Next Games

NEXT GAMES CORPORATION – TRANSITION TO IFRS REPORTING

Next Games Corporation Company Release 13 February 2019 at 13:00 EET

On January 10, 2019, Next Games published preliminary information prepared in accordance with the FAS standard concerning its financial performance for fourth quarter 2018 and announced that the company will transition from Finnish Accounting Standard (FAS) to International Financial Reporting Standards (IFRS) reporting. Previously Next Games has prepared its published financial statements in accordance with Finnish Accounting Standards (FAS).

Next Games has prepared the following unaudited IFRS financial information to provide its investors comparative information on Next Games’ previously published consolidated statement of comprehensive income, consolidated statement of financial position and key figures for the years ended December 31, 2016 and December 31, 2017 and the six month periods ended June 30, 2016, December 31, 2016, June 30, 2017, December 31, 2017 and June 30, 2018 as well as consolidated statement of financial position as at the transition date to IFRS January 1, 2016.

Key differences to the Finnish Accounting Standards resulting from the transition to IFRS are described in accompanying notes to this company release. For additional information on the historical financial information prepared in accordance with FAS, refer to the audited historical consolidated financial statements and the unaudited half year consolidated financial information of Next Games on the company’s website at www.nextgames.com.

The financial information included in this release is unaudited except for the consolidated statement of financial position information for the year ended 2016 and 2017. As part of the accounting standard change, Next Games changed the presentation of expenses of the consolidated statement of comprehensive income from classification based on nature to classification based on function. Therefore, also the FAS income statement figures are unaudited from financial years 2016 and 2017.

Next Games publishes its full-year financial bulletin on February 15, 2019.

Key Financial Figures (IFRS)

1000 EUR 1.1-31.12.2018 1.7-31.12.2018 1.1-30.6.2018 1.1-31.12.2017 1.7-31.12.2017 1.1-30.6.2017 1.1-31.12.2016 1.7-31.12.2016 1.1-30.6.2016
Revenue, gross bookings and gross Margin
Revenue 35,245 24,768 10,477 32,466 13,014 19,452 31,112 18,326 12,786
Gross bookings 35,788 25,339 10,449 30,930 12,641 18,289 33,594 19,828 13,766
Gross Profit 21,294 15,260 6,034 19,308 8,118 11,190 16,870 9,828 7,043
Operating profit and adjusted Operating Profit
Operating profit (loss) -16,914 -11.961 -4,954 -5,072 -4,202 -870 -2,192 1,593 -3,785
Depreciation and amortisation (excluding IFRS 16) 1,654 -1,513 140 382 132 251 244 122 123
Adjusted operating profit (loss) -15,261 -10,447 -4,814 -4,690 -4,070 -619 -1,948 1,714 -3,662
As percentage of revenue
Gross Profit (%) 60 % 62 % 58 % 59 % 62 % 58 % 54 % 54 % 55 %
Operating profit margin (%) -48 % -48 % -47 % -16 % -32 % -4 % -7 % 9 % -30 %
Adjusted Operating Profit (%) -43 % -42 % -46 % -14 % -31 % -3 % -6 % 9 % -29 %

2018

Consolidated statement of comprehensive income Jan 1 – Jun 30, 2018

EUR thousand   FAS Total IFRS adjustments IFRS
Jan 1 – Jun 30, 2018 Jan 1 – Jun 30, 2018
Revenue from contracts with customers 10 477 10 477
Cost of revenue -4 382 -60 -4 443
Gross profit 6 094 -60 6 034
Other operating income 45 45
Research and development costs -6 647 3 092 -3 555
Sales and marketing costs -5 338 -68 -5 405
Administrative costs -2 145 72 -2 073
Operating profit -7 990 3 036 -4 954
Finance income 722 722
Finance costs -1 461 995 -466
Finance costs – net -740 995 255
 
Share of associates’ profit/loss -116 -116
 
Profit before taxes   -8 730 3 915 -4 815
Income taxes
Change in deferred tax 9 -742 -733
Total income tax expense   9 -742 -733
Profit for the period   -8 721 3 173 -5 547
Total comprehensive income for the period   -8 721 3 173 -5 547

Consolidated balance sheet June 30, 2018

EUR thousand   FAS Total IFRS adjustments IFRS
June 30, 2018   June 30, 2018
Assets
Non-current assets
Intangible assets 6 664 3 229 9 893
Goodwill 790 2 554 3 344
Property, plant and equipment 232 1 434 1 666
Investments 63 -63 0
Share of associates 393 393
Long-term debtors 669 669
Deferred tax assets 2 785 -889 1 896
Non-current assets total 11 204 6 658 17 863
Current assets
Trade and other receivables 6 368 -9 6 359
Cash and cash equivalents 16 940 16 940
Current assets total 23 308 -9 23 300
 
Total assets 34 513 6 650 41 162
 
Equity and liabilities
Shareholders’ equity
Share capital 80 80
Invested non-restricted equity reserve 53 307 589 53 897
Retained earnings -16 755 2 922 -13 832
Profit (loss) for the period -8 721 3 173 -5 547
Shareholders’ equity 27 912 6 685 34 597
Liabilities
Non-current liabilities
Governmental agency loan 663 -35 628
Non-current liabilities total 663 -35 628
Current liabilities
Governmental agency loan 112 112
Deferred revenue 886 886
Trade payables 2 042 2 042
Other liabilities 192 192
Accruals and deferred income 2 705 2 705
Current liabilities total 5 937 5 937
Liabilities total 6 600 -35 6 565
Equity and liabilities total 34 513 6 650 41 162

