Next Games

Next Games Corp.: Change in Accounting Policy Related to Publishing and Product Development Functions

Next Games Corporation Company Release February 28, 2020 at 07:58 a.m. EET

Next Games is applying a change to its accounting policy relating to its research and development, sales and marketing as well as administrative functions. With the change, the company aims to improve its financial communication by providing investors more understandable, comprehensible and better structured financial information regarding the company’s product development and publishing operations in its financial reporting.

The accounting policy change relates to the classification of development costs for published products. Previously all game development costs, both for published and unpublished games, were reported under the Research and Development function. In the future development activities relating to published games are reported as part of the group’s Marketing and Sales function, and only costs related to unpublished games will be reported under the Research and Development function. The accounting policy change does not affect group-level revenues, EBIT, gross profit or balance sheet reporting.

In addition, a new Alternative Performance Metric, “Publishing Operations’ Profitability” will be introduced as supplemental information in Next Games financial reporting. The aim of the new alternative performance metric is to provide investors with meaningful insight into the profitability of the company’s publishing operations. Publishing Operations’ Profitability metric is defined as revenues generated by the company’s published games, adjusted by the costs and investments related to game’s maintenance, further development, marketing and customer support.

Both, 2018 financials and interim report Jan 1 – Jun 30, 2019 have been adjusted to reflect the changes in accounting policy. Detailed information regarding the change is listed below and adjusted figures presented in the attached tables.

Key changes in classifications of cost under the new accounting policy

Due to the nature of the free-to-play business model, Next Games will group together costs relating to its publishing operations and classify costs related to the continued development of running published games as a service as maintenance, rather than as Research and Development activities. These costs, relating to maintaining and improving published games are not capitalized. The change in accounting policy will improve predictability and comparability of the group’s profitability between periods, independent of which development phase games are in, and whether or not related research and development costs are capitalized.

Previously all game development costs, both for published and unpublished games, were reported under Next Games’ Research and Development function. Going forward, only costs related to unpublished games and technology development will be reported under the research and development function, this includes but is not limited to:

  • Personnel expenses relating to development activities, incl. Salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased services and outsourced development expenses
  • Testing activities related to research and development and other research-related costs
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Capitalization and depreciation related to Research and Development, as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Previously only costs related to marketing and personnel working in marketing were allocated under the Sales and Marketing function. Going forward, in addition to marketing activities, Next Games’ sales and marketing function will include all costs related to maintenance and continued development of published games. This includes but is not limited to:

  • Personnel expenses related to continued development and marketing of published games incl. salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased services, such as customer support
  • Direct marketing purchases such as player acquisition and other marketing expenses
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Capitalization and depreciation related to the marketing and sales function, as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Previously all costs related to the Group’s finance and legal department, general administration i.e. executive management as well as human resources were allocated under its administrative function. This also includes any expenses related to the company’s initial public offering and general financial services, such as auditing services. Going forward, the function will also include investor relations and the company’s corporate communications costs. This includes but is not limited to:

  • Personnel expenses of those working in administration incl. salaries, side costs, pensions, as well as an allocation of IFRS 2 share-based payments
  • Purchased administrative services and temporary administrative workforce
  • A general cost allocation factor based on the number of personnel in relation to the Group’s total headcount
  • Other corporate communication; the company’s corporate communication, investor relations and public relations costs
  • Capitalizations and depreciations related to the function as well as well as other tangible and intangible depreciations allocated via the general cost allocation factor, including those related to IFRS 16

Key impact from the accounting policy change for 2018

  • Research and development costs decreased EUR 2.8 million in 2018
  • Sales and marketing costs increased EUR 3.1 million in 2018
  • Administration costs decreased EUR 0.3 million in 2018
  • Net effect on the result for the financial year 2018 was EUR 0

