Frontier Developments
Annual Report 2016

Plain-text annual report

F R O N T I E R D E V E L O P M E N T S P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 6 POISED TO SUCCESSFULLY COMPLETE OUR BUSINESS TRANSITION FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 BUILDING WORLD-CLASS FRANCHISES The games industry is transitioning into the world’s premier form of entertainment. Frontier has a proven track record of progressive development in video games spanning several decades of rapid technological change. The Group’s projects cross a wide variety of genres and platforms and are linked by an underlying drive for innovation, timely delivery and, above all, quality, enabled by its COBRA technology. 04 06 10 CHAIRMAN’S STATEMENT Building the right management teams, organisation and infrastructure to further the success of our franchises and grow their number. CHIEF EXECUTIVE’S STATEMENT The expected full release of Planet Coaster will mark the successful completion of our transition, with all development staff working on revenue-generating franchises under our new self-published business model. OUR STRATEGIC PRIORITIES AND KEY PERFORMANCE INDICATORS Continued investment in the Group’s transition with Elite Dangerous revenues used to fund development of both Planet Coaster and further Elite Dangerous franchise development. CONTENTS STRATEGIC REPORT Highlights Chairman’s statement Chief Executive’s statement 02 04 06 Our strategic priorities and key performance indicators 10 Principal risks and uncertainties Financial review CORPORATE GOVERNANCE Directors’ biographies Report of the Directors Corporate governance report Remuneration report FINANCIAL STATEMENTS Independent Auditor’s report Consolidated statement of cashflows Company statement of cashflows Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Company statement of financial position Consolidated statement of changes in equity Company statement of changes in equity Notes to the financial statements ADDITIONAL INFORMATION Notice of Annual General Meeting Advisors and Company information i For more information visit: AR2016.frontier.co.uk or www.frontier.co.uk 20 22 26 28 30 34 36 37 38 39 39 40 41 42 43 44 65 68 01 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016 HIGHLIGHTS SUBSTANTIALLY, ALL GROUP REVENUES IN THE PERIOD WERE DERIVED FROM SELF-PUBLISHING. CONTINUED INVESTMENT IN THE GROUP’S TRANSITION. EXPANDED THE ELITE DANGEROUS AUDIENCE. PLANET COASTER ON A POSITIVE TRAJECTORY FOR NOVEMBER 2016 LAUNCH. FINANCIAL £8.6m NET CASH BALANCE (£m) -18% 10.5 8.4 8.6 £21.4m REVENUE (£m) -6% 22.8 21.4 9.5 £1.2m OPERATING PROFIT (£m) -21% 1.6 1.2 (1.7) 2014 2015 2016 2014 2015 2016 2014 2015 2016 £2.2m DEFERRED INCOME (£m) +68% 2.5 2.2 0.7 2014 2015 2016 4.2p EPS (p) -14% 4.9 4.2 (5.8) 2014 2015 2016 £(2.7)m ADJUSTED OPERATING RESULT* (£m) -209% 2.5 £4.9m EBITDA (£m) -20% 6.1 4.9 0.3 2014 2015 2016 (8.0)p ADJUSTED LPS / (EPS)* (p) -208% 7.4 (3.5) (2.7) (11.4) (8.0) 2014 2015 2016 2014 2015 2016 * See page 24 for the reconciliation to the operating profit. 02 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 20162 4 3 OPERATIONAL HIGHLIGHTS 1 Poised to complete business transition • Substantially, all Group revenues in the period were derived from self-publishing activities, which was up 13% at £21.0 million (FY15: £18.6 million). In addition the deferred income balance rose by £1.5 million to £2.2 million. • Good progress was made during the period towards the strategic objective of self-publishing multiple revenue generating franchises. There was continued investment in the Group’s transition with Elite Dangerous revenues used to fund development of both Planet Coaster and further Elite Dangerous franchise development. 3 Elite Dangerous audience expanded • The Group expanded the audience for Elite Dangerous by releasing on Microsoft’s Xbox One, and supporting the consumer launch of the two major PC Virtual Reality systems. • New Elite Dangerous products were introduced to cover all main price points: Elite Dangerous: Horizons is a paid-for seasons pass of expansions to extend the Elite Dangerous game, and Elite Dangerous: Arena is a low-priced entry point offering instant action player-vs-player combat. 2 Second franchise on track • Alpha builds of the Group’s second franchise, Planet Coaster, were released to early adopter customers and the game remains on track for launch on 17 November 2016. 4 Frontier’s player numbers grow • The total Elite Dangerous franchise unit sales increased by over one million during the year, and are currently around 1.8 million. • Planet Coaster exceeded the Board’s expectations, with around 25,000 unit sales during the period and 50,000 to date. 03 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTCHAIRMAN’S STATEMENT “THE FINANCIAL YEAR TO 31 MAY 2016 (FY16) REPRESENTS A YEAR OF CONTINUED GOOD PROGRESS IN OUR TRANSITION TO A MULTI-FRANCHISE, SELF-PUBLISHING COMPANY.” DAVID GAMMON Non-Executive Chairman For the first time substantially all our revenue has come from self-published titles: Elite Dangerous and Planet Coaster (in Alpha). We have transformed a business-to-business enterprise into a business-to-consumer organisation in the space of two years. In FY17, we will launch our second franchise, Planet Coaster, and as a result will complete our strategic transition to self-publishing multiple revenue generating franchises. As part of this transition and to continue the preparation of the business for long-term success, we will continue to develop, evolve and invest in our organisational structure and facilities. This will provide the right platform as we endeavour to further the success of our franchises and continue to grow their number. We believe we are building the right management teams, organisation and infrastructure to be able to effectively create, develop, market and sell even more distinct franchises aimed at different audience segments. Number of Planet Coaster pre-orders at end August 2016: 50,000 04 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016On behalf of all shareholders, I take this opportunity to thank our employees and advisors for their amazing skill, professionalism and dedication. I would also like to pay tribute to the support and experience Jonathan Milner brought to our Board during his period as an NED. Jonathan joined the Board pre-IPO in order to lend his weight and experience to the transfer from a private company to an AIM quoted company. That work has now been completed and I am delighted to welcome Charles Cotton as our new NED and Jonathan’s replacement. Charles has a successful worldwide track record in high-growth technology companies and his experience will be invaluable as we continue to build the organisation. During FY16 we further developed both Elite Dangerous and Planet Coaster franchises and recruited new people into the organisation. In FY17 we expect to start seeing the results of these efforts. DAVID GAMMON Non-Executive Chairman 6 September 2016 Elite Dangerous franchise units: 1,800,000 Read more on page: 10 05 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTCHIEF EXECUTIVE’S STATEMENT “WE HAVE DELIVERED ANOTHER GREAT YEAR OF PROGRESS TOWARDS OUR GOAL OF EARNING REVENUE FROM MULTIPLE SELF-PUBLISHED FRANCHISES.” DAVID BRABEN OBE Founder and CEO OVERVIEW We have had our first full year with Elite Dangerous, selling over one million franchise units in the period. At the same time we have made great progress with our second franchise Planet Coaster, releasing its first and second ‘alpha test’ versions to the public towards the end of the financial year, with the third ‘alpha test’ version released since the close of the financial year. The expected full release of Planet Coaster has just been announced for 17 November 2016 at the time of going to press, and will mark the successful completion of our transition, with all development staff working on revenue- generating franchises under our new self-published business model. We can then start on a third franchise as planned. This year we earned substantially all our revenue from self-published products for the first time, with self-published revenue increasing by 13% and revenue from work-for-hire contracts falling to zero in the year as planned, other than trailing royalties. Headline revenue was £21.4 million with deferred income of £2.2 million. The Group remains in a strong financial position with a net cash balance of £8.6 million. As we continued our planned transition, we generated a pre-tax profit of £1.3 million and EBITDA of £4.9 million. We are pleased with the strong financial position of the business, having invested £8.9 million in our two major self-published franchises during the financial year (2015: £4.3 million), with an increased proportion of development relating to titles yet to be released to 51% (2015: 30%). 06 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016Going forward we will continue to grow the capacity and capability of our organisation in both commercial and development areas in order to further the successful evolution of our franchises. As part of this process, we will explore potential partnerships and licensing opportunities. We will also continue to review potential acquisition targets that could augment our capacity or add new capabilities and / or IP that may help us achieve our goals. We will endeavour to enhance and expand our franchises and grow their audiences using appropriate additional products, platforms, media, distribution channels, and charging models through investing in the necessary people, organisation, resources and infrastructure. We believe that using our COBRA development tools and technology to facilitate the creation of innovative, strongly differentiated features for the PC and console audiences currently provides the best return on our investment. Whilst a publisher partner has in FY17 taken up two options under previous work-for-hire contracts to license COBRA to facilitate ports of existing games to new platforms, licensing our COBRA technology to new customers is not a current focus and remains a future strategic opportunity that we will continue to evaluate. MARKET The video games sector continues to grow significantly. In calendar year 2016, analysts predict that the global video game market will hit around $100 billion. PC is the largest digital sales revenue generator by platform, with over 50% market share, followed by mobile, then console. The shift to digital distribution is already largely complete in the PC and mobile segments. Consoles are the only segment in which physical retail remains significant; this is also the segment where digital sales are growing at their fastest rate. STRATEGY Our transition to publishing our own franchises is the best way to maximise the benefit of our core skills, assets and our technological platform, COBRA, which enables both Elite Dangerous and Planet Coaster and future franchises to have a significant technological advantage. The Company’s focus is on developing top quality self-published PC and console titles for digital distribution, as together these segments represent the majority of the available market by revenue, and generally the audiences on these platforms value high quality games, and quality is one of Frontier’s key development strengths. We will also continue to create further franchises and games that benefit from work on existing franchises that would make use of our established expertise and / or IP in order to further build our revenue pipeline over the long term. Our belief is that having all our people in our Cambridge HQ working together in a single building will maximise our operational efficiency. We will work toward this objective in the coming months and years. OPERATING IN LINE WITH OUR STRATEGIC PRIORITIES 1 Transition to self-publishing 2 Repeatable model over multiple franchises 3 Elite Dangerous franchise 4 Planet Coaster franchise Read more on page: 10 07 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTCHIEF EXECUTIVE’S STATEMENT CONTINUED PLANET COASTER Development of Planet Coaster remains on track for launch in calendar Q4 2016. Planet Coaster draws on our extensive past experience in the ‘Tycoon’ genre, and in coaster park games, including the massive hit RollerCoaster Tycoon 3. We have now released three Alpha builds of Planet Coaster (the first two within the financial year). These have been very well received, and early indications are positive, with social media ‘footprint’ tracking significantly higher than Elite Dangerous at the equivalent time in the development cycle. Planet Coaster moves the ‘Tycoon’ genre forwards significantly, adding detailed creative building and a community hub to enrich simulation gameplay, and has captured the imagination of players already with a number of ‘Youtubers’ showing their experiences of building truly amazing structures within the game. SUMMARY We have delivered another great year of progress towards our goal of earning revenue from multiple self-published franchises. I would like to add my thanks to all at Frontier for their hard work, our investors for their continued support, and to our many fans around the world that continue to make it all possible. DAVID BRABEN OBE Founder and CEO 6 September 2016 ELITE DANGEROUS We have continued to support Elite Dangerous with regular significant expansions, and released Elite Dangerous: Horizons, a paid-for seasons pass of expansions, and Elite Dangerous: Arena, an immediate- action player-vs-player component as a stand-alone entry-level game. These allow us to cover all main price points. We have also participated in price promotions on each of the distribution platforms we are using, making the game available to a wider audience than we would otherwise reach. We have continued to reach new audiences for the game by supporting new distribution channels and platforms such as Xbox One and Amazon as well as the first consumer Virtual Reality (VR) headsets, the HTC Vive and the Oculus Rift. Our investment in our own COBRA technology allowed us to benefit from e arly adoption of this new technology – for example, Elite Dangerous has been a leading title on Oculus Rift for both sales and play-time each and every month since its launch. All of this continues to build the franchise. Elite Dangerous is now in its second year of release. The attach rate of Elite Dangerous: Horizons to the base game was initially lower than expected, but unit sales of the base game were higher at the same time. Horizons and the base Elite Dangerous game continue to sell steadily, helped by the regular updates. These updates add to the quality of the game, renew the interest of existing players, and also generate additional coverage resulting in new sales. The opportunity to become a breakout hit franchise remains, as the game continues to sell and we continue to focus on enhancements to further improve perceived quality and sentiment. We expect to continue to expand the player base over the next financial year, adding new content and increasing the audience. 08 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016OUTLOOK AND CURRENT TRADING UPDATE Trading since the year end, in what is a seasonally quiet quarter for the Group, has exceeded the Board’s expectations. Up to 31 August 2016 the Group had sold approximately 1.8 million franchise units of Elite Dangerous. The third Planet Coaster Alpha build was released in August, and up to 31 August 2016 the Group had sold approximately 50,000 pre-order units of Planet Coaster. Net cash balance at 31 August 2016 was approximately £8.4 million. Since the year end the Group has also received £0.2 million of UK video game tax relief relating to its work for Amazon Game Studios. Frontier has submitted a further £0.7 million of claims related to Elite Dangerous which were not recognised in FY16, and will continue to submit claims for eligible projects at the appropriate time. See note 25 in the financial statements for an explanation of how this is treated. Frontier remains at an early stage of the multi-franchise self-published model and therefore, although the Board believes Frontier’s strategy will deliver successfully, it is difficult to predict future outcomes with a degree of certainty and the Board expects Frontier’s results to continue to exhibit stepped characteristics driven by the timing of major franchise releases. In FY17, following the successful completion of Frontier’s transition to generating self-publishing revenue from multiple franchises with the release of Planet Coaster, the Board expects the Group to be well placed – using the self-published business model maximises the return on Frontier’s core skills and assets, and two strong revenue-generating franchises will provide a good foundation from which to take further advantage of the significant opportunities available in the fastest growing segment of the entertainment industry. We plan to continue to increase the audience for Elite Dangerous via new distribution channels and platforms, and to further enrich the Elite Dangerous experience with new activities and new ways to play. The Board expects sales of Elite Dangerous to continue to build over the rest of the financial year as new players are recruited and adoption of Elite Dangerous: Horizons continues. The results for the year will primarily be driven by the successful launch of Planet Coaster in November and trading over the holiday period. The encouraging performance of Planet Coaster pre-orders and the positive reception of the Alpha build give the Board confidence of a successful launch. We will support Planet Coaster post launch in order to grow the community of players over time. Overall, the Board is confident and excited about the opportunities ahead in the coming years. Note regarding the effects of the UK’s referendum vote to leave the EU: The Board does not consider the UK referendum result to present any significant concerns for the business. Frontier has significant revenues from non-GBP sources, and exchange rate shifts therefore influence the Company’s finances. To date the impact of the currency movements since the referendum has been positive, notwithstanding the Group’s policy of hedging half its forecast exposure in its most significant foreign currencies. The Company is expecting that all existing non-UK EU nationals currently employed in the UK by Frontier will be able to remain working for the Company, although at the time of writing there are no specific details available as to the impact of the vote. The Board expects that even in the case where a visa may be required, as Frontier is a Tier 2 visa sponsor the Company should be able to retain the services of its current non-UK EU nationals. Frontier’s approach to exchange rate volatility, staff availability and staff retention risks is set out in the Principal Risks and Uncertainties section on pages 20 to 21. 