2017

Consolidated statement of comprehensive income Jan 1 – Dec 31, 2017

EUR thousand   FAS Total IFRS adjustments IFRS
Jan 1 – Dec 31, 2017 Jan 1 – Dec 31, 2017
Revenue from contracts with customers 32 466 32 466
Cost of revenue -13 042 -115 -13 158
Gross profit 19 423 -115 19 308
Other operating income 53 53
Research and development costs -9 274 2 240 -7 034
Sales and marketing costs -12 579 -135 -12 714
Administrative costs -3 981 -705 -4 686
Operating profit -6 357 1 285 -5 072
Finance income 37 37
Finance costs -507 -34 -541
Finance costs – net -470 -34 -504
 
Share of associates’ profit/loss -455 -455
 
Profit before taxes   -6 827 797 -6 031
Income taxes 0
Change in deferred tax 469 -574 -105
Total income tax expense   469 -574 -105
Profit for the period   -6 359 223 -6 137
Total comprehensive income for the period   -6 359 223 -6 137

Consolidated statement of comprehensive income Jul 1 – Dec 31, 2017

EUR thousand FAS Total IFRS adjustments IFRS
Jul 1 – Dec 31, 2017 Jul 1 – Dec 31, 2017
Revenue from contracts with customers 13 045 13 045
Cost of revenue -4 841 -55 -4 896
Gross profit 8 204 -55 8 149
Other operating income 16 16
Research and development costs -5 869 2 183 -3 686
Sales and marketing costs -6 786 -31 -6 817
Administrative costs -1 946 81 -1 865
Operating profit -6 380 2 177 -4 202
Finance income 36 36
Finance costs -347 -6 -353
Finance costs – net -311 -6 -317
 
Share of associates’ profit/loss -290 -290
 
Profit before taxes -6 690 1 881 -4 809
Income taxes 0
Change in deferred tax 476 -591 -115
Total income tax expense 476 -591 -115
Profit for the period -6 215 1 290 -4 924
Total comprehensive income for the period -6 215 1 290 -4 924

Consolidated statement of comprehensive income Jan 1 – Jun 30, 2017

EUR thousand FAS Total IFRS adjustments IFRS
Jan 1 – Jun 30, 2017 Jan 1 – Jun 30, 2017
Revenue from contracts with customers 19 452 19 452
Cost of revenue -8 201 -60 -8 262
Gross profit 11 251 -60 11 190
Other operating income 6 6
Research and development costs -3 405 57 -3 348
Sales and marketing costs -5 794 -103 -5 897
Administrative costs -2 035 -785 -2 821
Operating profit 22 -892 -870
Finance income 0 0
Finance costs -160 -28 -188
Finance costs – net -160 -28 -187
 
Share of associates’ profit/loss -165 -165
 
Profit before taxes -137 -1 084 -1 222
Income taxes -1 -1
Change in deferred tax -7 17 10
Total income tax expense -8 17 9
Profit for the period -145 -1 068 -1 212
Total comprehensive income for the period -145 -1 068 -1 212

Consolidated balance sheet December 31, 2017

EUR thousand   FAS Total IFRS adjustments IFRS
December 31, 2017   December 31, 2017
Assets
Non-current assets
Intangible assets 5 917 859 6 776
Goodwill 903 2 441 3 344
Property, plant and equipment 136 139 275
Investments 1 074 -1 074 0
Share of associates 509 509
Long-term debtors 820 820
Deferred tax assets 2 776 -147 2 629
Non-current assets total 11 626 2 727 14 353
Current assets
Trade and other receivables 4 987 -9 4 978
Cash and cash equivalents 26 377 26 377
Current assets total 31 364 -9 31 356
 
Total assets 42 990 2 719 45 709
 
Equity and liabilities
Shareholders’ equity
Share capital 80 80
Invested non-restricted equity reserve 53 277 589 53 866
Retained earnings -10 395 1 958 -8 437
Profit (loss) for the period -6 359 223 -6 137
Shareholders’ equity 36 602 2 770 39 372
Liabilities
Non-current liabilities
Governmental agency loan 691 -49 642
Non-current liabilities total 691 -49 642
Current liabilities
Governmental agency loan 84 84
Lease liabilities 224 224
Deferred revenue 914 914
Trade payables 1 162 1 162
Other liabilities 205 205
Accruals and deferred income 3 331 -227 3 104
Current liabilities total 5 697 -3 5 694
Liabilities total 6 388 -51 6 337
Equity and liabilities total 42 990 2 719 45 709

Consolidated balance sheet June 30, 2017

EUR thousand FAS Total IFRS adjustments IFRS
June 30, 2017 June 30, 2017
Assets
Non-current assets
Intangible assets 6 427 -1 768 4 660
Goodwill 1 116 2 228 3 344
Property, plant and equipment 150 289 439
Investments 1 074 -1 074 0
Share of associates 800 800
Long-term debtors 258 258
Deferred tax assets 2 300 443 2 744
Non-current assets total 11 326 919 12 245
Current assets
Trade and other receivables 5 250 -14 5 236
Cash and cash equivalents 32 003 32 003
Current assets total 37 253 -14 37 239
 
