pence being the exercise of share options by employees. The average market value was 201.5 pence on the days of exercise.

 

On 6 May 2014 2,001,573 ordinary shares of 0.5 pence were issued as fully paid as the consideration paid to Professional Practice Automation LLP for the acquisition of its assets. The market value on the day of approval at the AGM was 257.5 pence

 

17. Employee remuneration

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

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

 

	31 May 2014 £'000	31 May 2013 £'000
Wages and salaries	8,577	7,517
Social security costs	876	774
Pension costs	18	-
Share-based compensation	180	416
	9,651	8,707

Included in the above payroll costs for the year ended 31 May 2014 is £4,027,605, (2013: £1,621,571) capitalised within intangible fixed assets (note 7). Pension costs relate to contributions to the parent company's new defined contribution scheme set up ahead of auto enrolment.

 

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

 

	31 May 2014 £'000	31 May 2013 £'000
Research and development	233	212
General and administrative	12	14
	245	226

 

Remuneration of Directors	31 May 2014 £'000		31 May 2013 £'000
Directors' emoluments	384		318
Non-Executive fees	28		14
Non-Executive consultancy fees	37		24
Emoluments of highest paid Directors		31 May 2014 £'000	31 May 2013 £'000
Emoluments per Director		128	99

 

 

Remuneration of key management personnel

	31 May 2014 £'000	31 May 2013 £'000
Short-term employee benefits
Salaries including bonuses	1,012	755
Social security	128	101
Total short-term employee benefits	1,140	856
Non-Executive fees	65	38
Share-based compensation charge	212	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

14

11

 

A total of 42,000 share options were issued in the year to key management under the Group's new Company Share Option Plan. The number of options exercised for ordinary shares in the year ended 31 May 2014 was 89,400 from previous EMI grants.

 

18. Share options

The Group has a new Company Share Option plan for employees , under which options may be granted to employees (including Directors) to subscribe for ordinary shares in the Group. The scheme was approved by in January 2014.

Date of grant	Scheme type	Period when exercisable	Price in pence[*]	2014 Number	2013 Number
6 December 2005	2002 EMI Scheme	2006-2015	67	675,475	843,800
30 July 2013	2013 EMI Scheme	2013-2011	89	1,036,523	1,214,000
30 January 2013	Unapproved	2014-2023	89	34,000	100,000
15 May 2013	2013 EMI Scheme	2014-2023	95	230,000	240,000
15 May 2013	Unapproved	2014-2023	95	-	20,000
21 March 2014	Company Share Option Plan	2017-2024	224.5	251,000	-
				2,226,998	2,417,800

 

A number of Share warrants were issued as part of the Pre IPO and IPO process as follows:

 

Date of grant	Warrant type	Period when exercisable	Price in pence[*]	2014 Number	2013 Number
8 July 2013	Unapproved Pre IPO Warrants*	2013-2023	95	65,790	-
15 July 2013	Unapproved IPO Warrants**	2013-2015	127	232,832	-
15 July 2013	Unapproved IPO Warrants*	2013-2023	127	147,638	-
				446,260	-

 

*These share options were issued to the Non-Executive Directors (including Rockspring which is controlled by David Gammon)  at the prevailing market price as follows:

 

Non-Executive	8 July Number	15 July Number
Rockspring	52,632	118,100
Jonathan Milner	13,158	29,528

 

**Of these share options were 217,084 were issued to Canaccord Genuity Limited for services rendered as part of the IPO process and 15,748 to Adam Glinsman for services rendered as part of the IPO process, a pre IPO investor upon listing at the flotation price.

 

Movements in the number of employee and non-executive share options outstanding and their related weighted average exercise price are as follows:

	Group year ended
	May 2014			May 2013
	Number	Average exercise price in pence		Number	Average exercise price in pence
Opening balance	2,417,800	82.0		1,869,800	50.2
Adjustment	30,000	82.0		-	-
Granted	464,428	175.2		1,626,000	90.0
Exercised	(337,802)	76.8		(505,382)	33.0
Forfeited	(134,000)	90.0		(572,618)	44.0
Closing balance	2,440,426	100.0		2,417,800	82.0
Exercisable at the year end	2,189,426	85.6		843,800	67.0

 

The weighted average share price at the date of exercise of the share options was 201.5 pence

 

The share options at the end of May 2014 including those for non executive directors have a weighted average contractual life as follows:

		Group year ended
		May 2014			May 2013
Expiry date	Exercise price per share Pence	Options Number	Weighted average remaining  contractual life Months		Options Number	Weighted average remaining  contractual life Months
December 2015	67	675,475	19		843,800	31
July 2022	89	1,036,523	96		1,214,000	108
January 2023	89	34,000	104		100,000	116
May 2023	95	230,000	108		260,000	120
July 2023	95	65,790	110		-	-
July 2023	127	147,638	110		-	-
March 2024	224.5	251,000	118		-	-
Total		2,440,426	79		2,417,800	83

 

Under the rules of the new Company Share option plan, options are not exercisable until three years from the date of the grant. There are no performance conditions attaching to the options. The only vesting condition is continued service in the group.