09 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTOUR STRATEGIC PRIORITIES AND KEY PERFORMANCE INDICATORS FRONTIER’S STRATEGY IS TO BUILD MULTIPLE FRANCHISES OVER TIME IN THE PC AND CONSOLE SPACE, USING ITS COBRA TECHNOLOGY TO DELIVER QUALITY AND DIFFERENTIATION. 1 TRANSITION TO SELF-PUBLISHING Frontier has been shifting to a self-publishing business model using digital distribution channels, and has grown end-customer facing facets of the organisation such as marketing, community and customer support as well as re-focusing its development staff to self published projects. Read more on page: 12 10 2 REPEATABLE MODEL OVER MULTIPLE FRANCHISES Frontier invests its development resources in games with strong franchise potential. In order to maximise the return on its core skills and assets Frontier has targeted game genres in which the company has established expertise and intellectual property. Read more on page: 14 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 20163 ELITE DANGEROUS FRANCHISE Elite Dangerous is now in its second year of release, and made its debut on Xbox One. Horizons and the base Elite Dangerous game continue to sell steadily, with regular updates adding to the quality of the game, renewing the interest of existing players, and driving new sales. Read more on page: 16 4 PLANET COASTER FRANCHISE Planet Coaster draws on our extensive past experience in the ‘Tycoon’ genre, and in coaster park games. Feedback from the Alpha builds of Planet Coaster is very positive, with social media ‘footprint’ tracking significantly higher than Elite Dangerous at the equivalent time in the development cycle. Read more on page: 18 RELEVANT KEY PERFORMANCE INDICATORS INVESTMENT IN SELF-PUBLISHING AND TECHNOLOGY TRANSITION OF REVENUE MIX & MEASURE OF GROWTH MEASURE OF PROFITABILITY (£) 2,608 man months 2,608 1,864 1,243 21.0m self-published 21.4m total revenue £(2.7)m 21.0 21.0 19.4 19.4 22.8 22.8 21.4 21.4 2.5 (3.5) (2.7) 9.5 9.5 0 0 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 This was the Group’s first year of investing in two self-published franchises. Self-published revenue grew to be substantially all the Group’s total revenue. It grew in absolute terms to £21.0 million, an increase of 13% on the previous year. Adjusted operating profit as per note 5 to the financial statements. 11 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORT1 Transition to self-publishing Frontier has been shifting to a self-publishing business model using digital distribution channels, and has grown end-customer facing facets of the organisation such as marketing, community and customer support as well as re-focusing its development staff to self-published projects. risks related to ongoing access to third party technology, risks relating to ability to fix uncovered problems in that technology and lack of control over the delivery dates and feature roadmap of such solutions. It also facilitates rapid response to market opportunities like support for VR and Augmented Reality. The most significant sales drivers in the games market are perceived quality and creating a unique experience. Frontier’s development process uses its proprietary COBRA development tools and technology to facilitate innovative features and the creation of top quality self-published games with strong differentiation. Frontier’s control of its own COBRA games development technology also de-risks its developments in terms of A previous publishing partner has in FY17 exercised its option under two previous work-for-hire contracts to license COBRA for their ports of existing games to new platforms. The Board is not expecting further such options to be exercised, and licensing Frontier’s COBRA technology to new customers remains a potential future strategic opportunity that the Board will continue to evaluate rather than a current focus. 12 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 13 STRATEGIC REPORT2 Repeatable model over multiple franchises Frontier invests its development resources in games with strong franchise potential. Its focus is on PC and console titles, as together these segments represent the majority of the available market by revenue and generally the audiences on these platforms have valued games that exhibit Frontier’s key development strengths. In order to maximise the return on its core skills and assets Frontier has targeted game genres in which the Company has established expertise and intellectual property. Frontier sustained similar levels of revenue with one franchise in the market whilst continuing to develop two franchises. Major new releases will be key drivers of revenue. Because of the small number of franchises and relatively infrequent major releases Frontier is able to make, the revenue growth profile over financial years will be sensitive to the specific release schedule of such releases and may therefore exhibit ‘stepped’ behaviour. 2016 was a year of substantial investment for Frontier as we invested in Planet Coaster ahead of its release, which will complete our transition to earning self-published revenue from all our development effort. Frontier uses online channels to create and engage with a fan-base or community during its self-published developments, which provides a valuable source of feedback and an enthusiastic community for each franchise before first release. 14 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2015 15 STRATEGIC REPORT3 Elite Dangerous franchise Further updates to Elite Dangerous During the financial year Frontier continued to release updates to Elite Dangerous in order to drive awareness and interest in the game. 1.3 Powerplay (June 2015) added the ability for players to influence the behaviour of the main story characters. Elite Dangerous for Xbox One was updated in May 2016 to allow Xbox players to make additional purchases of in-game items such as paint jobs for their ships, giving parity between the Xbox One and PC versions of the game. Future expansions are planned for simultaneous release on all platforms. 1.4 Close Quarter Combat (CQC) (October 2015) added an instant action ‘CQC’ arena mode to the game for players to take part in combat as a sport. 1.5 (December 2015) added more playable ships into the game. 1.6 (May 2016) added a new mission system, including the first images of human characters in the game. Elite Dangerous on Xbox One In June 2015 Elite Dangerous became the first game to be offered as part of Microsoft’s Game Preview Program (GPP) for its Xbox One games console, opening up a further audience for the game. The GPP was the first time a paid beta / early access has been offered for a console, and Frontier’s experience with this method of development on the PC platform was a large factor in Microsoft’s decision to select Elite Dangerous as a lead title for the GPP. Elite Dangerous was launched on Xbox One in October 2015, including the first four expansions. Elite Dangerous: Horizons In August 2015 Frontier announced Elite Dangerous: Horizons, a second, paid-for, season of new expansions for Elite Dangerous dedicated to expanding gameplay, community and narrative. Frontier was able to engineer the underlying technology such that Horizons was fully backwards compatible, offering the key benefit that all players retain their progress and remain playing together in the same galaxy. The first expansion in the Horizons season, Planetary Landings, was released on PC in December 2015, and the second, The Engineers, in May 2016. The Engineers was released six weeks later than originally planned, in order to give additional development time to focus on the quality of the release. Elite Dangerous: Horizons initially offered an unclear value proposition to a proportion of players, and its positioning was subsequently altered early in 2016. The number of Elite Dangerous players upgrading to Horizons built throughout the second half of the financial year, and Frontier expects this to continue as further Horizons expansions are released which further enhance the perceived quality and sentiment. In June 2016, just after the end of the financial year, Elite Dangerous: Horizons was launched for Xbox One customers. Future expansions in the season will be released simultaneously on all platforms. Elite Dangerous: Arena Frontier launched Elite Dangerous: Arena on PC in February 2016 and in April 2016 for Xbox One. Elite Dangerous: Arena offers Elite Dangerous ‘CQC’ player-vs-player game as a standalone release at a low price point, with an easy upgrade path to the main game. Virtual Reality Using its COBRA technology Frontier was able to design Elite Dangerous from the ground up to support VR display systems. As a result Elite Dangerous was the only ‘AAA’ game fully available in VR at the commercial launch of such systems. After supporting early developer versions of the Oculus Rift, Frontier announced support for HTC’s Vive VR headset (and other Steam VR compatible headsets) in September 2015, and in March 2016 Elite Dangerous was a launch title for Facebook’s Oculus Rift consumer headset and available for purchase through the Oculus Home store on day one of its operation – Elite Dangerous has been a leading title on Oculus Rift for both sales and play-time each and every month since Home’s launch. 16 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 17 STRATEGIC REPORT4 Planet Coaster franchise Early in 2015 Frontier completed its outstanding contractual obligations to its publisher partners and started to invest in its second self-published franchise, Planet Coaster, a coaster park simulation game. Frontier has a very successful track record in developing games in this genre, for example RollerCoaster Tycoon 3 and Zoo Tycoon for PC and Xbox One respectively. A trailer video for Planet Coaster premiered at the PC Gaming Show held during the E3 tradeshow in Los Angeles in June 2015, with pre-orders being made available for purchase at that time. Planet Coaster Alpha builds Planet Coaster is being developed using a similar philosophy of phased public pre-release builds to the game’s community of followers that Frontier used successfully with Elite Dangerous. This serves both to test increasing levels of game functionality with large numbers of people and stimulate awareness of the game. Alpha One was released in March 2016 offering the first creation tools such as modular scenery construction and pathing, plus an early version of rollercoaster construction. Alpha Two was released in May 2016 including terrain modification tools, a further iteration of rollercoaster construction, refinements to pathing and other improvements. Building the Planet Coaster community Frontier started a programme to engage the Planet Coaster community including a ‘development diary’ video series, livestreams and internet forum ‘Q&A sessions’ designed to show the team’s design philosophy, progress and plans. The Board is encouraged by the feedback from the Planet Coaster community so far. 18 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 FRONTIER DEVELOPMENTS PLC ANNUAL REPORT AND ACCOUNTS 2016 19 STRATEGIC REPORTPRINCIPAL RISKS AND UNCERTAINTIES The Group faces competitive, strategic and financial risks that are inherent in a rapidly growing emerging market. The executive team maintains the risk register and escalates the key risks for further consideration at full Board level on a regular basis. The key business and financial risks for the Group are set out below: DESCRIPTION MITIGATION RELATIVE CHANGE OVER PERIOD STAFF AVAILABILITY If the Group does not have the correct numbers of people with the correct skills available, the execution of its business plan will be compromised. STAFF RETENTION Staff departures could create staff and key skill / experience shortages and compromise the execution of the Group’s business plan. CYBERSECURITY A breach of security could take many forms, and could significantly impact the business and impair our self-publishing plans. Exposure includes that of failure of security at our partners including Amazon, Valve and Microsoft. STRATEGIC FOCUS The Group is in the process of transitioning from entirely work-for-hire revenue from a small number of publisher customers to generating its revenue entirely from consumers via a number of self-published franchises based on its own IP. Inherently such a strategic shift of focus creates execution risks, whilst perhaps reducing financial risk based on a small customer base. CURRENCY RISK The Group continues to prioritise direct recruitment and outreach. We have visibility of our future needs via a regularly reviewed plan of record, and undertake analysis of potential bottlenecks. We seek to minimise days lost to sickness via healthcare benefits and general morale and wellbeing initiatives. The Group is a Tier 2 visa sponsor, to facilitate its objective to employ the best possible people from the worldwide talent pool. Whilst there will unavoidably be some level of staff turnover, the Group believes that its attractive project portfolio, talented staff and good quality leadership make Frontier a place where talented people want to build their careers. We use our business success to deliver benefits to our people, and the Group is undertaking a programme of improving incentives and leadership skills which is intended to further enhance its attractiveness as an employer. We review our security provisions regularly and believe them to be in accordance with industry best practices. The first step in the Group’s transition to fully self-publishing its output has been successful with materially all of its revenue coming from self-published sales in the financial year, mainly from ongoing sales of Elite Dangerous. The Group remains confident that it can use its experience and expertise to continue to deliver on the product, technology, commercial and operational aspects that support its strategy. 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 US Dollars (USD) and Euros (EUR). As the Group has expanded its revenue sources and there has been a subsequent increase in revenue from non-GBP currencies, the Group has entered into forward exchange contracts to mitigate the exposure to foreign currency risk. The intention is to retain an approximate 50% hedge against expected receipts over a rolling 12-month period. The currency exposure is monitored daily. 20 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016Increase Decrease No change DESCRIPTION MITIGATION RELATIVE CHANGE OVER PERIOD GROWTH MANAGEMENT The Group’s future success will depend on its ability to manage and fund its anticipated expansion. This includes the management of overseas-based subsidiaries and may include acquisitions. Such expansion and investment is expected to place demands on management, support functions and working capital. If the Group is unable to manage and fund its expansion effectively, its business and financial results could suffer. MARKET DISRUPTION The Group operates in a fast moving industry where competitive products, larger and better capitalised competitors, new market trends or disruptive technology may emerge which reduce its ability to compete and execute its business plan. CREDIT A third party might fail to fulfil its performance obligations under the terms of a financial instrument. This includes balances within trade and other receivables from distributors which can be up to two months of sales from the relevant platform. In order to mitigate the risk, the Group is investing in suitable training for key staff and key internal systems. The Group has appointed experienced key Non-Executive advisors to ensure risks are managed objectively, and will continue to review its requirements for strategic advice. The Group prudently manages its liquidity by monitoring forecast cash inflows and outflows both in the short and medium terms, as well as its long-term investment needs and opportunities. Investing in its own COBRA technology and self-published games allows the Group to continue to innovate, and we seek to make our processes and business decisions agile and well informed so we can anticipate and exploit such changes. We believe this risk is mitigated by our track record of execution on new platforms and the flexibility demonstrated by the diverse range of video games we have successfully developed in the past. The Group’s exposure is limited to the carrying value of financial assets recognised at the year end date (as summarised in notes 11 and 28). The Group’s management considers 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 risk from two counterparties who distribute product on the Group’s behalf; however, given the identity of each and their financial performance, we believe the likelihood of the risk of those companies defaulting to be low. 21 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTFINANCIAL REVIEW “IN THE FINANCIAL YEAR ENDED 31 MAY 2016, THE GROUP CONTINUED WITH ITS PLANNED INVESTMENT IN THE TRANSITION OF ITS BUSINESS TO EARNING ITS REVENUE FROM MULTIPLE SELF-PUBLISHED FRANCHISES. THE TRANSITION WILL BE COMPLETE WITH THE LAUNCH OF PLANET COASTER.” DAVID WALSH Chief Operations Officer NEIL ARMSTRONG Company Secretary and Chief Finance Officer 22 TRADING RESULTS During this transition year direct work- for-hire revenue fell to zero for the first time as planned (2015: £3.4 million), and self-published revenue grew to be substantially all the Group’s total revenue. For the first time, all the Group’s developers worked on our own self-published games and associated technology throughout the whole year. The continued support and growth of Elite Dangerous including the addition of the Xbox One platform, the release of Elite Dangerous: Horizons, the release of the Alpha version of Planet Coaster and the launch of RollerCoaster Tycoon 3 on the iOS platform all contributed to another profitable year whilst the business remains in transition. Development of Planet Coaster continued towards its intended launch of 17 November 2016, including the release of the first Alpha build in March 2016. The Group continues to show cashflow as the primary financial statement as the Board believes it represents a clearer picture of the Group’s performance during transition. The Group’s operating cashflow was £7.3 million (2015: £7.3 million) and its investment in non-current assets was £9.2 million (2015: £4.7 million), consequently net cash balance reduced in this investment phase to £8.6 million from £10.5 million. Total revenue was 6% lower year-on-year at £21.4 million (2015: £22.8 million), although self-published revenue grew from £16.8 million to £21.0 million and EBITDA was £4.9 million (2015: £6.1 million). The Group delivered an operating profit of £1.2 million (2015: £1.6 million). Self-published revenue £21.0m Investment in non-current assets £9.2m EBITDA £4.9m FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016 An adjusted operating result is used as the Board’s measure of profitability in order to provide an improved insight into performance by reflecting the underlying cash use of the business whilst in transition. The adjusted operating result is stated after adding back material non-cash overheads and expensing capitalised development costs. The adjusted operating result for the year was a loss of £2.7 million (2015: profit £2.5 million), reflecting the Group’s planned increased investment in its self-published franchises in the year. Basic earnings per share were 4.2 pence per share compared to 4.9 pence per share in the prior year, and on an adjusted basis (this measure, set out in note 5, excludes amortisation, depreciation and R&D capitalised) the basic adjusted loss per share was 8.0 pence (2015: positive 7.4 pence per share). Following a full year of Planet Coaster development, the increased amount of development effort related to future self-published releases resulted in 51% of all development man months contributing to releases outside the period (2015: 30%). Both Frontier Developments Inc. (USA & Canada) continued to provide publisher support services for the Group. At 31 May 2016 the Group’s Employee Benefit Trust had an interest in 230,400 Ordinary Shares (2015: 24,455 Ordinary Shares). The expenses stated in the income statement have been reclassified to allow comparability with other companies in the sector. Cost of sales is now represented by sales commission, royalties payable, online payment charges and physical merchandise costs. Operating costs have been analysed into selling and distribution, research and development, administration, and other expenses. Accounting policies and significant accounting estimates have been moved to the appropriate notes in the financial statements. CASH AND CASHFLOW The Group’s cash balance at the end of the financial year was £8.6 million (2015: £10.5 million) with movements summarised as follows: Summarised cashflow statement Cash at start of period Operating cashflow Investing activities Financing activities Exchange differences Movement in net cash balance inc. borrowings Cash at end of period 2016 £m 10.5 7.3 (9.7) 0.3 0.2 (1.9) 8.6 2015 £m 8.6 7.3 (5.1) – (0.3) 1.9 10.5 The Group’s operating cashflow was £7.3 million, supported by continued sales of Elite Dangerous franchise products, and pre-orders for Planet Coaster. The Group invested £9.2 million in non- current assets, including development costs for the Elite Dangerous and Planet Coaster franchises plus the continued investment in our underlying COBRA technology. The loan to the Employee Benefit Trust increased by £0.6 million to meet the exercise of options related to the expiry options, mainly issued in 2005. A working capital improvement of £2 million was mainly supported by an increase in deferred income of £1.5 million, shown in note 22. Funding and other sources comprised share issues and tax credits received. Financing from share issues, warrants and options exercised amounted to £0.3 million. The overall result was a decrease of £1.9 million in net cash and cash equivalents to £8.6 million, as a result of the Group’s continued investment and growth plan. Frontier’s simplified cash movements can be represented as follows: Movement in cash balances Customer receipts Funding and other sources Incoming funds Salaries Overhead, other expenses, tax and currency differences Outgoing flows 2016 £m 19.4 0.7 20.1 11.9 10.1 22.0 2015 £m 21.1 0.3 21.4 11.3 8.2 19. 5 Movement in net cash balance inc. borrowings (1.9) 1.9 REVENUE AND REVENUE MIX Group revenue is now generated from our self-publishing activities plus associated merchandise and some trailing royalties from previous successful titles. Self-published revenue grew to be substantially all the Group’s total revenue. The prior year included £3.4 million from external publisher work, for which as planned we have not sought replacement contracts. Total revenue was 6% lower at £21.4 million (2015: £22.8 million). Revenue Revenue 2016 £’000 2015 £’000 21,363 22,763 % change (6%) 2015 Revenue mix £’000 Self-published 20,958 18,558 2016 £’000 % change 13% 2014 £’000 9,541 2014 £’000 424 External publishers Royalties Merchandise and other – 3,429 (100%) 7,707 241 322 (25%) 1,366 164 454 (64%) 44 Total revenue 21,363 22,763 (6%) 9,541 Merchandise and other income in FY15 included recognition of revenue from the Elite Dangerous Kickstarter crowd-funding campaign in conjunction with the public release of the game. Self-published revenue Self-published revenue was substantially derived from product sales within the Elite Dangerous franchise and related digital in-game purchases, with the Alpha proportion of pre-orders for Planet Coaster and RollerCoaster Tycoon 3 sales on the iOS platform also contributing. Deferred income of £0.2 million from prior Elite Dangerous lifetime pass sales was released to the income statement in the year from the brought forward balance of £0.7 million. During the financial year £1.7 million of deferred income was carried forward into future years, arising from a proportion of Elite Dangerous: Horizons and Elite Dangerous lifetime pass sales, and pre-orders of the release version of Planet Coaster. Deferred revenue for the year was therefore £2.2 million (2015: £0.7 million). Royalty income continued to accrue from sales under prior work-for-hire agreements on the RollerCoaster Tycoon 3 and Kinect Disneyland Adventures titles, published by Atari and Microsoft respectively. The Group receives royalty reports from Atari for RollerCoaster Tycoon 3 on a quarterly basis and Microsoft for Kinect Disneyland Adventures on a monthly basis. Revenue is accrued upon receipt of royalty reports. Royalty revenues were £0.2 million (2015: £0.3 million). 23 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTFINANCIAL REVIEW CONTINUED GROSS MARGIN BY REVENUE STREAM The digital distribution of products is undertaken from Frontier’s own online store and third party stores (Steam, Xbox, iOS, Amazon, Oculus). Commission payments for such third party distribution platforms are typically around 30% of net revenue. Distribution to USA and Russian customers of the Frontier store is undertaken by the wholly-owned subsidiary Frontier Developments Inc. (USA). PROFITABILITY Operating profit was £1.2 million compared with £1.6 million in the prior period. EBITDA was £4.9 million compared with £6.1 million in the prior year. The Board monitors performance on an adjusted operating profit basis in order to focus on the cash value drivers of the business whilst in transition. For adjusted operating profit the adjusting items were depreciation and amortisation, fair value on forward exchange contracts, R&D capitalised, share-based compensation, and tax credits due, offset against administration costs. The measures of EBITDA and adjusted EBITDA are shown below as sub totals for comparative purposes. The reconciliation is as follows: 2016 £’000 16,061 2015 £’000 17,078 % change (6%) – 3,429 (100%) Operating result Depreciation Gross margin Self-published External publishers Royalties, merchandise & other Amortisation and impairment EBITDA 49% (21%) Share-based compensation Fair value adjustments Gain on sale of investment Funding costs / listing expenses Dilapidations provision Subsidiary set-up fees EBITDA adjusted R&D capitalised Tax credits deducted from administration expenses Adjusted operating (loss) / profit 2016 £’000 1,238 262 3,376 4,876 738 551 – – 13 – 6,178 (8,857) (13) (2,692) 2015 £’000 1,566 271 4,246 6,083 767 72 1 – 37 7 6,967 (4,338) (163) 2,466 % (21%) (20%) (11%) (209%) 2014 £’000 (1,705) 225 1,802 322 286 32 (21) 217 36 – 872 4,035 (307) (3,470) Amortisation has reduced as in the period up to the release of Elite Dangerous, in December 2014 it was charged at a higher rate to reflect the development costs funded by the Kickstarter campaign of 2012. The adjusted operating result is stated after adding back material non-cash overheads and expensing capitalised development costs. The adjusted operating result was a loss of £2.7 million compared to a profit of £2.5 million in the prior year (and 2016 consensus figure of £6.9 million loss) reflecting the investment in the period where 51% of development activity was for product not yet fully released (2015: 30%). The Group was able to recognise income related to the delivery of a content update for Elite Dangerous: Horizons prior to the financial year end. The Group’s policy is to hedge 50% of estimated net income in foreign currencies (mainly US$ and €) on a rolling 12 month basis in order to manage the risk of currency fluctuations. Although the recognised forward sterling contracts increased cost in the year, the Group expects to benefit from a falling £ on the unhedged proportion. The increase in R&D capitalised reflects the change to all development being for self-published projects. Gross margin 16,265 20,644 204 137 Overall gross margin was 76% (2015: 91%), reflecting a shift to third party platform distribution which represented 75% of the value of self-published orders (2015: 28%) as the Group expanded the audience for Elite Dangerous via such third party channels. Gross margin is stated after deduction of third party commissions / royalties, payment charges and merchandise product costs. Gross margin reported in last year’s Annual Report has been reclassified in order to align with common industry gross margin reporting practice and as a result there are no costs attributed to external publisher work in the comparative period shown above. Costs of £2.5 million disclosed in cost of sales in the prior year associated with publisher revenues have been moved to development costs within the reclassified comparative shown in the income statement. 24 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCE INCOME Interest receivable from the Group’s cash resources was £0.04 million (2015: £0.05 million), reflecting both lower cash balances in the business and a lower interest rate environment worldwide. INCOME TAX Frontier is able to take advantage of cash-based tax credits in the UK for the creative service industry (Video Games Tax Relief) available from April 2014. With Video Games Tax Relief, eligible claims based on cultural tests administered by the British Film Institute (BFI) are made after the completion of a project and are based on relevant development expenses over the project life (up to two years). Frontier intends to recognise claims once they have been submitted to HMRC along with the certification from the BFI. In the first year since this is a new tax relief, acknowledgement by HMRC is also sought before recognition. Frontier has currently made Video Games Tax Relief claims totalling £0.9 million, £0.2 million of which have been received post year end and thus recognised in full. The remaining £0.7 million has not been recognised as we await acknowledgement from HMRC. The Group had a tax credit of £0.16 million for current taxes within which is a liability of £0.05 million relating to overseas tax and tax credits of £0.21 million recognised in the UK. In the prior year the Canadian operation incurred a £0.01 million charge. There is no deferred tax liability in the Group for the financial year ended May 2016 (prior year £0.04 million in Canada). The parent company continues to hold unused tax losses of £5.6 million to set against future taxable profits generated in the UK (2015: £5.9 million). EARNINGS PER SHARE The basic earnings per share for 2016 was 4.2 pence per share (2015: 4.9 pence) based on a weighted average number of shares of 33.8 million (2015: 33.5 million). On a diluted basis earnings per share was 4.1 pence (2015: 4.7 pence) based on a weighted average number of shares of 35.3 million (2015: 35.3 million). The adjusted basic earnings per share is based on the adjusted operating result with all development spend expenses shown on page 24. The adjusted loss per share was 8.0 pence compared to the prior period of 7.4 pence of earnings per share. On a diluted basis the adjusted loss per share is 8.0 pence (2015: earnings 7.0 pence). NON-CURRENT ASSETS AND RESEARCH AND DEVELOPMENT EXPENDITURE Investment in the Group’s own IP capitalised in the year rose to £8.9 million in line with our transition plans, reflecting Frontier’s commitment to a strategic software development programme in respect of Elite Dangerous, Planet Coaster and COBRA technology. Including the acquired rights, £11.5 million of self-published net book value is represented by the Elite Dangerous franchise, and £3.7 million for Planet Coaster, (scheduled for Q4 2016). Research and development expensed was £0.6 million (2015: £0.8 million). Additions for tangible assets mainly comprised computer equipment. SHARE ISSUES Employees converted 0.5 million share options into Ordinary Shares up to the end of May 2016; exercise proceeds were £0.4 million, and of these conversions 0.3 million of Ordinary Shares were transferred under arrangements with the Employee Benefit Trust, representing exercise proceeds of £0.2 million. The Group granted 0.2 million share options in the year (2015: 1.5 million) under CSOP and unapproved plans. 288,000 share options vested in the year. The Employee Benefit Trust operates by way of a loan under a drawdown facility of up to £10.0 million dated 9 December 2014. At 31 May 2016 the loan balance drawn down was £1.4 million, and the trust owned 230,400 Ordinary Shares. CURRENT ASSETS Trade and other receivables were £0.6 million lower at £2.4 million, caused by a reduction in local digital media tax credits due in Canada being reported before tax. Other short-term assets are represented by current tax assets in both the UK and Canada, which are reported via the tax line. For cash and cash equivalents see note 16. CURRENT AND NON-CURRENT LIABILITIES Trade and other current liabilities were £3.1 million (2015: £3.1 million). Current tax liabilities increased in Canada, whilst a reduction in trade payables was offset by a fair value provision for forward exchange rate contracts. Deferred income was £2.2 million (2015: 0.7 million) with £1.1 million (2015: £0.6 million) being reported in non-current liabilities, being revenue from the sale of lifetime passes which are being recognised annually over the expected length of the franchise. The Group did not recognise any deferred tax liabilities in the year. The Group fully utilised deferred tax assets (losses and provisions) to offset UK deferred tax liabilities (timing differences on fixed asset) resulting in a nil balance. Overseas deferred tax of £0.04 million crystallised in the year, all based in Canada. Dilapidation provisions are ongoing following the renewal of the leases in 2015 with termination dates of 2020. This Strategic Report was approved by the Board and signed on its behalf by: DAVID WALSH Chief Operations Officer 6 September 2016 NEIL ARMSTRONG Company Secretary and Chief Finance Officer 6 September 2016 25 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTDIRECTORS’ BIOGRAPHIES 2 4 6 1 3 5 26 1. DAVID GAMMON Non-Executive Chairman Joined: February 2012 David has widespread experience in developing and building technology based businesses. Since 2001, David has focused on finding, advising and investing in UK technology companies. David founded Rockspring, an advisory and investment firm, which focuses on early stage technology companies and where he continues as CEO today. Other current positions include Non-Executive Directorships at Accesso Technologies plc, Funderbeam Limited and Raspberry Pi Trading Limited, and he is Group Strategy Advisor at Marshall of Cambridge (Holdings) Limited. Previous experience includes Non- Executive Director (NED) and advisor at artificial general intelligence company DeepMind Technologies Limited, advisor to Hawkwood Capital LLP, NED at real-time location technology specialist Ubisense Trading Limited, NED at internet TV specialist Amino Technologies plc, NED at smart metering and software company BGlobal plc and acting CFO at internet specialist Envisional Solutions Limited. Earlier in his career David worked as an investment banker for over 15 years. Committees Audit, Remuneration, Nominations 4. JONNY WATTS Chief Creative Officer Joined: November 1998 Jonny has over 30 years’ experience in gaming. He joined the Company in 1998 from Sensible Software, and over the course of his career has been involved in all aspects of the creation of 25 published games such as Sensible Soccer and Cannon Fodder, along with Frontier’s suite of games, including Rollercoaster Tycoon 3, Elite Dangerous and the forthcoming Planet Coaster. Jonny’s titles span the full range from independent development to 400-person projects, encompass a diverse range of genres, and together have been enjoyed by over 35 million people worldwide. Jonny holds zoology and computer science degrees, is an active member of BAFTA, including serving as a judge for seven years, and an advocate of supporting young game developers. Jonny joined the Board in February 2012. Committees n/a FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 20162. DAVID BRABEN OBE Founder and CEO Founding shareholder January 1994 3. DAVID WALSH Chief Operations Officer Joined: September 2001 CORPORATE DIRECTORY David has over 25 years’ experience of engineering and commercial management roles in high-growth technology companies. In 2001 David joined Frontier from ARM, the FTSE / NASDAQ listed microprocessor IP licensing company where he served for six years, helping to grow the company and, as Director of Software Systems, setting up a division of the company to facilitate adoption of the architecture in key target market segments. David is President of Frontier Developments Inc., Frontier’s wholly owned Canadian subsidiary, and Frontier Developments Inc. (USA), Frontier’s wholly owned US subsidiary. Committees Remuneration DIRECTORS Mr D R Gammon Dr. D J Braben Mr D J Walsh Mr J F Watts Mr C W A Cotton COMPANY SECRETARY AND CFO Mr N R Armstrong REGISTERED OFFICE 306 Science Park Milton Road Cambridge CB4 0WG REGISTERED COMPANY NUMBER 02892559 (Incorporated and registered in England and Wales) David is the co-author of the seminal Elite title and has over 34 years’ experience in the gaming industry. David is also one of the six founding trustees of the Raspberry Pi Foundation, a charity which aims to inspire a new generation of children to get interested in computer science through the use of a low cost credit-card sized computer that plugs into your TV and a keyboard. David was formerly a Non-Executive Director of Phonetic Arts, a Cambridge- based company focused on speech synthesis that was acquired by Google in December 2010. David is a Fellow of the Royal Academy of Engineering, was honoured with a Fellowship of BAFTA in 2015, the recipient of three honorary doctorates (from Abertay University, The Open University and York University), and was honoured with an OBE in the 2014 Birthday Honours for services to the UK computer and video games industry. Committees Nominations 5. CHARLES COTTON Non-Executive Director Joined: July 2016 6. NEIL ARMSTRONG Company Secretary and CFO Joined: June 2010 Neil qualified with Ernst & Whinney (now Ernst & Young) as a chartered accountant in 1989. He has previously held various senior finance positions in the SME space with experience of media, manufacturing and international charities. In 2014 Neil was appointed as Treasurer to Frontier Developments Inc. (USA), Frontier’s wholly owned US subsidiary. Committees Audit, Remuneration, Nominations Charles has a successful worldwide track record in high-growth technology companies. He was a Supervisory Board member of Euronext Amsterdam listed Tele Atlas which was sold to TomTom for €2.8 billion in 2008; Executive Chairman of NASDAQ listed GlobespanVirata Inc.; and CEO of Virata Corp. which he took public on NASDAQ in 1999 and achieved a market capitalisation of $5 billion in 2000. Charles is an active member of the Cambridge technology community, holding a range of technical and financial roles. He also founded and is currently Chairman of Cambridge Phenomenon International Ltd and has co-authored two books; The Cambridge Phenomenon 50 Years of Innovation and Enterprise and The Cambridge Phenomenon: Global Impact. Committees Remuneration 27 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CORPORATE GOVERNANCEREPORT OF THE DIRECTORS FOR THE YEAR ENDED 31 MAY 2016 DIRECTORS The Directors who held office at 31 May 2016 and their interest in the share capital of the Company were as follows: Name David Gammon* David Braben David Walsh* Jonathan Watts Jonathan Milner* Total 2016 Number 311,720 17,160,953 1,245,820 55,390 662,104 19,435,987 * Including direct family holdings. DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The Directors are responsible for preparing the Strategic Report, Report of the Directors and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare such financial statements for each financial year. Under that law, the Directors have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and of the profit or loss of the Company and Group for that year. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether the applicable IFRSs have been followed, subject to any material departures disclosed and explained in the Company’s financial statements; and • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business. 2016 % 0.9 50.3 3.7 0.2 1.9 57.0 2015 Number 291,720 17,910,953 1,245,820 44,760 662,104 20,155,357 2015 % 0.9 53.3 3.7 0.1 2.0 60.0 The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that: • so far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and • the Directors have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors present their report for the Group and Company together with the financial statements for the year to 31 May 2016. The financial statements are prepared under International Financial Reporting Standards as adopted by the EU. BUSINESS REVIEW A review of the Group’s development performance and future development is provided in the Strategic Report (see page 9 to 19). Information on the financial risk management strategy is given within that report and in note 28 to the financial statements. GOING CONCERN The Group’s forecasts lead to a reasonable expectation that the Group has adequate resources to continue business for the foreseeable future. Further to a review of required cash resources the Group did not renew the revolving credit facility with Barclays Bank plc of £1 million, which expired on 8 May 2016. SHARE ISSUES Details of shares issued during the year are given in note 17 to the financial statements. The Company has one class of Ordinary Shares which carries no right to fixed income. Each share carries the right to one vote at general meetings of the Company, with the exception of shares held by the Employee Benefit Trust that are not eligible to vote under the Trust deed. DIRECTORS’ REMUNERATION AND SHARE OPTIONS Details of Directors’ remuneration and share options are provided within the Remuneration Report and are in addition to the interests in shares shown below. During the year David Gammon purchased 20,000 Ordinary Shares of 0.5 pence each in the Company at 240 pence per share. David Braben sold 750,000 Ordinary Shares at 240 pence per share. Jonathan Watts exercised share options in respect of 30,000 Ordinary Shares at an exercise price of 67 pence per Ordinary Share. On the same day as the exercise of these options, Mr Watts sold 19,370 Ordinary Shares at a price of 230 pence per Ordinary Share to meet the exercise costs and associated tax liabilities. 28 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016SUBSTANTIAL SHAREHOLDERS At 1 September 2016 the following, other than the Directors whose shareholdings are listed on page 28, had notified the Company of disclosable interests in 3% or more of the nominal value of Frontier Developments plc of 0.5 pence each: Name Lansdowne Partners Shareholding 3,263,089 Chris Sawyer Amati Venture Capital 1,283,726 1,073,230 % 9.6 3.8 3.1 AUDITOR A resolution to re-appoint Grant Thornton UK LLP as the Company’s Auditor will be proposed at the forthcoming Annual General Meeting. In accordance with normal practice, the Directors will be authorised to determine the Auditor’s remuneration. Approved by the Board of Directors and signed on behalf of the Board. NEIL ARMSTRONG Company Secretary 6 September 2016 DIRECTORS’ INDEMNITY ARRANGEMENTS During the year the Company purchased directors’ and officers’ liability insurance in respect of itself and its Directors. INTELLECTUAL PROPERTY AND RESEARCH AND DEVELOPMENT The Group actively protects its intellectual property via trademark registrations. Whilst the Directors consider these to be of significant value, the costs associated with registrations are expensed. The Group invests heavily in research and development through the COBRA engine and associated development tools. Costs that meet the criteria for capitalisation are included in intangible assets (see note 7 of the financial statements). The Group‘s total spend, including items expensed, in research and development to support its strategy was £9.5 million in the year (2015: £5.1 million). DIVIDEND The Directors are not recommending the payment of a dividend at this time (2015: £nil). EMPLOYEE INVOLVEMENT The Group seeks to encourage and promote an agile, open, fair and meritocratic culture of engagement, achievement and fun. The Group is committed to the principle of equal opportunities in employment. Its aim is to ensure that no job applicant or employee receives less favourable treatment or is placed at a disadvantage by requirements or conditions that cannot be shown to be justifiable and thereby promote equality of opportunity for employment within the Group on grounds such as sex, disability, marital status, religion, colour, race, nationality, ethnic or national grounds, age or sexual orientation. The Group’s policies and procedures are created and administered in such a way that they do not tolerate or foster such discrimination. The Group has an Employee Consultation group that meets regularly with senior management. The Group encourages employee involvement in the Group’s performance by using a contractual bonus scheme for all Non-Director level staff. In addition, it seeks to issue share options at relevant times. EMPLOYMENT POLICIES The Group is committed to following UK employment law for its Cambridge-based operations, the Canada Labour Code for its Halifax, Nova Scotia operations and applicable labor codes for its US operations based in Nevada and Kansas. Where possible the Group strives for similar employment and benefit arrangements between territories. HEALTH AND SAFETY AND ENVIRONMENT The aim of the Directors is to provide healthy, safe and congenial working conditions, equipment and systems of work for all employees. The Directors further intend to provide sufficient information, training and supervision to enable employees to do their work safely, effectively and without risk to themselves or to others. We acknowledge that we are responsible for the safety of visitors, both professional and social, who enter the premises. Frontier Developments plc recognises its duty to comply and operate within the requirements of statutory environmental legislation and is committed to minimising the environmental impacts of its business operations. The Directors of the Group will support this policy with this commitment in mind. 29 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED 31 MAY 2016 The Board of Frontier Developments plc established Corporate Governance arrangements through consideration of best practice guidelines and aspects of the UK Corporate Governance Code relevant to the Company. Progress is reviewed against the 12 principles of Corporate Governance issued by the Quoted Companies Alliance issued in the 2013 Corporate Governance Code for Small and Mid-sized Quoted Companies. Being an AIM-listed company Frontier is not required to comply with the UK Corporate Governance Code. THE BOARD The Board is responsible for the long-term growth and profitability of Frontier Developments plc. Among its responsibilities it works with management to set corporate values and to develop strategy, including deciding its risk management policy and financial objectives. A schedule of matters reserved for the Board’s resolution details key aspects of the Company’s affairs that are not delegated beyond the Board (including, among other things, approval of business plans and budgets, material expenditure and alterations to share capital). Approximately half of the time at Board meetings is set aside for Core Strategic issues. At least two meetings a year have extended time allowed where the focus is predominantly on Core Strategic issues. The following statements set out the principles and methods to which it adheres. BOARD MEETINGS AND PRACTICES The Board seeks to meet formally at least nine times a year including two extended strategic review days. The entire Board is invited to attend all meetings. In the financial year to 31 May 2016 the Board met on nine occasions. The Chairman and the Company Secretary plan the agenda for each Board meeting in consultation with all other Directors. The agenda is issued with supporting papers ahead of the Board meetings, along with appropriate information required to enable the Board to discharge its duties. The matters reserved for the attention of the Board include: • overall business strategy; • review of key operational and commercial matters; • review of key finance matters, including approval of financial plans, changes to capital structure, acquisitions and disposals of businesses, material capital expenditure and dividends; • governance: Board membership and powers including the appointment and removal of Board members, set up and delegation of matters to appropriate committees, and the reviewing of reporting back thereof; • approval of financial statements both interim and year end; • stock exchange related issues including the approval of communications to the stock exchange and communications with Shareholders in conjunction with any financial public relations firm; • subsidiary Board appointments, as the 100% shareholder, and review of key decisions at their Board meetings; • approval of acquisitions, disposals, borrowing facilities, premises and matters proposed by the corporate lawyer (Bird and Bird) and nominated advisor and broker, Numis Securities Limited; • appointment and performance review of key advisors; and • approval of letters of recommendation for the Employee Benefit Trust in the respect of the operation of share option schemes. BOARD COMPOSITION The Board of Frontier Developments plc is comprised of the Non-Executive Chairman, the Chief Executive Officer and two other Executive officers, one further Non-Executive Director and the Company Secretary. As per the individual biographies, the Directors have a range of experience and provide a balance of skills, experience and knowledge to the Board. All Directors are subject to election at the first Annual General Meeting following their appointment and to re-election thereafter at intervals of no more than four years. The composition of the Board of Directors is illustrated on pages 26 and 27. There were no changes in membership during the financial year 2015/16, however, on 1 July 2016, Jonathan Milner stepped down as Non-Executive Director and Charles Cotton was appointed in his place as NED. COMPANY SECRETARY The role of the Company Secretary is to ensure reliable and regular information flows to the Board and its committees and to ensure applicable rules and regulations are followed. The Company Secretary is available to all Directors to provide advice and assistance and is responsible for providing governance advice to the Board. 30 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016BOARD COMMITTEES The committees report regularly to the Board on the performance of the activities they have been assigned. Audit Committee The Audit Committee comprises only independent Non-Executive Directors; its members are: David Gammon and Neil Armstrong, supported by Amanda Alsop (Group Accountant). The Audit Committee determines the terms of engagement of the Company’s Auditor and, in consultation with the Auditor, the scope of the audit. It will receive and review reports from management and the Auditor relating to the interim and annual accounts as well as the accounting and internal control systems in use by the Company and Group. The Audit Committee has unrestricted access to the Company’s Auditor. The Audit Committee also reviews accounting and treasury policies, financial reporting including key performance indicators and supporting key areas of management judgements, and corporate governance standards. The Audit Committee is open to attendance by any Director and reports its key issues at Board meetings. In the financial year to 31 May 2016 the Audit Committee met on four occasions, including three meetings with the Auditor present. Key areas of activity • Financial reporting • Internal control and risk management reviews • External audit • Significant audit issues – revenue recognition • Treasury policy and foreign exchange risk review ATTENDANCE AT MEETINGS Number of meetings David Gammon David Braben David Walsh Jonathan Watts Jonathan Milner Neil Armstrong Board 9 Remuneration Committee 5 Nominations Committee 2 Audit Committee 4 9 9 9 9 9 9 5 – 5 – 4 5 2 2 – – – 2 Nominations Committee The Nominations Committee comprises David Gammon, David Braben and Neil Armstrong. The Nominations Committee reviews the constituents of the Board and its committees to ensure appropriate balanced representation. In the financial year to 31 May 2016 the Nominations Committee met on two occasions. Key areas of activity • Assessing the need for further Non-Executives • Review of senior positions required to strengthen the organisation Remuneration Committee During the financial year the Remuneration Committee comprised David Gammon, David Walsh, Jonathan Milner, Neil Armstrong and, as required, Yvonne Dawes (HR Manager). Charles Cotton replaced Jonathan Milner on 1 July 2016. The Remuneration Committee reviews the scale and structure of the Executive Directors’ future remuneration and the terms of the service agreements with due regard to the interests of shareholders. No Director is permitted to participate in discussions or decisions concerning their own remuneration. The Remuneration Committee also approves annual salary review limits, bonus schemes and payment limits, in addition to significant employee benefits, such as pensions, medical insurance and share option schemes. In the financial year to 31 May 2016 the Remuneration Committee met on five occasions. Key areas of activity • Review of staff benefits through employee surveys and benchmarking • Introducing performance related pay for Executives 4 – – – – 4 31 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORT CONTINUED FOR THE YEAR ENDED 31 MAY 2016 AUDITOR INDEPENDENCE Frontier Developments’ external Auditor is Grant Thornton UK LLP, who has served the Company since 2012. The external audit function provides independent review and audit. It is the responsibility of the Audit Committee to review and monitor the external Auditor’s independence, objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements as well as developing and implementing policy on the engagement of the external Auditor to supply non-audit services. The Audit Committee monitors procedures to ensure the rotation of external audit partners every five years and audit managers every seven years. SENIOR MANAGEMENT AND GROUP FUNCTIONS Frontier’s Senior Management are involved in multiple functions within the Company. They are responsible for reviewing the overall organisational structure of the Company, as well as refining and implementing the recruitment and retention programme in order to identify and hire the right candidates as required in addition to retaining existing staff members. INTERNAL CONTROL AND ASSESSMENT OF BUSINESS RISK The systems for internal control and risk management processes are designed to manage and mitigate risks that may impact achievement of the Company’s strategic objectives. Such systems can only provide a reasonable but not absolute level of assurance against material misstatement or loss. The strategic risks are regularly reviewed by the Board and a Corporate Risk Register (CRR) is maintained. The risk assessment process is facilitated by the COO who holds and appraises the Risk Register at least once a year. A further review is then undertaken with Senior Management and the Register itself is updated for the Executive Team to consider. Once the review has concluded the revised CRR is forwarded to the Audit Committee which assesses the updated register and confirms the key risks. A proposal for updating the risks reported in the Annual Report is then drawn up; the Audit Committee will then take its recommendations to the Board on key risks and the reporting thereof. CONTROL ENVIRONMENT AND INTERNAL AUDIT The Group has established operating procedures appropriate to its size and structure for reporting both financial and non-financial information to the Board. These include, but are not limited to: • operating guidelines and procedures with approval limits; • accounting policies, controls and procedures; • performance monitoring systems updated monthly for review at Board meetings; and • regulatory and legal changes that may materially impact on the business. Due to the Executive Directors’ close involvement in business activities, the Group does not currently believe that an internal audit function would be cost effective. The Audit Committee considers the need annually and will advise the Board as and when it feels this position is required. INVESTOR RELATIONS The Company places considerable importance on communication with Shareholders and maintains regular contact with its larger institutional Shareholders through its investor relations team, meetings with the Executive Directors and the Chairman and through investor events. The Directors, together with the Group’s advisors, held a number of meetings and discussions with key institutional Shareholders, ensuring clarity around the Group’s strategic intent. The Executive Directors and officers also took the opportunity during the year to hold external (London based) and on-site meetings to demonstrate Elite Dangerous: Horizons and Planet Coaster to both investors and potential investors. The Group uses the Annual General Meeting to encourage attendance and participation by Shareholders. In order to support internal capacity building for investor relations the Group has continued to be a member of the Quoted Companies Alliance and the IR Society. The latest results presentation is available through the Company’s investor relations website. 