Total assets 48 580 904 49 484
 
Equity and liabilities
Shareholders’ equity
Share capital 80 80
Invested non-restricted equity reserve 53 255 589 53 845
Retained earnings -10 395 1 024 -9 372
Profit (loss) for the period -145 -1 068 -1 212
Shareholders’ equity 42 795 545 43 341
Liabilities
Non-current liabilities
Governmental agency loan 691 -49 642
Non-current liabilities total 691 -49 642
Current liabilities
Governmental agency loan 84 84
Lease liabilities 408 408
Deferred revenue 1 316 1 316
Trade payables 873 873
Other liabilities 122 122
Accruals and deferred income 2 698 2 698
Current liabilities total 5 093 408 5 501
Liabilities total 5 784 359 6 143
Equity and liabilities total 48 580 904 49 484

2016

Consolidated statement of comprehensive income Jan 1 – Dec 31, 2016

EUR thousand   FAS Total IFRS adjustments IFRS
Note Jan 1 – Dec 31, 2016 Jan 1 – Dec 31, 2016
Revenue from contracts with customers 31 112 31 112
Cost of revenue -14 106 -135 -14 241
Gross profit 17 005 -135 16 870
Other operating income 1 238 -147 1 091
Research and development costs -6 515 156 -6 359
Sales and marketing costs -12 268 -63 -12 331
Administrative costs -1 020 -443 -1 463
Operating profit -1 560 -632 -2 192
Finance income 0 0
Finance costs -62 -38 -100
Finance costs – net -62 -38 -100
 
Share of associates’ profit/loss -110 -110
 
Profit before taxes   -1 622 -780 -2 402
Income taxes 0
Change in deferred tax 2 400 97 2 496
Total income tax expense   2 400 97 2 496
Profit for the period   778 -683 94
Total comprehensive income for the period   778 -683 94

Consolidated statement of comprehensive income Jul 1 – Dec 31, 2016

EUR thousand FAS Total IFRS adjustments IFRS
Jul 1 – Dec 31, 2016 Jul 1 – Dec 31, 2016
Revenue from contracts with customers 18 326 18 326
Cost of revenue -8 423 -75 -8 498
Gross profit 9 902 -75 9 828
Other operating income 1 189 -147 1 042
Research and development costs -3 105 172 -2 933
Sales and marketing costs -5 422 -30 -5 452
Administrative costs -572 -319 -892
Operating profit 1 991 -399 1 593
Finance income 0 0
Finance costs 50 -21 30
Finance costs – net 50 -21 30
 
Share of associates’ profit/loss -110 -110
 
Profit before taxes 2 041 -529 1 512
Income taxes
Change in deferred tax 2 400 76 2 476
Total income tax expense 2 400 76 2 476
Profit for the period 4 441 -453 3 988
Total comprehensive income for the period 4 441 -453 3 988

Consolidated statement of comprehensive income Jan 1 – Jun 30, 2016

EUR thousand FAS Total IFRS adjustments IFRS
Jan 1 – Jun 30, 2016 Jan 1 – Jun 30, 2016
Revenue from contracts with customers 12 786 12 786
Cost of revenue -5 683 -60 -5 744
Gross profit 7 103 -60 7 043
Other operating income 49 49
Research and development costs -3 422 -16 -3 438
Sales and marketing costs -6 847 -33 -6 880
Administrative costs -434 -124 -558
Operating profit -3 551 -233 -3 785
Finance income 0 0
Finance costs -112 -18 -130
Finance costs – net -112 -18 -130
 
Share of associates’ profit/loss
 
Profit before taxes -3 663 -251 -3 914
Income taxes
Change in deferred tax 20 20
Total income tax expense 0 20 20
Profit for the period -3 663 -231 -3 894
Total comprehensive income for the period -3 663 -231 -3 894

Consolidated balance sheet December 31, 2016

EUR thousand   FAS Total IFRS adjustments IFRS
Note December 31, 2016   December 31, 2016
Assets
Non-current assets
Intangible assets 389 279 668
Goodwill 200 2 035 2 235
Property, plant and equipment 145 519 664
Investments 1074 -1 074 0
Share of associates 964 964
Long-term debtors 258 258
Deferred tax assets 2400 30 2 430
Non-current assets total 4 465 2 753 7 219
Current assets
Trade and other receivables 6413 -269 6 144
Cash and cash equivalents 3 664 3 664
Current assets total 10 076 -269 9 808
 
Total assets 14 542 2 485 17 027
 
Equity and liabilities
Shareholders’ equity
Share capital 3 3
Invested non-restricted equity reserve 15 783 1 927 17 710
Retained earnings -11 173 773 -10 400
Profit (loss) for the period 778 -683 94
Shareholders’ equity 5 390 2 017 7 407
Liabilities
Non-current liabilities
Deferred tax liabilities 0 0
Governmental agency loan 775 -68 707
Lease liabilities 224 224
Non-current liabilities total 775 156 931
Current liabilities
Governmental agency loan
Lease liabilities 313 313
Deferred revenue 2482 2 482
Trade payables 1178 1 178
Other liabilities 125 125
Accruals and deferred income 4 592 4 592
Current liabilities total 8 377 313 8 689
Liabilities total 9 152 468 9 620
Equity and liabilities total 14 542 2 485 17 027