Key impact from the accounting policy change for Jan 1 – Jun 31, 2019

  • Financial statement Jul 1 – Dec 31, 2019has been drafted according to the new policy
  • Research and development costs decreased EUR 1.4 million in Jan 1 – Jun 31, 2019
  • Sales and marketing costs increased EUR 1.4 million in Jan 1 – Jun 31, 2019
  • Administration costs decreased EUR 0.03 million in Jan 1 – Jun 31, 2019
  • Net effect on the result was EUR 0 Jan 1 – Jun 31, 2019

TABLES 2018

  Adjusted    
EUR thousand Jan-Dec 2018 Jan-Dec 2018 Change
       
Revenue 35,245 35,245 0
Cost of Revenues -13,952 -13,952 0
Gross Profit 21,294 21,294 0
Other Operating Income 71 71 0
Research and Development -7,541 -10,418 2,877
Sales and Marketing -26,776 -23,643 -3,133
Administrative -3,963 -4,218 255
Operating Profit (EBIT) -16,914 -16,914 0

  Adjusted     Adjusted    
EUR thousand Jan-Jun 2018 Jan-Jun 2018 Change Jul-Dec 2018 Jul-Dec 2018 Change
Revenue 10,477 10,477 0 24,769 24,769 0
Cost of Revenues -4,443 -4,443 0 -9,509 -9,509 0
Gross Profit 6,034 6,034 0 15,260 15,260 0
Other Operating Income 45 45 0 27 27 0
Research and Development -3,481 -3,555 74 -4,060 -6,863 2,803
Sales and Marketing -5,564 -5,405 -159 -21,212 -18,238 -2,974
Administrative -1,987 -2,073 86 -1,975 -2,146 171
Operating Profit (EBIT) -4,954 -4,954 0 -11,961 -11,961 0

TABLES 2019

  Adjusted    
EUR thousand Jan-Jun 2019 Jan-Jun 2019 Change
Revenue 19,224 19,224 0
Cost of Revenues -7,974 -7,974 0
Gross Profit 11,250 11,250 0
Other Operating Income 9 9 0
Research and Development -3,284 -4,679 1,395
Sales and Marketing -9,838 -8,414 -1,424
Administrative -1,632 -1,661 29
Operating Profit (EBIT) -3,495 -3,495 0

Publishing Profitability 2018 and 2019

EUR thousand Jan-Jun 2018 Jul-Dec 2018 Jan-Dec 2018
Revenue 10,477 24,769 35,245
Gross Profit 6,034 15,260 21,294
Sales & Marketing Cost -5,564 -21,212 -26,776
Publishing Operations EBIT 470 -5,952 -5,482
Depreciations of the Publishing Operation 69 961 1,030
Publishing Operations EBITDA 538 -4,991 -4,452

EUR thousand Jan-Jun 2019 Jul-Dec 2019 Jan-Dec 2019
Revenue 19,224 15,477 34,701
Gross Profit 11,250 8,418 19,668
Sales & Marketing Cost -9,838 -7,756 -17,594
Publishing Operations EBIT 1,412 662 2,074
Depreciations of the Publishing Operation 847 846 1,693
Publishing Operations EBITDA 2,259 1,508 3,767

Additional information:

Annina Salvén, CFO,  +358 (0) 40 588 3167
investors@nextgames.com

Certified Adviser: Danske Bank A/S, Finland branch, tel. +358 10 546 7938

About Next Games

Next Games (Helsinki Nasdaq First North: NXTGMS) is the first publicly listed mobile game developer and publisher in Finland, specializing in games based on entertainment franchises, such as movies, TV series or books. The developers of the critically acclaimed The Walking Dead games redefines the way franchise entertainment transforms into highly engaging service-based mobile games. In summer 2018, Next Games launched The Walking Dead: Our World, which utilizes cutting edge AR technology and is powered by Google Maps. Currently Next Games is working on multiple new games based on popular entertainment franchises including, Blade Runner Nexus, for the popular Blade Runner franchise and a mobile game based on Netflix’s Stranger Things. For more information head to www.nextgames.com