32 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016ANNUAL GENERAL MEETING The AGM will be held at: 306 Cambridge Science Park Milton Road Cambridge CB4 0WG UK On: 18 October 2016 At: 9.15am The Company’s Annual General Meeting (“AGM”) affords shareholders the opportunity to question the Chairman and the Board. The Chairmen of the Audit, Nominations and Remuneration Committees are also available to answer questions. All voting at the meeting will be conducted on a poll where every shareholder present in person or via proxy will have one vote per share held. The Group will convey the results of the poll via RNS following the AGM. Shareholders are invited to submit written questions in advance of the meeting. Questions should be sent to the Company Secretary, Neil Armstrong, Frontier Developments plc 306 Cambridge Science Park, Milton Road, Cambridge CB4 0WG, UK or via email to IR@frontier.co.uk Details of resolutions to be proposed at the meeting are set out in the Notice of General Meeting on pages 65 to 66. Notice of the AGM, the Form of Proxy and the Annual Report are sent to shareholders at least 20 working days before the AGM via post and online at AR2016.frontier.co.uk 33 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CORPORATE GOVERNANCEREMUNERATION REPORT FOR THE YEAR ENDED 31 MAY 2016 As Frontier Developments is an AIM-listed company it is not required to disclose all the information in the Remuneration Report; however, in the interests of transparency the Board has chosen to provide the following details as a voluntary disclosure. The Auditor is not required and has not, except where indicated, audited the information included in the Remuneration Report. The Remuneration Committee is responsible to the Board for developing remuneration policy. The Report of the Remuneration Committee has been approved by the Board of Directors for submission for Shareholders’ approval at the Annual General Meeting. REMUNERATION COMMITTEE TERMS OF REFERENCE The Remuneration Committee comprises both Non-Executive Directors of the Company, the Chief Operations Officer and the Company Secretary. The Remuneration Committee meets at least twice a year. After the financial year end Charles Cotton replaced Jonathan Milner and was appointed as chairman of the committee. The Remuneration Committee is responsible for the following functions: • setting of remuneration for Directors and officers, including pay, annual cash bonuses and long-term incentive arrangements; • approval of the overall increase for annual pay and bonus levels for all other staff; • approval of share option plans or arrangements; • setting of overall share option issues; • approval of any significant employee benefit arrangements; and • reviewing the Committee’s terms of reference and submitting to the Board for subsequent approval. Remuneration policy The Remuneration Committee approved the following policy: “Frontier endeavours to pay salaries and benefits around the median level for relevant skills. Where there is a material gap in remuneration, it is the policy of the Group to close this over time and subject to affordability.” The Remuneration Committee commissioned a report from KPMG LLP on Executive Incentives, bonus schemes and Long Term Incentive plans in order to bring incentives in line with the Group’s strategic objectives and investor interests by way of linking the majority of remuneration with market based performance criteria and structure commonly operated by AIM and FTSE 350 companies. Having reviewed the report the Remuneration Committee has decided to revise the annual bonus scheme to operate from 1 June 2016 based on EPS performance against market consensus. Arrangements for a Long Term Incentive Plan based on share price performance remain under consideration. COMPONENTS OF EXECUTIVE DIRECTORS’ REMUNERATION Overview The remuneration policy is to maintain an appropriate balance between fixed elements of remuneration and performance related elements, with an increasing proportion of the latter. Directors and staff are all encouraged to acquire shares in the Company and to hold these shares for the long term. This participatory element is an important aspect of the Group’s culture and its focus on long-term performance. The Remuneration Committee is pleased to report on progress against the policy objectives as follows: • the move to median level pay as benchmarked by KPMG LLP’s survey of Executive remuneration in AIM companies (March 2016); • from 1 June 2016 the introduction of an annual cash bonus scheme based on market consensus EPS; and • plans to set up a new Executive share option scheme based on share price performance. 34 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016COMPONENTS OF REMUNERATION PACKAGE Service contracts The service agreements adopted on 1 July 2013 for the Executive Directors can be terminated by either party provided at least six months’ notice has been given. Basic pay Salaries were last reviewed to take effect from 1 June 2014. Having considered the results of KPMG’s survey of Executive remuneration in AIM companies, an update of base pay will be implemented to take effect from 1 June 2016. Annual bonus A bonus payment totalling £0.07 million was made for the year to May 2015, paid in December 2015 representing 3.5% of the 5% eligible pool. The interim scheme adopted for the year to 31 May 2015 is based on a 5% pool of profit before tax and bonus allocated between Executive Directors and officer. The scheme operates in the same way as the staff contractual scheme whereby an element is paid pro rata and the remainder discretionary. Share options No further share option grants were made to Executive Directors and the Non-Executive Directors in the year to 31 May 2016. Pension contributions, medical insurance and life cover The Executive Directors joined the Group’s scheme for pension auto enrolment and life cover arrangements. A basic life cover sum of £25,000 per person was adopted from 1 October 2013. Pension auto enrolment of a 1% employer contribution was commenced from 1 July 2014. These benefits are the same as adopted for all UK-based staff. From August 2014, medical insurance including family cover was offered to all employees including Executive Directors. All Executive Directors elected to take up these arrangements. NON-EXECUTIVE DIRECTORS’ REMUNERATION The remuneration of Non-Executive Directors is determined by the Board and reflects their anticipated time commitment to fulfil their duties. The Non-Executive Directors’ remuneration is subject to the same principles of the remuneration policy for the Group and the same transitional phase of alignment to median market rates was undertaken. The letters of appointment of Non-Executive Directors can be terminated with six months’ notice for the Chairman and three months’ for all other Non-Executives under notice given by either party. Share warrants were issued to the Non-Executive Directors in connection with the IPO (see note 19 to the accounts). DIRECTORS’ REMUNERATION (AUDITED) The remuneration of the Directors is as follows: Current Directors Executive David Braben David Walsh Jonathan Watts Non-Executive David Gammon Jonathan Milner Total Salary / fee £’000 Bonus £’000 180 180 180 50 30 620 20 20 29 – – 69 Pension contribution £’000 Taxable benefits £’000 2 2 2 – – 6 1 1 1 – – 3 2016 Total £’000 203 203 212 50 30 698 2015 Total £’000 183 183 183 50 30 629 The expense recognised in the statement of comprehensive income for the Directors’ share options including Non-Executive Directors’ was £207,765 (2015: £375,525) with the amount attributable to the highest paid Director being £46,149 (2015: £34,612). The gain attributable to Directors on share options in the year at the date of exercise was £31,573 (2015: £1,246). A resolution to accept the Report of the Remuneration Committee will be put to Shareholders at the Annual General Meeting. DAVID GAMMON Chairman, Remuneration Committee 6 September 2016 35 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CORPORATE GOVERNANCEINDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FRONTIER DEVELOPMENTS PLC (REGISTERED NO: 02892559) We have audited the financial statements of Frontier Developments plc for the year ended 31 May 2016 which comprise the consolidated statement of cashflows, the Company statement of cashflows, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the Company statement of financial position, the consolidated statement of changes in equity, the Company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Directors’ Responsibilities Statement as set out on page 28, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate OPINION ON FINANCIAL STATEMENTS In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 May 2016 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. OPINION ON OTHER MATTER PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. ALISON SEEKINGS Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Cambridge 12 September 2016 36 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CONSOLIDATED STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 31 MAY 2016 Operating activities Cash generated from operations (see below) Finance income Taxes (paid) / received Cashflow from operating activities Investing activities Purchase of property, plant and equipment Expenditure on intangible assets Proceeds from disposal of non-derivative financial assets Employee Benefit Trust investment Interest received Cashflow from investing activities Financing activities Repayment of interest-free loan Proceeds from issue of share capital Cashflow from financing activities Net change in cash and cash equivalents from continuing operations Cash and cash equivalents at beginning of period Exchange differences on cash and cash equivalents Cash and cash equivalents at end of period 31 May 2016 £’000 31 May 2015 £’000 7,475 (37) (121) 7,317 (233) (8,965) – (563) 37 (9,724) – 276 276 (2,131) 10,478 263 8,610 7,334 (53) 23 7,304 (289) (4,385) 36 (551) 53 (5,136) (158) 159 1 2,169 8,612 (303) 10,478 The accompanying accounting policies and notes form part of this financial information. The following non-cashflow adjustments and adjustments for changes in working capital have been made to profit before tax to arrive at operating cashflow: CASH GENERATED FROM OPERATIONS Profit after tax Depreciation and amortisation Fair value adjustments Profit on disposal of fixed assets and available for sale assets Proceeds from the sale of non-current assets Share-based payment expenses Taxation Foreign exchange Operating cashflow before changes in working capital Net changes in working capital: Change in inventories Change in trade and other receivables Change in trade and other payables Change in provisions Cash generated from operations 31 May 2016 £’000 1,432 3,638 551 – – 738 (162) (267) 5,930 4 603 925 13 31 May 2015 £’000 1,647 4,517 31 1 16 767 (190) 242 7,031 2 74 190 37 7,475 7,334 37 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSCOMPANY STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 31 MAY 2016 Operating activities Cash generated from operations (see below) Finance income Taxes (paid) / received Cashflow from operating activities Investing activities Purchase of property, plant and equipment Expenditure on intangible assets Proceeds from disposal of non-derivative financial assets Employee Benefit Trust investment Interest received Cashflow from investing activities Financing activities Proceeds from issue of share capital Cashflow from financing activities Net change in cash and cash equivalents from continuing operations Cash and cash equivalents at beginning of period Exchange differences on cash and cash equivalents Cash and cash equivalents at end of period 31 May 2016 £’000 31 May 2015 £’000 6,572 (35) (148) 6,389 (233) (8,965) – (563) 35 (9,726) 276 276 (3,061) 10,203 389 7,531 7,468 (50) – 7,418 (287) (4,385) 36 (551) 50 (5,137) 159 159 2,440 7,997 (234) 10,203 The accompanying accounting policies and notes form part of this financial information. The following non-cashflow adjustments and adjustments for changes in working capital have been made to profit before tax to arrive at operating cashflow: 31 May 2016 £’000 1,531 31 May 2015 £’000 1,584 3,638 4,485 551 – 745 (217) (389) 5,859 4 185 511 13 6,572 – 3 761 (7) 233 7,059 2 676 (306) 37 7,468 CASH GENERATED FROM OPERATIONS Profit after tax Depreciation and amortisation Fair value adjustments Loss on disposal of fixed assets and available for sale assets Share-based payment expenses Taxation Foreign exchange Operating cashflow before changes in working capital Net changes in working capital: Change in inventories Change in trade and other receivables Change in trade and other payables Change in provisions Cash generated from operations 38 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 2016 Revenue Cost of sales Gross profit Other income Selling and distribution expenses Administrative expenses Research and development expenses Operating profit Finance income Profit before tax Income tax Profit for the period attributable to the equity holders of the parent All the activities of the Group are classified as continuing. Earnings per share Basic earnings per share Diluted earnings per share CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY 2016 FOR THE YEAR ENDED 31 MAY 2016 Profit for the period Other comprehensive income: Items that will be reclassified subsequently to profit and loss Exchange differences on translation of foreign operations Total comprehensive income for the period attributable to the equity holders of the parent The accompanying accounting policies and notes form part of this financial information. Notes 5 31 May 2016 £’000 21,363 31 May 2015 £’000 22,763 (5,098) 16,265 3 (3,887) (4,154) (6,989) 1,238 37 1,275 157 1,432 (2,119) 20,644 3 (2,749) (4,561) (11,771) 1,566 53 1,619 28 1,647 31 May 2016 p 31 May 2015 p 4.2 4.1 4.9 4.7 24 6 25 Notes 26 31 May 2016 £’000 1,434 31 May 2015 £’000 1,647 (4) 1,428 (27) 1,620 39 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 2016 (REGISTERED COMPANY NO: 02892559) Non-current assets Intangible assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Other short-term assets Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Share capital Share premium account Equity reserve Foreign exchange reserve Retained earnings Total equity Liabilities Current Trade and other payables Deferred income Current tax liabilities Total current liabilities Non-current Provisions Deferred income Deferred tax Total non-current liabilities Total liabilities Total equity and liabilities Notes 31 May 2016 £’000 31 May 2015 £’000 7 9 13 14 15 16 17 20 22 21 23 22 12 16,690 304 16,994 9 2,443 376 8,610 11,438 28,432 170 14,476 579 (61) 7,600 22,764 3,073 1,085 89 4,247 273 1,148 – 1,421 5,668 28,432 11,101 333 11,434 13 3,046 50 10,478 13,587 25,021 168 13,963 633 (57) 6,180 20,887 3,107 96 – 3,203 260 627 44 931 4,134 25,021 These financial statements were approved by the Directors on 6 September 2016 and signed on their behalf by: DAVID BRABEN OBE Director The accompanying accounting policies and notes form part of this financial information. 40 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016COMPANY STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 2016 (REGISTERED COMPANY NO: 02892559) Notes 31 May 2016 £’000 31 May 2015 £’000 Non-current assets Intangible assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Other short-term assets Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Share capital Share premium account Equity reserve Retained earnings Total equity Liabilities Current Trade and other payables Deferred income Total current liabilities Non-current Provisions Deferred income Total non-current liabilities Total liabilities Total equity and liabilities 7 9 13 14 15 16 17 20 22 23 22 16,690 304 16,994 9 2,586 376 7,531 10,502 27,496 170 14,476 579 7,133 22,358 3,103 822 3,925 273 940 1,213 5,138 27,496 These financial statements were approved by the Directors on 6 September 2016 and signed on their behalf by: DAVID BRABEN OBE Director The accompanying accounting policies and notes form part of this financial information. 11,101 333 11,434 13 2,771 13 10,203 13,000 24,434 168 13,963 633 5,607 20,371 3,080 96 3,176 260 627 887 4,063 24,434 41 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 2016 Share capital £’000 167 Share premium account £’000 13,805 Equity reserve £’000 790 Foreign exchange reserve £’000 (30) Retained earnings £’000 4,160 Total equity £’000 18,892 767 (495) (56) – 159 375 1,647 (27) 1,620 20,887 738 (412) (392) – 515 449 – – – 373 – 373 1,647 – 1,647 6,180 – – – (12) – (12) 1,432 1,432 – 1,432 7,600 (4) 1,428 22,764 – – – – – – – (27) (27) (57) – – – – – – – (4) (4) (61) At 31 May 2014 Increase in equity in relation to options issued Net loss on EBT shares Own shares held by the EBT Share-based payment transfer Issue of share capital less expenses Transactions with owners Profit for the year Other comprehensive income: Exchange differences on translation of foreign operations Total comprehensive income for the year At 31 May 2015 Increase in equity in relation to options issued Net loss on EBT shares Own shares held by the EBT Share-based payment transfer Issue of share capital less expenses Transactions with owners Profit for the year Other comprehensive income: Exchange differences on translation of foreign operations Total comprehensive income for the year – – – – 1 1 – – – – – – – 158 158 – – – 168 13,963 – – – – 2 2 – – – – – – – 513 513 – – – 767 (495) (56) (373) – (157) – – – 633 738 (412) (392) 12 – (54) – – – At 31 May 2016 170 14,476 579 The accompanying accounting policies and notes form part of this financial information. 