Consolidated balance sheet June 30, 2016

EUR thousand FAS Total IFRS adjustments IFRS
June 30, 2016   June 30, 2016
Assets
Non-current assets
Intangible assets 212 453 665
Goodwill 467 1 768 2 235
Property, plant and equipment 169 746 915
Investments 0 0
Long-term debtors 257 257
Non-current assets total 1 105 2 968 4 072
Current assets
Trade and other receivables 2 329 2 329
Cash and cash equivalents 2 402 2 402
Current assets total 4 731 0 4 731
 
Total assets 5 835 2 968 8 803
 
Equity and liabilities
Shareholders’ equity
Share capital 3 3
Invested non-restricted equity reserve 15 777 1 973 17 750
Retained earnings -11 163 529 -10 634
Profit (loss) for the period -3 663 -231 -3 894
Shareholders’ equity 953 2 271 3 224
 
Liabilities
Non-current liabilities
Deferred tax liabilities 58 58
Governmental agency loan 426 -36 390
Lease liabilities 408 408
Non-current liabilities total 426 429 855
Current liabilities
Governmental agency loan
Lease liabilities 256 256
Deferred revenue 980 980
Trade payables 1 260 1 260
Other liabilities 103 103
Accruals and deferred income 2 114 12 2 126
Current liabilities total 4 457 267 4 724
Liabilities total 4 883 697 5 579
Equity and liabilities total 5 835 2 968 8 803

Consolidated balance sheet January 1, 2016

EUR thousand   FAS Total IFRS adjustments IFRS
January 1, 2016 January 1, 2016
Assets
Non-current assets
Intangible assets 48 639 688
Goodwill 623 1612 2 235
Property, plant and equipment 157 838 996
Investments 0 0
Long-term debtors 257 257
Non-current assets total 1 086 3 090 4 176
Current assets
Trade and other receivables 3 032 -12 3 021
Cash and cash equivalents 4 645 4 645
Current assets total 7 677 -12 7 666
 
Total assets 8 763 3 079 11 842
 
Equity and liabilities
Shareholders’ equity
Share capital 3 3
Invested non-restricted equity reserve 15 776 1 973 17 750
Retained earnings -11 173 285 -10 888
Profit (loss) for the period
Shareholders’ equity 4 606 2 258 6 864
Liabilities
Non-current liabilities
Deferred tax liabilities 78 78
Governmental agency loan 426 -46 380
Lease liabilities 537 537
Non-current liabilities total 426 569 995
Current liabilities
Lease liabilities 251 251
Trade payables 1 833 1 833
Other liabilities 184 184
Accruals and deferred income 1 714 1 714
Current liabilities total 3 731 251 3 983
Liabilities total 4 157 821 4 978
Equity and liabilities total 8 763 3 079 11 842

The following table summarizes the impact of the adoption of the IFRS to the equity of Next Games for the periods presented below:

EUR thousand Note June 30, 2018 December 31, 2017 June 30, 2017 December 31, 2016 June 30, 2016 January 1, 2016
Equity, FAS 27 912 36 602 42 795 5 390 953 4 606
IFRS adjustments
Depreciation method  9. 16 17 24 32 36 40
Licence acquisitions  5. 239 299 359 211 272 332
Tekes loans  9. 28 39 39 55 20 27
Business combinations and goodwill 3. 2 799 2 649 2 400 2 170 2 014 1 858
IPO transaction costs  6. -1 201 -1 562 -1 983 -203
Leasehold improvements  9. -28 -14 -12
Leases  7. 0 2 -168 -114 -58
GaaS platform 2. 1 213 654 323 137
Armada investment 8. 196 -699 -409 -244
Bad debt provision  9. -7 -7 -11 -11
Development expenses  1. 3 402 1 378
Adjustments total 6 685 2 770 545 2 017 2 271 2 258
Equity, IFRS 34 597 39 372 43 341 7 407 3 224 6 864

The following table summarizes the impact of the adoption of the IFRS to the profit of Next Games for the periods presented below:

EUR thousand Note Jan 1 – Jun 30, 2018 Jan 1 – Dec 31, 2017 Jul 1 – Dec 31, 2017 Jan 1 – Jun 30, 2017 Jan 1 – Dec 31, 2016 Jul 1 – Dec 31, 2016 Jan 1 – Jun 30, 2016
Profit for the period, FAS -8 721 -6 360 -6 215 -145 778 4 441 -3 663
IFRS adjustments
Depreciation method 9. -1 -15 -7 -7 -9 -4 -4
Licence acquisitions 5. -60 -121 -60 -60 -121 -60 -60
Tekes loans 9. -11 -16 -16 27 35 -7
Business combinations and goodwill 3. 134 384 222 162 277 139 139
IPO transaction costs  6. 361 228 421 -192 -157 -157
Leasehold improvements  9. 14 28 -14 -14 -2 -12
Leases  7. -2 116 171 -54 -114 -56 -58
GaaS platform  2. 559 517 331 186 137 137
Armada investment  8. 895 -455 -290 -165 -244 -244
Bad debt provision  9. 4 4 -11 -11
Development expenses  1. 2024 1378 1378
Share-based payments 4. -725 -1813 -907 -907 -454 -227 -227
Adjustments total 3173 223 1290 -1068 -683 -453 -231
Profit of the year, IFRS -5547 -6137 -4924 -1212 94 3988 -3894