 

For the warrants issued, the pre IPO related options issued to Non Executive Directors and the IPO options issued to third parties vested immediately. The IPO related options issued to Non Executive Directors vest after one year.

 

Fair value assumptions of share-based payments

The fair value of services received in return for share options is measured by reference to the fair value of share options granted. The estimate of fair value measured using the Black-Scholes model. Details of the fair value granted in the period, together with the assumptions used in determining the fair value are summarised below:

 

	July 2013 Pre IPO	July 2013 IPO	March 2014
Share price at date of grant (pence)	95	127	224.5
Exercise price	95	127	224.5
Expected time to expiry (years)	10	10	7.94
Risk free interest rate (%)	4.3	4.3	4.3
Expected dividend yield on shares (%)	0	0	0
Expected volatility of share price (%)	20	20	40
Fair value of options granted (pence)	68.7	53.7	122.6

 

The assumptions for the March 2014 are based on statistical analysis of share price data from the listing on AIM from 15 July 2014 to the date of grant, hence the changes to volatility and expected life.

 

 

19. 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 2014 £'000	31 May 2013 £'000
Trade payables	463	183
Intercompany payable	-	-
Other taxation and social security	270	284
Accruals	474	1,464
Convertible loan note	-	1,129
Total trade and other payables	1,207	3,060

 

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 carried an interest rate of 8% per annum. The loan notes were converted into ordinary shares on the 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.

 

20. Deferred income

Deferred income in the statement of financial position can be analysed as follows:

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Contractual	268	-
Self-published	2,188	1,283
Deferred income	2,456	1,283

 

Deferred income is due within one year (in the prior year due over one year from the self-published source). The carrying values of deferred income are considered to be a reasonable approximation of fair value. Self published deferred income derives from a combination of crowd sourced income raised and pre-orders from the sale of Elite:Dangerous planned for release within one year.

 

21. Other short-term liabilities and financial liabilities due over one year.

 

These balances represent the interest free loan from the Atlantic Canada Opportunities Agency, for fair value see Note 10.

The Group has a £3m revolving credit facility with Barclays Bank plc, this had not been drawn upon in the financial year.

 

 

22. Provisions for dilapidations

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Opening balance	187	150
Provided for in period	36	37
At period end	223	187

 

The dilapidation provision relates to the rental contracts for two office buildings (included within Note 10). These leases expire April 2015 and August 2015. It is likely that by the time this is agreed with the landlord that the majority of this expenditure is expected to be incurred after May 2015. 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.

 

23. Finance income

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

	31 May 2014 £'000	31 May 2013 £'000
Interest income from cash and cash equivalents	63	19

 

 

 

24. Taxation on ordinary activities

(a) Analysis of the charge in the period

		31 May 2014 £'000	31 May 2013 £'000
UK corporation tax based on the results for the year		(8)	4
Overseas tax on the results for the period		75	(6)
Deferred tax	45		28
Tax on profit on ordinary activities	112		26

 

(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 20.3% (2013: 24.1%) as follows:

	31 May 2014 £'000	31 May 2013 £'000
(Loss)/profit on ordinary activities before taxation	(1,642)	1,071
Tax on (loss)/profit on ordinary activities at standard rate	(334)	258
Factors affecting tax expense for the year:
Overprovision in prior period	(8)	-
Expenses not deductible for tax purposes	116	215
Adjustments for opening deferred tax average rate	(1)	16
Deferred tax provided	46	(1)
Research and development tax credits	(498)	(397)
Exercise of share options	(88)	(65)
Losses to carry forward	879	-
Total amount of tax	112	26

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 2014 the Video Games Tax Relief becomes available and the Group expects that some of its projects will qualify for this relief.

 

25. 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 5.

	31 May 2014	31 May 2013
(Loss)/Profit attributable to shareholders (£'000)	(1,754)	1,045
Weighted average number of shares	30,479,942	25,014,043
Basic (loss)/earnings per share (pence)	(5.8)	4.2

 

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. For May 2014 as the effect of options and convertible loan notes would reduce the loss per share, the diluted loss per share is the same as the basic loss per share.