42 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY 2016 At 31 May 2014 Increase in equity in relation to options issued Net loss on EBT shares Own shares held by the EBT Share-based payment transfer Issue of share capital less expenses Transactions with owners Profit for the year Total comprehensive income for the year At 31 May 2015 Increase in equity in relation to options issued Net loss on EBT shares Own shares held by the EBT Share-based payment transfer Issue of share capital less expenses Transactions with owners Profit for the year Total comprehensive income for the year At 31 May 2016 Share capital £’000 167 Share premium account £’000 13,805 Equity reserve £’000 777 Retained earnings £’000 3,668 – – – – 1 1 – – – – – – 158 158 – – 168 13,963 – – – – 2 2 – – – – – – 513 513 – – 170 14,476 762 (495) (56) (355) – (144) – – 633 745 (412) (392) 5 – (54) – – 579 – – – 355 – 355 1,584 1,584 5,607 – – – (5) – (5) 1,531 1,531 7,133 Total equity £’000 18,417 762 (495) (56) – 159 370 1,584 1,584 20,371 745 (412) (392) – 515 456 1,531 1,531 22,358 The accompanying accounting policies and notes form part of this financial information. 43 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MAY 2016 1. CORPORATE INFORMATION Frontier Developments plc (“the Group”) develops video games for the interactive entertainment sector. The Company is a public limited company and is incorporated and domiciled in the United Kingdom. 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 its North American subsidiaries, Frontier Developments Inc., are based in Canada and in the US. 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, except for financial instruments held at fair value. The financial information is presented in Sterling, the presentation and functional currency for the Group and Company. All values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated. The expenses stated in the income statement have been reclassified to allow comparability with other companies in the sector. Cost of sales is now represented by sales commission, royalties payable, online payment charges and physical merchandise costs. Operating costs have been analysed into selling and distribution, research and development and administration expenses. Going concern basis The Group’s forecasts and projections, taking account of current cash resources and 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 12 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. 3. PRINCIPAL ACCOUNTING POLICIES The majority of the principal accounting policies have been repositioned to the relevant notes to the financial statements. 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 is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. 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. 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. 44 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016Standards and interpretations not yet applied The following new standards, which are yet to become mandatory, have not been applied in the financial statements: • IFRS 9 Financial Instruments (IASB effective date 1 January 2018)* • IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)* • IFRS 16 Leases (effective 1 January 2019)* • Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (IASB effective date 1 January 2016) (Endorsed) • Annual Improvements to IFRSs 2010–2012 Cycle (IASB effective date generally 1 July 2014) (EU mandatory effective date is financial years starting on or after 1 February 2015) (Endorsed) • Annual Improvements to IFRSs 2012–2014 Cycle (effective 1 January 2016) (Endorsed) • Amendments to IAS 27 Equity Method in Separate Financial Statements (effective 1 January 2016) (Endorsed) • Disclosure Initiative: Amendments to IAS 1 Presentation of Financial Statements (effective 1 January 2016) (Endorsed) • Disclosure Initiative: Amendments to IAS 7 Statement of Cash Flows (effective 1 January 2017) • Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (effective 1 January 2017)* * Not yet EU endorsed. Based on the Group’s current business model and accounting policies, management does not expect material impacts on the financial information when the standards become effective except for IFRS 16. The Group is considering early implementation in line with the timing of its strategic intent to relocate into one building. The Group does not expect IFRS 15 to have a material impact on the business as the key principles have already been adhered to within the current revenue recognition policy. 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 have been moved to notes 5, 7 and 12 of the financial statements. 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 one operating segment, being self-published work, and royalties plus merchandise (in the prior financial year the Group recognised external publisher work as a separate segment, but has transitioned the business away from that type of work). 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: United Kingdom United States of America Rest of the world The Group’s gross profit by each revenue stream is as follows: Self-published External publishers Royalties, merchandise and other income 31 May 2016 £’000 3,271 31 May 2015 £’000 5,795 8,787 9,305 21,363 7,687 9,281 22,763 31 May 2016 £’000 16,061 31 May 2015 £’000 17,078 – 204 16,265 3,429 137 20,644 45 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 5. SEGMENT INFORMATION CONTINUED For further analysis of gross margin per revenue stream see Financial review page 24. All of the Group’s non-current assets are held within the UK. In both 2015 and 2016 there were no customers whose revenue accounted for more than 10% of the Group and Company’s total revenue, although the Group bears the credit risk associated with sales made through distribution platforms. All material revenue is categorised as either ‘self-published’, ‘external publishers’ or royalties, or merchandise and other. External publishers Self-published Royalties Other 31 May 2016 £’000 – 20,958 241 164 21,363 31 May 2015 £’000 3,429 18,558 322 454 22,763 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 release of full games and early access versions of self-published games royalties from published games, and associated merchandise. Revenue from released self-published titles is recognised on download of the game or upon purchase of in-game digital items. Revenue from pre-orders of games and crowd-funding for self-published titles is normally deferred, then 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. Revenue earned from royalties under distribution agreements is recognised in the period that the sales to the end customer are made, estimated on an accruals basis as royalty reports are received on a monthly or calendar quarter basis. Adjusted operating profit / (loss) costs are adjusted for non cash expenses and funding items as a key performance indicator for the Group and are also used by the Chief Executive Officer. Adjusted EBITDA was monitored in prior years and has been included as sub totals which are calculated as follows: Operating profit Depreciation Amortisation and impairment EBITDA Share-based compensation Dilapidation provision Fair value adjustments Gain on investment US set-up fees Adjusted EBITDA R&D capitalised Tax credits deducted from administration expenses Adjusted Operating (loss) / profit 31 May 2016 £’000 1,238 31 May 2015 £’000 1,566 262 3,376 4,876 738 13 551 – – 6,178 (8,857) (13) (2,692) 271 4,246 6,083 767 37 72 1 7 6,967 (4,338) (163) 2,466 Accounting policies Segment reporting The Group identifies one operating segment as the business is managed as a whole reflecting the transition of the Group from an external publisher to self-publishing. For management purposes the chief operating decision maker reviews the financial information which is consistent with that reported in its financial statements, with financial performance measured on the basis of contribution before central costs. Assets are not fully directly attributable to any separable activity, other than to self-published software intangibles. 46 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016Significant accounting estimates Revenue recognition Where self-published titles have pre-orders, recognition is made by reference to delivery of performance obligations. Revenue stemming from the sale of ‘early versions’ of a game are recognised from the date of release of the ‘early access versions’. Where pre-orders include delivery of the final version of the game, an estimate is made of this final element, which is based on man months to complete and is moved to deferred income until the final version is released to the public. Where the Group has made a self-published title containing a season of content (a number of periodic releases) recognition is made by reference to delivery of performance obligations which use a measure of development man months incurred per periodic release as an estimate of delivery of these performance obligations. 6. PROFIT BEFORE TAX This is stated after charging / (crediting): Amortisation and impairment on intangibles Depreciation of owned property, plant and equipment Research and development costs expensed Auditor remuneration: Audit of the parent and Group Audit related assurance services Operating leases – land and buildings 31 May 2016 £’000 31 May 2015 £’000 3,376 262 609 40 10 655 4,246 271 287 39 8 526 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. 7. INTANGIBLE ASSETS Group and Company The Group and Company 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: Cost At 31 May 2014 Additions – arising from internal development Disposals At 31 May 2015 Additions – arising from internal development Disposals At 31 May 2016 Amortisation and impairment At 31 May 2014 Charge for the period Charge for the period for acquired rights Disposals At 31 May 2015 Charge for the period Charge for the period for acquired rights Disposals At 31 May 2016 Net book value at 31 May 2016 Net book value at 31 May 2015 Development tools and licences £’000 Self-published software £’000 Third party software £’000 4,527 663 (848) 4,342 398 (774) 3,966 2,025 1,075 – (848) 2,252 1,127 – (774) 2,605 1,361 2,090 9,466 3,675 – 13,141 8,459 – 21,600 1,166 2,680 375 – 4,221 1,509 644 – 6,374 15,226 8,920 956 47 (9) 994 108 – 1,102 796 116 – (9) 903 96 – – 999 103 91 Total £’000 14,949 4,385 (857) 18,477 8,965 (774) 26,668 3,987 3,871 375 (857) 7,376 2,732 644 (774) 9,978 16,690 11,101 47 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 7. INTANGIBLE ASSETS CONTINUED Excluding an immaterial amount of third party software amortisation that is included in administrative expenses, all amortisation charges, impairments or reversals (if any) are included within research and development expenses. The Elite rights acquired from Professional Practice Automation LLP in 2014 are included within self-published software. The net book value of the acquired rights at 31 May 2016 was £4.1 million (2015: £4.8 million). Accounting policies 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; and • 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 license 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 three and five years. When a self-published game is intended for release on multiple platforms without material content change, amortisation is based on the length of time in which that game is expected to be supported in an unchanged format with a limit of up to six years. Acquired rights are assessed for the useful ‘franchise life’. For Elite Dangerous this is prudently estimated at eight years; within the sector successful franchises normally have useful lives of over ten years. Until completion the assets are subject to annual impairment testing. In most circumstances amortisation commences upon completion of the asset and is shown within research and development expenses 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. Research activities Expenditure on research activities is recognised as an expense in the period in which it is incurred. Impairment of intangible assets At each balance sheet date, the Group reviews the carrying amounts of its 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. Significant accounting estimates 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 and Company intangible assets including rights acquired at 31 May 2016 are £16,689,747 (2015: £11,100,568). 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. 48 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016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 Company 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 reflects this ‘contribution element’. The pledge levels also include delivery of a number of ‘early versions’ of the game and an estimated and prudent cost is applied as amortisation. In the case of Elite Dangerous 60% was used and upon release of the game, amortisation reverted to an estimated useful life of six years. In the financial year to May 2016 £1,509,238 of amortisation was recognised for these elements of Elite Dangerous (2015: £1,220,085). 8. INVESTMENT IN SUBSIDIARY UNDERTAKINGS The Company holds a £66 investment in Frontier Developments Inc., a company registered in Canada and a £6 investment in Frontier Developments Inc., a company registered in the US. These represent 100% of the Ordinary Share capital of the companies, which are engaged in publisher support services for the Group. Accounting policy Employee Benefit Trust As the Company is deemed to have control of its Employee Benefit Trust (EBT), it is treated as a subsidiary and consolidated for the purposes of the consolidated financial statements. The EBT’s assets (other than investments in the Company’s shares), liabilities, income and expenses are included on a line-by-line basis in the consolidated financial statements. The EBT’s investment in the Company’s shares is deducted from equity in the consolidated statement of financial position as if they were treasury shares. The gain or loss on transfer of the shares from the EBT to employees is recognised within equity. 9. PROPERTY, PLANT AND EQUIPMENT Group Cost At 31 May 2014 Additions Disposals At 31 May 2015 Additions Disposals At 31 May 2016 Depreciation At 31 May 2014 Charge for the period Disposals At 31 May 2015 Charge for the period Disposals At 31 May 2016 Net book value at 31 May 2016 Net book value at 31 May 2015 Fixtures and fittings £’000 Computer equipment £’000 Leasehold improvements £’000 273 76 (116) 233 2 – 235 230 52 (110) 172 41 – 213 22 61 1,399 213 (267) 1,345 231 – 1,576 1,118 216 (261) 1,073 221 – 1,294 282 272 10 – (6) 4 – – 4 6 3 (5) 4 – – 4 – – Total £’000 1,682 289 (389) 1,582 233 – 1,815 1,354 271 (376) 1,249 262 – 1,511 304 333 49 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 9. PROPERTY, PLANT AND EQUIPMENT CONTINUED Company Cost At 31 May 2014 Additions Disposals At 31 May 2015 Additions Disposals At 31 May 2016 Depreciation At 31 May 2014 Charge for the period Disposals At 31 May 2015 Charge for the period Disposals At 31 May 2016 Net book value at 31 May 2016 Net book value at 31 May 2015 Depreciation charges are apportioned to the income statement as follows: Charge Research and development expenses Administration expenses Total Fixtures and fittings £’000 Computer equipment £’000 Leasehold improvements £’000 258 75 (100) 233 2 – 235 223 49 (100) 172 41 – 213 22 61 1,299 212 (166) 1,345 231 – 1,576 1,050 189 (166) 1,073 221 – 1,294 282 272 4 – – 4 – – 4 4 – – 4 – – 4 – – Total £’000 1,561 287 (266) 1,582 233 – 1,815 1,277 238 (266) 1,249 262 – 1,511 304 333 Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 253 9 262 241 30 271 253 9 262 213 25 238 Accounting policies Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged to the income statement so as to write off the cost less estimated residual values over their expected useful lives on a straight line basis over the following periods: Fixtures and fittings Computer equipment Leasehold improvements 5 years 2½ years – 5 years Length of the lease Residual values and useful economic lives are assessed annually. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in administrative expenses. Impairment of property, plant and equipment At each balance sheet date, the Group reviews the carrying amounts of its individual property, plant and equipment 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 by a review of the expected useful economic life compared to that implied in the amortisation rate. 50 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 201610. OPERATING LEASES AS LESSEE At each period end the future operating lease payments were as follows: Minimum lease payments due within one year Minimum lease payments due within one to five years Minimum lease payments due in greater than five years Total Group and Company year ended 31 May 2015 £’000 31 May 2016 £’000 692 2,037 – 2,729 670 2,669 43 3,382 Group lease payments recognised as an expense during the year ended 31 May 2016: £651,695 (2015: £522,587). The lease payments relate to the rental contracts for the office buildings, which expire April 2020 and August 2020, a lease agreement for office equipment that will expire in January 2019 and a lease agreement for a commercial vehicle which expires in October 2018. A new lease agreement was entered into for Unit 321-3 Cambridge Science Park and is due to expire in August 2020. Both building leases have flexible break clauses that can be exercised if required by the Group. During the year the Group entered into two new lease agreements, one for office equipment and another for a commercial vehicle. Company property lease payments recognised as an expense during the year ended 31 May 2016: £651,695 (2015: £431,227), for the office equipment: 31 May 2016: £3,455 (2015: £nil) and for the commercial vehicle: 31 May 2016: £1,049 (2015: £nil). The lease payments relate to the rental contracts for the office buildings, which expire April 2020 and August 2020. The Group’s and Company’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. Accounting policy Operating lease agreements Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to the income statement net of any incentives received from the lessor on a straight line basis over the period of the lease. 