NOTES

SUMMARY OF EFFECTS OF IFRS TRANSITION ON EQUITY AND PROFIT

  1. Capitalization of game development expenses

Under FAS, Next Games has expensed all development costs as they have incurred. Under IFRS, it is mandatory to capitalize development costs once certain criteria in IAS 38 Intangible assets have been met. Therefore, Next Games has analyzed its game development projects and identified two projects, where the capitalization criteria were met during the financial years 2017 and 2018. As a result, the following adjustments were made:

  • In the financial period, 2017 the expenses of R&D function were decreased by EUR 1.723 thousand and change in deferred taxes (expense) was increased by EUR 345 thousand.
  • As at 31 December 2017, intangible assets were increased by EUR 1.723 thousand, retained earnings were increased by EUR 1.378 thousand and deferred tax liabilities were increased by EUR 345 thousand.
  • In the financial period January 1, 2018 – June 30, 2018 the expenses of R&D function were decreased by EUR 2.530 thousand and change of deferred taxes (expense) was increased by EUR 506 thousand.
  • As at 30 June 2018, intangible assets were increased by EUR 4.252 thousand, retained earnings were increased by EUR 3.402 thousand and deferred tax liabilities were increased by EUR 850 thousand.

As the development projects were not yet completed and the two games were not yet launched as at 30 June 2018, no amortization of the capitalized development costs was recognized.

  1. Game as a Service platform capitalization

Under FAS, Next Games has expensed all costs related to the development of the Game as a Service platform (‘GaaS platform’). Under IFRS, management has concluded that the IAS 38 criteria for capitalization of GaaS platform development costs were met during the financial year 2016, as the GaaS platform is controlled by Next Games, future economic benefits are expected in a form of cost savings and increased revenue from new games, and the cost can be measured reliably. As a result, the following adjustments were made:

  • In the financial year, 2016, expenses of R&D function were decreased by EUR 171 thousand and change in deferred taxes (expense) was increased by EUR 34 thousand.
  • As at 31 December 2016, intangible assets were increased by EUR 171 thousand, retained earnings (profit for the period) were increased by EUR 137 thousand and deferred tax liabilities were increased by EUR 34 thousand.
  • In the financial year, 2017, expenses of R&D function were decreased by EUR 646 thousand and change in deferred taxes (expense) was increased by EUR 129 thousand.
  • As at 31 December 2017, intangible assets were increased by EUR 817 thousand, retained earnings were increased by EUR 654 thousand and deferred tax liabilities were increased by EUR 163 thousand.
  • In the financial period January 1, 2018 – June 30, 2018, expenses of R&D function were decreased by EUR 699 thousand and change in deferred taxes (expense) was increased by EUR 140 thousand.
  • As at 30 June 2018, intangible assets were increased by EUR 1.516 thousand, retained earnings were increased by EUR 1.213 thousand and deferred tax liabilities were increased by EUR 303 thousand.

As the GaaS platform was still under development and not in use as at 30 June 2018, no amortization of the capitalized GaaS platform development costs were recognized.

  1. Business combinations and reversal of goodwill amortizations

Under IFRS, Next Games has elected to apply IFRS 3 Business combinations to a past business combination. Accordingly, the accounting of the acquisition of Helsinki Game Works Oy in October 2014 has been prepared in accordance with IFRS 3. Next Games did not have any other business combinations before the transition to IFRS as at 1 January 2016. Main adjustments compared to FAS consist of fair valuing Next Games’ shares given as consideration and identifying and fair valuing acquired intellectual property rights, which were not recognized under FAS. Component for post-combination services was separated from the acquisition cost, reflecting the employment obligation of the selling parties. This component is recognized as employee costs as the service is received by Next Games. Transaction costs were expensed instead of including them in the acquisition cost as treated under FAS. In addition, as goodwill is not amortized under IFRS, goodwill amortizations made under FAS were reversed. As a result, the following adjustments were made:

  • As at 1 January 2016, goodwill was increased by EUR 1.612 thousand, intangible assets were increased by EUR 307 thousand, invested unrestricted equity reserve was increased by EUR 1.611 thousand, retained earnings were increased by EUR 247 thousand and deferred tax liabilities were increased by EUR 61 thousand.
  • In the financial year 2016, expenses of R&D function were decreased by EUR 277 thousand.
  • As at 31 December 2016, goodwill was increased by EUR 1.924 thousand, intangible assets were increased by EUR 307 thousand, invested unrestricted equity reserve was increased by EUR 1.611 thousand, retained earnings were increased by EUR 559 thousand and deferred tax liabilities were increased by EUR 61 thousand.
  • In the financial period 2017 expenses of R&D function were decreased by EUR 172 thousand.
  • As at 31 December 2017, goodwill was increased by EUR 2.124 thousand, intangible assets were increased by EUR 307 thousand, invested unrestricted equity reserve was increased by EUR 1.611 thousand, retained earnings were increased by EUR 759 thousand and deferred tax liabilities were increased by EUR 61 thousand.
  • As at 30 June, 2018, goodwill was increased by EUR 2.124 thousand, intangible assets were increased by EUR 307 thousand, invested unrestricted equity reserve was increased by EUR 1.611 thousand, retained earnings were increased by EUR 759 thousand and deferred tax liabilities were increased by EUR 61 thousand.