	31 May 2014	31 May 2013
(Loss)/Profit attributable to shareholders (£'000)	(1,754)	1,045
Weighted average number of shares	30,479,942	25,495,040
Adjusted basic (loss)/earnings per share (pence)	(5.8)	4.1

 

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	31 May 2014	31 May 2013
Ordinary shares	30,479,942	25,014,043
Under option	-	480,997
Diluted average number of shares	30,479,942	25,495,040

 

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

	31 May 2014	31 May 2013
Adjusted (loss)/profit attributable to shareholders (£'000)	(928)	1,816
Weighted average number of shares	30,479,942	25,014,043
Adjusted basic (loss)/earnings per share (pence)	(3.0)	7.3
Weighted average number of shares (diluted)	30,479,942	25,495,040
Adjusted diluted earnings per share (pence)	(3.0)	7.1

 

Adjusted profit	31 May 2014 £'000	31 May 2013 £'000
(Loss)/Profit attributable to shareholders	(1,754)	1,045
Share-based compensation	286	416
Funding costs/listing expense	217	308
Dilapidations provision	36	37
Impairment of intangible asset	276	-
Fair value adjustment	32	-
Investment (gain)	(21)	-
Set up of Canadian subsidiary	-	10
Adjusted (loss)/profit	(928)	1,816

 

26. Cashflow adjustments and changes in working capital

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

 

Group adjustments and changes

Adjustments	31 May 2014 £'000	31 May 2013 £'000
Depreciation, amortisation and impairment	2,027	1,801
Finance income	(63)	(19)
Fair value adjustments	(32)	-
(Profit) on disposal of fixed assets and available for sale assets	(5)	-
Atari shares	(33)	-
Share-based payment expenses	286	416
Taxation	(70)	26
Foreign exchange	336	(26)
Total adjustments	2,446	2,198
Net changes in working capital:
Change in inventories	(15)	75
Change in trade and other receivables	(882)	464
Change in trade and other payables	447	1,064
Change in non-current liabilities	37	1,320
Total changes in working capital	(413)	2,923

 

 

27. 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 2014 £'000	Creditor balance May 2014 £'000	Expense paid May 2013 £'000	Creditor balance May 2013 £'000
Chris Sawyer - Royalties	40	53	53	6
Marjacq Micro Limited - Sales Commission	20	27	27	-

 

 

Professional Practice Automation LLP, controlled by David Braben received 2,001,573 ordinary shares for the assets of that business including the rights to the Elite franchise being a royalty of 10% of the profits in respect of Elite sequels, including Elite: Dangerous.

Jonathan Milner subscribed to the Convertible loan note and received £3,699 of interest before tax deduction.

 

28. Acquisition

On 6 May 2014 the Group acquired the business and assets of Professional Practice Automation LLP, controlled by David Braben, for a non-cash consideration of £5.154m through the issuance of 2,001,573 ordinary shares. The ruling market price at the date of shareholder approval was 257.5 pence. The transaction has been accounted for as a share based payment.

 

The acquisition had the following effect on the Group's assets at the acquisition date:

	£'000
Intangible assets	5,148
Other short-term financial assets	6
Non-cash consideration	5,154

 

The amounts were considered to be fair value at the time of acquisition

 

29. 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 11. 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 cashflows.

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.

 

29.1 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 10).

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  the Group's financial assets are secured by a debenture issued in favour of Barclays bank plc as  Part of its agreement to provide a revolving credit facility.

 

29.2 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 did not  enter into forward exchange contracts to mitigate the exposure to foreign currency risk in the year but is considering in doing so, now that it is in receipt of multi currency (as above) revenue from its self published activity and will have associated marketing expenses that are likely to be in similar currencies. 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 are as follows:

	Consolidated year ended
	31 May 2014						31 May 2013
	CAD £'000	USD £'000	Euro £'000			CAD £'000		USD £'000	Euro £'000
Assets	1,994	1,170	38			501		1,218	22

 

In addition some of the Group's revenue and overhead transactions are completed in a foreign currency. Transaction exposure is reduced 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 USD and CAD. An increase in Sterling would lead to a decrease in income and a decrease in equity.

	Consolidated year ended
	May 2014 £'000	May 2013 £'000
Effect of a 5% change in relevant exchange rate on:
Income statement	189	100
Equity	180	105

 

29.3 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 use the revolving credit, 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 £'000	Between 6 and 12 months £'000	Between 1 and 5 years £'000		Later than 5 years £'000
As at 31 May 2014
Trade and other payables	834	131	102		19
As at 31 May 2013
Trade and other payables	564	479	79		-

 

 

Financial assets used for managing liquidity risk

Cashflows 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 three months.

 

29.4 Interest rate sensitivity

The convertible loan carried a fixed rate of 8% per annum and was converted upon listing to AIM. 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.

 

30. 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.

 

The Group had an interest free loan in Canada of £135k at the end of the financial period

 

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

 

	Consolidated year ended
	31 May 2014 £'000	31 May 2013 £'000
Total equity	18,892	8,395
Convertible loan	-	1,129
Financial liability	135	-
Less cash and cash equivalent	(8,612)	(7,155)
	10,415	2,369