11. FINANCIAL ASSETS AND LIABILITIES The carrying amounts presented in the statement of financial position relate to the following categories of financial assets and liabilities: Loans and receivables Trade and other receivables Cash and cash equivalents Total Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 1,598 8,610 10,208 1,592 10,478 12,070 1,781 7,531 9,312 1,656 10,203 11,859 Derivative financial instruments The Group’s financial instruments measured at fair value are summarised below: Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 Derivative financial (liabilities) / assets Total – Forward exchange contracts – held for trading (388) 163 (388) 163 The Group used forward foreign exchange contracts to mitigate exchange rate exposure arising from forecast sales in US Dollars. The forward contracts are considered by management to be part of economic hedge arrangements but have not been formally designated. All forward contracts are held at fair value through the profit and loss by reference to the exchange rate at the balance sheet date as supplied by the Group’s main banking partner. 51 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 11. FINANCIAL ASSETS AND LIABILITIES CONTINUED Financial liabilities Financial liabilities measured at amortised cost: Trade and other payables Total Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 2,337 2,337 2,806 2,806 2,367 2,367 2,779 2,779 Accounting policies Foreign currencies 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 average 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. 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 Loans and receivables comprise trade receivables, other receivables and cash and cash equivalents. Financial assets classified as loans and 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 asset’s carrying amount and the present value of estimated future cashflows discounted at the financial asset’s original effective interest rate. Financial assets and liabilities at FVTPL Derivative financial instruments are financial assets and liabilities measured at fair value through the profit and loss (FVTPL) and are financial instruments that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative instruments fall into this category. Financial instruments in this category are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets and liabilities in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. Financial liabilities The Group’s other financial liabilities include trade and other payables. 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). 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). 52 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 201612. DEFERRED TAX ASSETS AND LIABILITIES Deferred taxes arising from temporary differences can be summarised as follows: Accelerated capital allowances Short-term temporary differences (restricted) Tax losses (restricted) Total liability Balance brought forward Effect of tax rate change on opening balance Effect of exchange rate change on opening balance Movement in year Balance carried forward liability Consolidated year ended 31 May 2015 £’000 1,493 31 May 2016 £’000 1,885 31 May 2016 £’000 1,885 Company year ended 31 May 2015 £’000 1,493 (267) (1,618) – 44 – – (44) – (483) (966) 44 74 – (2) (28) 44 (267) (1,618) (483) (1,010) – – – – – – – – – – – – No deferred tax asset at 31 May 2016 has been recognised in the statement of financial position for the Group. The deferred tax liability at 31 May 2016 is £nil (2015: £43,689), with the 2015 liability being wholly attributable to the Canadian entity. The table below summarises the deferred tax assets for the Group and Company 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 2016 amount to £5.6 million (2015: £5.9 million). Deferred tax asset not provided Losses and Video Games Tax Relief Total Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 (893) (893) (1,122) (1,122) (893) (893) (1,122) (1,122) Significant accounting estimate 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. 13. INVENTORIES Inventories recognised in the statement of financial position can be analysed as follows: Merchandise Total inventory Group and Company year ended 31 May 2015 £’000 31 May 2016 £’000 9 9 13 13 There is no material difference between the replacement cost of inventory and the amounts stated above. For the year ended 31 May 2016 a total of £144,872 was expensed for merchandise (2015: £453,784). Accounting policy Inventories Inventories are stated at the lower of cost and net realisable value. Inventory comprises stock of merchandise items held at a third party distribution location; these are reviewed at the balance sheet date for an indication of slow moving and defective items. Where such an indication exists, a suitable provision is made. 53 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 14. TRADE AND OTHER RECEIVABLES Trade and other receivables recognised in the statement of financial position can be analysed as follows: Trade receivables, gross Intercompany receivable Trade receivables, net Derivative financial instruments Other receivables Financial assets Prepayments VAT and other taxes Non-financial assets Trade and other receivables Consolidated year ended 31 May 2015 £’000 134 31 May 2016 £’000 106 31 May 2016 £’000 75 Company year ended 31 May 2015 £’000 127 – 106 – 1,492 1,598 779 66 845 2,443 – 134 163 1,458 1,755 770 521 1,291 3,046 213 288 – 1,493 1,781 779 26 805 2,586 72 199 163 1,457 1,819 752 200 952 2,771 All amounts are short term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. No receivables are past their due date and the balances comprise receivables from highly credit rated customers. 15. OTHER SHORT-TERM ASSETS Other short-term assets comprise: Other short-term assets – current tax assets 16. CASH AND CASH EQUIVALENTS Cash and cash equivalents include the following components: Cash at bank and in hand GBP USD EUR CAD Financial assets Consolidated year ended 31 May 2015 £’000 50 31 May 2016 £’000 376 31 May 2016 £’000 376 Company year ended 31 May 2015 £’000 13 Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 6,352 1,404 301 553 8,610 7,944 2,229 55 250 10,478 6,352 877 301 1 7,531 7,944 2,195 55 9 10,203 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. Accounting policy Cash and cash equivalents Cash and cash equivalents comprise cash in hand and bank deposits available on demand. 54 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 201617. EQUITY Share Capital Group and Company movements in share capital Movements in Ordinary Shares are as follows: At 1 June 2014 and 31 May 2015 Ordinary Shares of 0.5 pence Shares issued on option exercises Shares issued to Employee Benefit Trust At 31 May 2016 Number ’000 33,580 217 300 34,097 2016 Value £’000 168 1 1 170 Number ’000 33,384 196 – 33,580 2015 Value £’000 167 1 – 168 During the year to 31 May 2016 the following share issues were made: From 1 June 2015 to 31 May 2016 517,084 Ordinary Shares of 0.5 pence were allotted as fully paid at an average premium of 99 pence being the exercise of share warrants by a third party (granted at IPO) and to the Employee Benefit Trust in order to meet employee exercise of share options. The average market value was 223.3 pence on the days of allotment. Accounting policy Share capital and reserves Share capital represents the nominal value of the shares that have been issued. Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. Equity reserve represents the value of the Employee Benefit Trust (EBT) that gets offset against distributable reserves and equity-settled share-based employee remuneration until such share options are exercised. Foreign exchange reserve represents the exchange difference on consolidation of overseas subsidiaries. Retained earnings include all current and prior period retained earnings. 18. EMPLOYEE REMUNERATION Remuneration recognised for employee benefits (including Directors) are analysed below. Staff costs for all employees, including Directors, consist of: Wages and salaries Social security costs Pension costs Share-based compensation 31 May 2016 £’000 10,603 31 May 2015 £’000 10,933 1,084 92 738 12,517 1,048 84 767 12,832 Included in the above payroll costs for the year ended 31 May 2016 is £7,954,705 (2015: £4,021,039) capitalised within intangible fixed assets (see note 7). Pension costs relate to contributions to the parent company’s defined contribution scheme for auto enrolment. The average number of employees, including Directors, during the period was: Research and development General and administrative 31 May 2016 £’000 267 31 May 2015 £’000 258 14 281 15 273 55 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 18. EMPLOYEE REMUNERATION CONTINUED Remuneration of Directors Directors’ emoluments Non-Executive fees Non-Executive consultancy fees Emoluments of highest paid Director Emoluments Remuneration of key management personnel Short-term employee benefits Salaries including bonuses Social security Pension contributions Benefits in kind Total short-term employee benefits Non-Executive fees Share-based compensation charge Total Number of key management personnel, including Directors, at the statement of financial position date* * Key management of the Group are the Board and senior management (functional heads). 31 May 2016 £’000 609 31 May 2015 £’000 540 20 60 20 60 31 May 2016 £’000 209 31 May 2015 £’000 180 31 May 2016 £’000 31 May 2015 £’000 1,401 178 13 8 1,600 60 351 2,011 13 1,321 168 12 7 1,508 50 488 2,046 14 A total of 8,000 share options were issued in the year to key management under the Company Share Option Plan. The number of options exercised for Ordinary Shares in the year ended 31 May 2016 was 223,600 from previous EMI grants. Accounting policy Employee benefits All accumulating employee compensated absences that are unused at the balance sheet date are recognised as a liability. The parent company operates a defined contribution retirement benefit scheme which was commenced on 1 January 2014 ahead of the Company’s expected auto enrolment date. Payments to defined contribution retirement benefit schemes are charged as an expense in the period to which they relate. 56 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 201619. SHARE OPTIONS The Group has a 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 in January 2014. The Group operates two EMI schemes (Pre July 2013), a Company Share Option Plan (from January 2014), and an Unapproved scheme (Pre July 2013) and plan (from January 2014). The share option grants for employees vest between one and three years with a contractual term of ten years. The option holder must be employed by the Group at the time of exercise. The unapproved options carry similar conditions as the main Company Share Option Plan, except for one tranche issued on 15 September 2014 that had a shorter vesting period of one year. Date of grant 6 December 2005 30 July 2012 15 May 2013 21 March 2014 15 September 2014 15 September 2014 15 September 2014 10 March 2015 10 March 2015 21 September 2015 21 September 2015 Scheme type 2002 EMI scheme Period when exercisable 2006–2015 Price in pence 67 2013 EMI scheme 2012–2022 2013 EMI scheme 2014–2023 Company Share Option Plan Company Share Option Plan Unapproved 2017–2024 2017–2024 2017–2024 Unapproved 2015–2024 Company Share Option Plan 2018–2025 Unapproved 2018–2025 Company Share Option Plan 2018–2025 Unapproved 2018–2025 89 95 224.5 257.5 257.5 257.5 230 230 193.5 193.5 2016 Number – 722,523 224,000 206,000 283,950 626,850 288,350 175,600 8,200 144,800 47,400 2015 Number 443,400 789,223 228,000 228,000 291,950 649,850 288,350 232,100 8,200 – – 2,727,673 3,159,073 A number of share warrants around the IPO and subsequent share options for Non-Executive Directors are as follows: Date of grant 8 July 2013 15 July 2013 15 July 2013 10 March 2015 Warrant type Unapproved pre–IPO warrants* Period when exercisable 2013–2023 Unapproved IPO warrants** 2013–2015 Unapproved IPO warrants* Unapproved Options 2013–2023 2018–2025 Price in pence 95 127 127 193.5 2016 Number 65,790 15,748 147,638 25,000 254,176 2015 Number 65,790 232,832 147,638 – 446,260 * These share options were issued to the Non-Executive Directors (including Rockspring, which is a company controlled by David Gammon) at the prevailing market price. ** Of these share options 217,084 were issued to Canaccord Genuity Limited for services rendered as part of the IPO process, which were exercised in July 2015, 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. 57 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 19. SHARE OPTIONS CONTINUED Movements in the number of employee and Non-Executive share options outstanding and their related weighted average exercise price are as follows: Opening balance Granted Exercised Forfeited Closing balance Exercisable at the year end 31 May 2016 Weighted average exercise price in pence 181.9 193.5 70.9 226.3 157.0 95.3 Number 3,372,501 193,200 (508,100) (91,500) 2,966,101 1,159,951 Group and Company year ended 31 May 2015 Weighted average exercise price in pence 100.0 216.6 78.7 210.4 181.9 87.6 Number 2,440,426 1,512,450 (496,375) (84,000) 3,372,501 1,674,051 The weighted average share price at the date of exercise of the share options was 217.3 pence. The share based compensation charge in the profit and loss was £738,020 of which £10,287 was in respect of warrants. The share options at the end of May 2016 including those for Non-Executive Directors but excluding those of third parties have a weighted average contractual life as follows: Expiry date December 2015 July 2022 May 2023 July 2023 July 2023 March 2024 September 2024 March 2025 September 2025 Total Exercise price per share Pence 67 89 95 95 127 224.5 257.5 230.0 193.5 Options Number – 722,523 224,000 65,790 147,638 206,000 1,199,150 208,800 192,200 2,966,101 31 May 2016 Weighted average remaining contractual life Months – 72 84 86 86 94 100 106 111 91 Group and Company year ended 31 May 2015 Weighted average remaining contractual life Months 7 84 96 98 98 106 112 118 – 90 Options Number 443,400 789,223 228,000 65,790 147,638 228,000 1,230,150 240,300 – 3,372,501 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 Company. 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 is 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: Share price at date of grant (pence) Exercise price Expected time to expiry (years) Risk-free interest rate (%) Expected dividend yield on shares (%) Expected volatility of share price (%) Fair value of options granted (pence) September 2015 193.5 March 2015 230 193.5 8.25 2.9 0 34 86.8 230 8.47 4.3 0 38 123.4 The assumptions of volatility for the September 2015 round are based on statistical analysis of share price data from the listing on AIM. 58 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016Employee Benefit Trust (EBT) On 5 December 2014 the Company set up an Employee Benefit Trust for the purposes of allowing employees to exercise their share options, including the choice of being able to do this on a cashless exercise basis. The exercise of options are approved by the Board at each Board meeting, outside of share dealing closed periods, under a letter of recommendation to the Trustees of the EBT. The fulfilment of the share option conversions, whether by issue of shares to the EBT or market purchases, is also made at the same time. The EBT is limited under ABI guidelines to holding not more than 10% of the Ordinary Share capital of the Group. The Trustees are appointed by Estera Trust (Jersey Limited) (formerly Appleby Trust (Jersey) Limited), who administer the trust. The number of share options exercised by employees in the year and fulfilled as part of these arrangements was 508,100 Ordinary Shares. The EBT purchased 195,899 Ordinary Shares from the market and 218,146 Ordinary Shares from employees exercising under the cashless options. The EBT had no other assets or liabilities at 31 May 2016 outside of its interest in 230,400 Ordinary Shares, and £1,353,770 (2015: £550,766) was the drawndown balance from the £10 million facility provided by the Company. Accounting policy Share-based payment transactions Share options are periodically granted to staff. Share options are measured at fair value at the date of grant 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 an equity reserve. 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 those 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. Upon the exercise or lapsing of the grant a transfer of the cumulative value of the grant is made from the equity reserve to the profit and loss reserve. 20. TRADE AND OTHER PAYABLES Trade and other payables recognised in the statement of financial position can be analysed as follows: Trade payables Intercompany payable Accruals Financial liabilities Derivative financial instruments Other taxation and social security Total trade and other payables Consolidated year ended 31 May 2015 £’000 1,014 31 May 2016 £’000 702 31 May 2016 £’000 701 Company year ended 31 May 2015 £’000 974 – 1,635 2,337 388 348 3,073 – 1,792 2,806 – 301 3,107 39 1,627 2,367 388 348 3,103 26 1,779 2,779 – 301 3,080 Trade and other payables are due within one year. The carrying values of trade and other payables are considered to be a reasonable approximation of fair value. 21. CURRENT TAX LIABILITIES Current tax liabilities in the statement of financial position can be analysed as follows: Current tax liabilities Consolidated year ended 31 May 2015 £’000 – 31 May 2016 £’000 89 31 May 2016 £’000 – Company year ended 31 May 2015 £’000 – The Group current tax liability is £89,136. This is represented by a UK tax liability of £nil and the remainder attributed to Canada. 59 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 22. DEFERRED INCOME Deferred income in the statement of financial position can be analysed as follows: Deferred income – Self-published activities Consolidated year ended 31 May 2015 £’000 723 31 May 2016 £’000 2,233 31 May 2016 £’000 1,762 Company year ended 31 May 2015 £’000 723 £1,085,612 of deferred income is to be recognised within one year with the remaining £1,147,767 due within the next five and a half years (expected remaining life of the franchise period). The deferred revenue is in respect of Elite Dangerous lifetime expansion passes purchased during the financial year, Elite Dangerous: Horizons revenue in respect of future promised content and Planet Coaster pre-orders. The deferred lifetime expansion passes revenue will be released over the remaining franchise period after the first paid-for update has been released. Elite Dangerous: Horizons and Planet Coaster pre-orders revenue will be released when the product has been delivered to the customer. The carrying values of deferred income are considered to be a reasonable approximation of fair value. 