Next Games acquired Lume Games Oy in February 2017 and prepared the acquisition accounting in accordance with IFRS 3. Main adjustments compared to FAS consist of fair valuing Next Games’ shares given as consideration, fair valuing acquired technology, separating a component for post-combination services and expensing transaction costs. In addition, as goodwill is not amortized under IFRS, goodwill amortizations made under FAS were reversed. As a result, the following adjustments were made:

  • In the financial year 2017, expenses of R&D function were decreased by EUR 291 thousand, expenses of admin function were increased by EUR 61 thousand and change in deferred taxes (expense) was increased by EUR 18 thousand.
  • As at 31 December 2017, goodwill was increased by EUR 206 thousand, intangible assets were increased by EUR 92 thousand, invested unrestricted equity reserve was increased by EUR 41 thousand, retained earnings were increased by EUR 239 thousand and deferred tax liabilities were increased by EUR 18 thousand.
  • In the financial period January 1, 2018 – June 30, 2018, expenses of R&D function were decreased by EUR 143 thousand and change in deferred taxes (expense) was increased by EUR 9 thousand.
  • As at 30 June 2018, goodwill was increased by EUR 319 thousand, intangible assets were increased by EUR 138 thousand, invested unrestricted equity reserve was increased by EUR 41 thousand, retained earnings were increased by EUR 389 thousand and deferred tax liabilities were increased by EUR 28 thousand.
  1. Share-based payments

Next Games has established several share option plans which give the employees the right to subscribe Next Games’ shares.

Under FAS, Next Games has not recognized employee benefit expenses from the plans. Under IFRS, the plans are classified as equity-settled share-based payment plans. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense over the vesting period. As a result, the following adjustments were made:

  • In the financial year 2016, expenses of R&D function were increased by EUR 175 thousand, expenses of sales and marketing function were increased by EUR 42 thousand , expenses of admin function were increased by 237 and retained earnings were credited with same total amount EUR 454 thousand. Therefore, the balance sheet as at 31 December 2016 was not affected.
  • In the financial year 2017, expenses of R&D function were increased by EUR 698 thousand, expenses of sales and marketing function were increased by EUR 169 thousand, expenses of admin function were increased by EUR 946 and retained earnings were credited with same total amount EUR 1.813 thousand. Therefore, the balance sheet as at 31 December 2017 was not affected.
  • In the financial period January 1, 2018 – June 30, 2018, expenses of R&D function were increased by EUR 280 thousand, expenses of sales and marketing function were increased by EUR 68 thousand , expenses of admin function were increased by 378 and retained earnings were credited with same total amount EUR 725 thousand. Therefore, the balance sheet as at 30 June 2018 was not affected.
  1. License acquisitions

Next Games has acquired two licenses from AMC Networks Ventures LLC (‘AMC’): first one in 2014 related to The Walking Dead: No Man’s Land (‘NML license’) and the second one in 2017 related to The Walking Dead: Our World (‘OW license’). As a consideration, Next Games issued its shares to AMC. Under FAS, the NML license was not recognized to the balance sheet but the OW license was recognized as an intangible asset and as an increase in equity.

Under IFRS, management has concluded that both licenses meet the IAS 38 criteria for an intangible asset. Furthermore, as Next Games received a license from AMC and AMC received shares of Next Games in return, the arrangement is considered as an equity-settled share-based payment transaction in the scope of IFRS 2 Share-based payment. As the arrangement does not include any specific vesting conditions, the shares are considered to be vested once AMC has provided the rights to the licenses to Next Games, i.e. the shares vest immediately at the date of the acquisition. As the fair value of the acquired unique licenses cannot be estimated reliably, Next Games shall measure their value indirectly, by reference to the fair value of the equity instruments granted. As a result, the following adjustments were made:

  • As at 1 January 2016, intangible assets were increased by EUR 332 thousand, invested unrestricted equity reserve was increased by EUR 362 thousand and retained earnings were decreased by EUR 30 thousand.
  • In the financial year 2016, cost of revenue was increased by EUR 121 thousand.
  • As at 31 December 2016, intangible assets were increased by EUR 211 thousand, invested unrestricted equity reserve was increased by EUR 362 thousand and retained earnings were decreased by EUR 151 thousand.
  • In the financial year, 2017, cost of revenue was increased by EUR 121 thousand.
  • As at 31 December 2017, intangible assets were increased by EUR 299 thousand, invested unrestricted equity reserve was increased by EUR 571 thousand and retained earnings were decreased by EUR 272 thousand.
  • In the financial period 1 January, 2018 – 30 June, 2018, cost of revenue was increased by EUR 61 thousand.
  • As at 30 June 2018, intangible assets were increased by EUR 239 thousand, invested unrestricted equity reserve was increased by EUR 571 thousand and retained earnings were decreased by EUR 332 thousand
  1. Transaction costs related to the listing of Next Games’ shares

Next Games completed a listing of its shares on the First North Finland marketplace of Nasdaq Helsinki Ltd in March 2017. Under FAS, majority of incurred transaction costs were capitalized as prepayments and accrued income or intangible assets and amortized over three years. Other transaction costs were expensed as incurred. Under IFRS, transaction costs directly attributable to the issue of new equity instruments are not capitalized but rather deducted from equity as incurred. Other transaction costs directly attributable to the listing shall be allocated to the issue of new shares which are consequently deducted from equity and to the sale of old shares which are expensed as incurred. Next Games has made the allocation of such transaction costs based on the actual relative amounts of new and old shares. Other transaction cost not directly attributable to the listing were expensed as incurred. In addition, with respect to transaction costs eligible to be deducted from equity and incurred before 31 December 2016, management has chosen to deduct such costs from equity already as at 31 December 2016. As a result, the following adjustments were made:

  1. In the financial year 2016, expenses of admin function were increased by EUR 197 thousand and change in deferred taxes (income) was increased by EUR 39 thousand.
  2. As at 31 December 2016, prepayments and accrued income was decreased by EUR 254 thousand, deferred tax assets were increased by EUR 51 thousand, invested unrestricted equity reserve was decreased by EUR 46 thousand and retained earnings (profit for the period) were decreased by EUR 157 thousand.
  3. In the financial year 2017, expenses of admin function were decreased by EUR 284 thousand and change in deferred taxes (expense) was increased by EUR 56 thousand.
  4. As at 31 December 2017, intangible assets were decreased by EUR 1.954 thousand, deferred tax assets were increased by EUR 392 thousand, invested unrestricted equity reserve was decreased by EUR 1.633 thousand and retained earnings were increased by EUR 71 thousand.
  5. In the financial period January 1, 2018- June 30, 2018, expenses of admin function were decreased by EUR 451 thousand and change in deferred taxes (expense) was decreased by EUR 90 thousand.
  6. As at 30 June 2018, intangible assets were decreased by EUR 1.503 thousand, deferred tax assets were increased by EUR 302 thousand, invested unrestricted equity reserve was decreased by EUR 1.633 thousand and retained earnings were increased by EUR 432 thousand.
  7. Leases

Next Games has adopted IFRS 16 Leases retrospectively from 1 January 2016, however certain specific transition provisions as permitted under the IFRS 1 have been applied as described below.

On adoption of IFRS 16, Next Games recognized lease liabilities in relation to leases which had previously been classified as of balance sheet operating leases under FAS. Next Games has applied the exemptions of IFRS 1.D9B(a-b) and, therefore, the initial recognition is done by measuring the lease liability at the present value of the remaining lease payments at the date of transition to IFRS using the incremental borrowing rate at the date of transition as a discount rate. Right-of-use asset is measured as an amount which is equal with the lease liability. Next Games has also decided to apply recognition exemptions for short-term leases and leases of low-value assets, i.e. payments are recognized on a straight-line basis as an expense in the income statement. Short-term leases are leases with a lease term of 12 months or less and this exemption is used with property leases which contain the interim head office. Low-value assets contain certain IT-equipment.

Next Games has applied the exemption of IFRS 1.D9D(e) and used hindsight when determining the lease terms of certain property leases, which included extension or termination options. Therefore, the lease term of previous head quarter was not revised during the financial year 2017 when the lease was terminated. The termination penalties of the previous head quarter amounting to EUR 210 thousand has been included in the initial recognition of the lease liability and the right-of-use asset.

After the recognition exemptions, under IFRS Next Games has recognized lease liability and right-of-use asset from the lease contract of previous head quarter. As a result, the following adjustments were made:

  • As at 1 January 2016, non-current lease liabilities were increased by EUR 537 thousand and current lease liabilities were increased by EUR 251 thousand. The right-of-use assets under buildings and structures were increased by EUR 788 thousand.
  • In the financial year 2016, expenses of R&D function were increased by EUR 95 thousand, expenses of sales and marketing function increased by 17 thousand and expenses of admin function increased by 8 thousand. Financial expenses were increased by EUR 23 thousand and change in deferred taxes (income) was increased by EUR 29 thousand.
  • As at 31 December 2016, non-current lease liabilities were increased by EUR 224 thousand and current lease liabilities were increased by EUR 313 thousand. The right-of-use assets under buildings and structures were increased by EUR 394 thousand. Deferred tax assets were increased by EUR 29 thousand and retained earnings (profit for the period) were decreased by EUR 114 thousand.
  • In the financial year 2017, expenses of R&D function were decreased by EUR 107 thousand, expenses of sales and marketing function increased by EUR 35 thousand and expenses of admin function increased by EUR 18 thousand. Financial expenses were increased by EUR 14 thousand and change in deferred taxes (expense) was increased by EUR 29 thousand.
  • As at 31 December 2017, current lease liabilities were increased by EUR 224 thousand. Accruals and deferred income were decreased by EUR 227 thousand. Deferred tax assets were increased by EUR 45 thousand, deferred tax liabilities were increased by EUR 45 thousand and retained earnings were decreased by EUR 2 thousand.
  • In the financial year January 1, 2018 – June 30, 2018, Financial expenses were increased by EUR 3 thousand and change in deferred taxes (income) was increased by EUR 1 thousand.
  • No adjustments for balance sheet June 30, 2018
  1. Armada investment

In the financial year 2015, Next Games made an investment in Armada Interactive Oy (‘Armada’), a Finnish mobile gaming company. The amount of this initial investment was immaterial. In December 2016, Next Games made an additional investment in Armada by assigning the intellectual property rights received in connection with the acquisition of Helsinki Game Works Oy in October 2014 to Armada. Under FAS, it was considered that part of the goodwill generated from the acquisition of Helsinki Game Works Oy was disposed of when the intellectual property rights were assigned to Armada and the additional investment to Armada was made. However, under IFRS, as the accounting of the acquisition of Helsinki Game Works Oy was made in accordance with IFRS 3 and the acquired intellectual property rights were fair valued, no goodwill was considered to be disposed when the intellectual property rights were assigned to Armada.