23. PROVISIONS Provisions for dilapidations Opening balance Provided for in period At period end Group and Company year ended 31 May 2015 £’000 223 31 May 2016 £’000 260 13 273 37 260 The dilapidation provision relates to the rental contracts for two office buildings (included within note 10). These leases expire in April 2020 and August 2020. 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. Accounting policy Provisions for dilapidations are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be estimated reliably. Timing or amount of the outflow may be uncertain. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. 24. FINANCE INCOME Finance income may be analysed as follows for the reporting periods presented: 31 May 2016 £’000 37 31 May 2015 £’000 53 31 May 2016 £’000 31 May 2015 £’000 94 (207) (44) (157) – – (28) (28) Interest income from cash and cash equivalents 25. TAXATION ON ORDINARY ACTIVITIES (a) Analysis of the charge in the period UK corporation tax based on the results for the year Overseas tax on the results for the period Video Games Tax Relief credits (UK) Deferred tax Tax on profit on ordinary activities 60 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016(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 19.6% (2015: 21.5%) as follows: Profit on ordinary activities before taxation Tax on profit on ordinary activities at standard rate Factors affecting tax expense for the year: Expenses not deductible for tax purposes Adjustments for opening deferred tax average rate Research and development tax credits Deferred tax Exercise of share options Losses to carry forward Total amount of tax 31 May 2016 £’000 1,275 31 May 2015 £’000 1,619 250 297 – (410) 44 (159) (179) (157) 347 236 (2) (282) – (163) (164) (28) 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 became available and the Group expects that some of its projects will qualify for this relief. Claims of £207,087 were received post period and recognised; a further claim of £664,761 has been made, but not yet received nor recognised. Accounting policy Income taxes Income tax expense comprises the current and deferred tax. Current income tax liabilities comprise those obligations to fiscal authorities relating to the current or prior reporting period that are unpaid at the statement of financial position date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the income statement, except where it relates to items outside profit or loss. Tax relating to items in other comprehensive income is recognised in other comprehensive income and tax relating to items directly in equity is recognised directly in equity. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the financial statements with their respective tax bases. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. However, deferred tax is not provided on the initial recognition of an asset or liability, unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax liabilities are always provided in full. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the reporting date. Deferred tax is recognised as a component of tax expense in the income statement. Deferred tax relating to items directly in equity is recognised directly in equity and deferred tax relating to items recognised in other comprehensive income is recognised in other comprehensive income. Tax credits The UK and Canada offer tax credits which are reported ‘above the line’, meaning that they are reported within the operating result. The Group recognises these on the likelihood of their receipt, taking into account any uncertainty in the claims, including uncertainty that arises in the first year of any claim for a new credit. 61 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 26. 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 adjusted operating profit as shown for adjusted items in note 5. Profit attributable to Shareholders (£’000) Weighted average number of shares Basic earnings per share (pence) 31 May 2016 1,432 31 May 2015 1,647 33,812,840 33,513,575 4.2 4.9 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 dilutive share options. Profit attributable to Shareholders (£’000) Diluted weighted average number of shares Diluted earnings per share (pence) 31 May 2016 1,432 31 May 2015 1,647 35,302,973 35,346,221 4.1 4.7 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 Ordinary Shares Under option Diluted average number of shares 31 May 2016 33,812,840 31 May 2015 33,513,575 1,490,133 1,832,647 35,302,973 35,346,221 The calculation of the adjusted earnings per share, based on the adjusted operating profit / (loss) as shown in detail in note 5, is as follows: Adjusted Operating (loss) / profit attributable to shareholders (£’000) Weighted average number of shares Adjusted basic (loss) / earnings per share (pence) Weighted average number of shares (diluted) Adjusted diluted earnings per share (pence) 31 May 2016 (2,691) 31 May 2015 2,466 33,812,840 33,513,575 (8.0) 7.4 35,302,973 35,346,222 (8.0) 7.0 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. Connected party Chris Sawyer – royalties Marjacq Micro Limited – sales commission Connected party Employee Benefit Trust – Share options exercised by employees Employee Benefit Trust – Shares issued and market purchases Movement in year Opening loan balance Closing loan balance 62 31 May 2016 £’000 Expense paid 84 31 May 2016 £’000 Creditor balance – Group and Company year ended 31 May 2015 £’000 Creditor balance – 31 May 2015 £’000 Expense paid 58 19 – 33 – Group and Company year ended 31 May 2015 £’000 31 May 2016 £’000 Change in value of loan expense paid 129 Change in value of loan (63) 614 551 – 551 675 804 550 1,354 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 201628. 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 co-ordinated in close co-operation 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. 28.1 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 11). 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 Board monitors the credit risk by reference to the date of receipt compared to the contractual terms. The Group considers it has minimal credit risk for liquid funds and other short-term financial assets as cash is held with reputable UK, US and Canadian banks. At the year end the Group’s financial assets are secured by a debenture issued in favour of Barclays Bank plc. 28.2 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 has entered into several forward contracts during the financial year in order to mitigate the risk of US currency movements. The closing value of the contracts has been disclosed within financial assets, and accounted for at fair value through the profit and loss. 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 Company year ended Consolidated year ended Company year ended CAD £’000 553 31 May 2016 Euro £’000 301 USD £’000 1,404 CAD £’000 728 31 May 2016 Euro £’000 301 USD £’000 878 CAD £’000 9 31 May 2015 Euro £’000 55 USD £’000 2,229 CAD £’000 9 31 May 2015 Euro £’000 55 USD £’000 2,195 Assets 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 EUR. An increase in Sterling would lead to a decrease in income and a decrease in equity. Effect of a 5% change in relevant exchange rate on: Income statement Equity Consolidated year ended 31 May 2015 £’000 31 May 2016 £’000 31 May 2016 £’000 Company year ended 31 May 2015 £’000 298 188 202 192 661 118 330 182 63 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 MAY 2016 28. FINANCIAL INSTRUMENT RISKS CONTINUED 28.3 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 facility, seek external funding or the need for securing finance from its shareholder base. The Group’s financial liabilities have contractual maturities as summarised below: As at 31 May 2016 Trade and other payables As at 31 May 2015 Trade and other payables Within 6 months £’000 2,281 2,748 The Company’s financial liabilities have contractual maturities as summarised below: As at 31 May 2016 Trade and other payables As at 31 May 2015 Trade and other payables Within 6 months £’000 2,311 2,721 Current Between 6 and 12 months £’000 56 58 Current Between 6 and 12 months £’000 56 58 Non-current Between 1 and 5 years £’000 Later than 5 years £’000 – – – – Non-current Between 1 and 5 years £’000 Later than 5 years £’000 – – – – 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. 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. Capital for the reporting period under review is summarised as follows: Total equity Borrowings (includes current element) Less cash and cash equivalent Total capital Consolidated year ended 31 May 2015 £’000 20,887 31 May 2016 £’000 22,764 31 May 2016 £’000 22,358 Company year ended 31 May 2015 £’000 20,371 – (8,610) 14,154 – (10,478) 10,409 – (7,531) 14,827 – (10,203) 10,168 30. ULTIMATE CONTROL The Directors consider that David Braben has a majority control of the Group by reference to his shareholding interest. 64 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016NOTICE OF ANNUAL GENERAL MEETING FRONTIER DEVELOPMENTS PLC (Incorporated and registered in England and Wales with no. 02892559) (THE ‘COMPANY’) Notice is hereby given that the Annual General Meeting of the Company will be held at the registered offices of Frontier Developments plc at 306 Science Park, Milton Road, Cambridge CB4 0WG on 18 October 2016 at 9:15am (London time) for the following purposes: ORDINARY RESOLUTIONS To consider and, if thought fit, pass the following resolutions as ordinary resolutions: Resolution 1. To receive and adopt the financial statements for the year ended 31 May 2016 together with the Reports of the Directors and Auditor thereon. Resolution 2. To appoint Mr Charles Cotton as a Non-Executive Director in accordance with Article 67 of the Company’s Articles of Association (the ‘Articles’). Resolution 3. To re-appoint Dr. David Braben as a Director, who has retired by rotation in accordance with Article 70 of the Articles and is therefore required to stand for re-election pursuant to Article 70 of the Articles. Resolution 4. To re-appoint Mr David Gammon as a Non-Executive Director, who has retired by rotation in accordance with Article 70 of the Articles and is therefore required to stand for re-election pursuant to Article 70 of the Articles. Resolution 5. To re-appoint Grant Thornton UK LLP as the Company’s Auditor in accordance with Section 489 of the Companies Act 2006 (the ‘Act’) until the conclusion of the next Annual General Meeting. Resolution 6. To authorise the directors of the Company (the ‘Directors’) to determine the Auditor’s remuneration for the ensuing year. Resolution 7. That in substitution for all authorities in existence immediately prior to this resolution being passed, the Directors be and are hereby generally and unconditionally authorised to exercise all powers of the Company, pursuant to Section 551 of the Act, to allot equity securities (within the meaning of Section 560 of the Act) up to an aggregate nominal amount of £56,854.22, which represents one-third of the nominal value of the Company’s issued share capital at the date of this notice, provided that this authority, unless renewed, varied or revoked by the Company in a general meeting, shall expire on the earlier of 15 months after the passing of this resolution or the conclusion of the Annual General Meeting of the Company to be held in 2017 save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. 65 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016ADDITIONAL INFORMATIONNOTICE OF ANNUAL GENERAL MEETING CONTINUED SPECIAL RESOLUTION To consider and, if thought fit, pass the following resolution as a special resolution: Resolution 8. THAT subject to the passing of resolution 7 above, the Directors be empowered in accordance with Section 570 of the Act to allot equity securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority conferred on them pursuant to resolution 7 above as if Section 561(1) of the Act did not apply to any such allotment provided that this power shall be limited to: (a) the allotment of equity securities in connection with an open offer or otherwise in favour of ordinary shareholders in proportion (as nearly as possible) to the respective number of shares held, or deemed to be held, by them subject only to such exclusions or other arrangements as the Directors may consider appropriate to deal with fractional entitlements or problems arising in any territory or with the requirements of any recognised regulatory body or stock exchange in any territory; and (b) the allotment of equity securities (otherwise than pursuant to sub-paragraph (a) above) up to an aggregate nominal amount of £17,056.26 which represents one-tenth of the nominal value of the Company’s issued share capital as at the date of this notice, provided that this power shall expire on the earlier of 15 months after the passing of this resolution or the conclusion of the Annual General Meeting of the Company to be held in 2017 save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Board may allot equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. By order of the Board DAVID GAMMON Chairman 8 September 2016 Frontier Developments plc 306 Science Park Milton Road Cambridge CB4 0WG 66 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016 EXPLANATORY NOTES To the Notice of Annual General Meeting Notes 1. A member entitled to attend and vote at the meeting is also entitled to appoint one or more proxies to attend, speak and vote instead of him. A member may appoint more than one proxy in relation to the meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. The proxy need not be a member of the Company but must attend the meeting to represent you. 2. 3. 4. 5. 6. You may not appoint more than one proxy to exercise rights attached to any one share. To appoint more than one proxy, you will need to complete a separate Form of Proxy in relation to each appointment. To request additional Forms of Proxy, please contact the Company Secretary on 01223 394300 or at Frontier Developments plc, 306 Science Park, Milton Road, Cambridge, CB4 0WG. You will need to state clearly on each Form of Proxy the number of shares in relation to which the proxy is appointed. A failure to specify the number of shares a proxy appointment relates to or specifying a number of shares in excess of those held by the member will result in the proxy appointment being invalid. If you wish your proxy to speak on your behalf at the meeting, you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to them. If you wish to appoint a proxy other than the Chairman, write the full name of your proxy in the box provided in the Form of Proxy. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. In the absence of instructions, the person appointed proxy may vote or abstain from voting as he / she thinks fit on the specified resolutions and, unless otherwise instructed, may also vote or abstain from voting on any other matter (including amendments to resolutions) which may properly come before the meeting. In the case of joint holders, the signature of any one of them will suffice but the names of all joint holders should be stated. The vote of the senior who tenders a vote (whether in person or by proxy) will be accepted to the exclusion of the votes of the other holders. For this purpose, seniority is determined by the order in which the names stand in the register of members in respect of the joint holding. To be effective, the Form of Proxy must be duly completed and deposited together with any power of attorney or other authority (if any) under which it is executed (or a duly certified copy of such power or authority) and lodged at PXS, Capita Asset Services, 34 Beckenham Road, Beckenham, Kent, BR3 4TU no later than 9.15am on 14 October 2016 (being not more than 48 hours (excluding non-working days) prior to the time fixed for the meeting). 7. Whether or not you propose to attend the Annual General Meeting, please complete, sign and submit a Form of Proxy to our registrars Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU by no later than the time and date specified above. 8. Completion and return of the Form of Proxy will not preclude a shareholder from attending and voting in person at the meeting. 9. The Company, pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, specifies that only those members entered on the register of members of the Company by close of business UK time on 14 October 2016 (being not more than 48 hours (excluding non-working days) prior to the time fixed for the meeting) shall be entitled to attend and vote at the meeting or, if the meeting is adjourned, by close of business UK time on such date being not more than 48 hours (excluding non-working days) prior to the date fixed for the adjourned meeting. Changes to entries on the register of members after such time shall be disregarded in determining the right of any person to attend or vote at the meeting. 10. The following documents will be available for inspection from the date of this notice until the meeting at the Company’s registered office and at the meeting convened by this notice: (a) register of Directors’ share interests; and (b) Directors’ service contracts and letters of appointment (as applicable). 11. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member. 67 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016ADDITIONAL INFORMATION ADVISORS AND COMPANY INFORMATION COMPANY SECRETARY AND CFO Mr N R Armstrong REGISTERED AND HEAD OFFICE 306 Science Park Milton Road Cambridge CB4 0WG Website www.frontier.co.uk REGISTERED NUMBER 02892559 (Incorporated and registered in England and Wales) BROKER AND NOMINATED ADVISOR Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT JOINT BROKER FinnCap Limited 60 New Broad Street London EC2M 1JJ AUDITOR Grant Thornton UK LLP 101 Cambridge Science Park Milton Road Cambridge CB4 0FY LEGAL ADVISORS TO THE COMPANY Bird & Bird LLP 12 New Fetter Lane London EC4A 1JP REGISTRARS Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU United Kingdom 68 FRONTIER DEVELOPMENTS PLCANNUAL REPORT AND ACCOUNTS 2016This report is printed on Condat Silk paper. Manufactured at a mill that is FSC® accredited. Printed by Principal Colour. Principal Colour are ISO 14001 certified, Alcohol Free and FSC® Chain of Custody certified. Designed and produced by SampsonMay Telephone: 020 7403 4099 www.sampsonmay.com FRONTIER DEVELOPMENTS PLC 306 Science Park Milton Road Cambridge CB4 0WG 

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