As at 31 December 2017 Next Games held approximately 9.5 % of the shares and voting rights of Armada. Under FAS, the shareholding in Armada is accounted for as an investment measured at cost.

However, under IFRS, management has concluded that despite the ownership interest of less than 20 %, Next Games has significant influence in Armada and, consequently, the investment shall be accounted for as an associate in accordance with IAS 28 Investments in associates and joint ventures. Next Games has a right to appoint one of the board members of Armada and there are material transactions between Next Games and Armada as Armada is developing a game which is primarily based on the intellectual property rights received from Next Games. As a result, the following adjustments were made:

  • In the financial year 2016, other operating income was decreased by EUR 196 thousand and share of associates result was decreased by EUR 110 thousand. Change in deferred tax increase (income) EUR 61 thousand.
  • As at 31 December 2016, goodwill was increased by EUR 111 thousand, intangible assets were decreased by EUR 307 thousand, investments were decreased by EUR 1.074 thousand, investments in associates were increased by EUR 964 thousand, retained earnings (profit for the period) were decreased by EUR 244 thousand and deferred tax liabilities were decreased by EUR 61 thousand.
  • In the financial year 2017, share of associates result was decreased by EUR 455 thousand.
  • As at 31 December 2017, goodwill was increased by EUR 111 thousand, intangible assets were decreased by EUR 307 thousand, investments were decreased by EUR 1.074 thousand, investments in associates were increased by EUR 509 thousand, retained earnings were decreased by EUR 699 thousand and deferred tax liabilities were decreased by EUR 61 thousand.
  • In the financial period January 1, 2018 – June 30, 2018, share of associates result was decreased by EUR 116 thousand and amortization expenses of non-current investments were decreased by EUR 1.011 thousand euros
  • As at 30 June 2018, goodwill was increased by EUR 111 thousand, intangible assets were decreased by EUR 307 thousand, investments were decreased by EUR 63 thousand, investments in associates were increased by EUR 393 thousand, retained earnings were increased by EUR 196 thousand and deferred tax liabilities were decreased by EUR 61 thousand.
  1. Other adjustments

Change in depreciation method:

Under IFRS, Next Games has depreciated machinery and equipment over its useful life and accordingly adjusted the depreciation based on the reducing-balance method that was applied under FAS. The change in the depreciation policy decreased the accumulated depreciation of machinery and equipment in the opening IFRS balance sheet and thereby increased the carrying amount of machinery and equipment by EUR 50 thousand. The corresponding amount, net of deferred liability of EUR 10 thousand, was debited to retained earnings. As a result of the change, expenses of R&D function increased EUR 9 thousand in 2016, sales and marketing function expenses increased EUR 2 thousand and admin functions’ expenses increased EUR 1 thousand. Change of deferred taxes (income) increased EUR 2 thousand. As a result of the change, expenses of R&D function increased EUR 12 thousand in 2017, sales and marketing function expenses increased EUR 4 thousand and admin functions’ expenses increased EUR 2 thousand. Change of deferred taxes (income) increased EUR 4 thousand. As a result of the change, expenses of R&D function increased EUR 0 thousand in January – June 2018, sales and marketing function expenses increased EUR 0 thousand and admin functions’ expenses increased EUR 0 thousand. Change of deferred taxes (income) increased EUR 0 thousand.

Leasehold improvements:

Under FAS, leasehold improvements have been classified as intangible assets. Under IFRS, leasehold improvements are classified as tangible assets, in accordance with their nature.

Next Games has incurred leasehold improvement costs during the financial year 2016 related to their old head quarter premises, which lease contract was terminated effective from 31 December 2017. As a result, EUR 103 thousand was reclassified from intangible assets to tangible assets as at 31 December 2016. Due to a reassessment of the depreciation period, R&D functions’ expenses were increased by EUR 14 thousand in the financial year 2016 and decreased by EUR 12 thousand in the financial year 2017. Sales and marketing functions’ expenses increased EUR 2 thousand in 2016 and decreased EUR 4 thousand in 2017. Admin functions’ expenses increased EUR 1 thousand in 2016 and decreased EUR 2 thousand in 2017. Deferred tax asset of EUR 4 thousand was recognized as at 31 December 2016 and subsequently derecognized in the financial year 2017.

In addition, Next Games has incurred leasehold improvement costs during the financial year 2017 related to their new head quarter premises, which were taken into use during the summer 2018. As a result, EUR 118 thousand was reclassified from intangible assets to tangible assets as at 31 December 2017 and EUR 1.413 thousand as at June 2018. As the premises were not yet in use, no depreciation was recognized.

Governmental loans:

Next Games has two outstanding loans from governmental agency Tekes. First loan was granted in 2014 and the total nominal amount of the loan is EUR 336 thousand. According to the original loan agreement the loan will be repaid annually in four instalments starting from March 2018. Hence, company made amendment to the agreement and repayments starts in March 2019. Last payment will be performed in March 2021. According to the loan agreement the interest rate of the loan is three percent points below the base interest, however, at least 1% per annum.

Second loan with total nominal amount of EUR 439 thousand was granted in two instalments, first EUR 90 thousand in September 2015 and second EUR 349 thousand in September 2016. According to the loan agreement the loan will be repaid annually in four instalments starting from September 2019. Last payment will be performed in September 2022. According to the loan agreement the interest rate of the loan is three percent points below the base interest, however, at least 1% per annum.

Due to low market interest rates during recent years, the actual interest rates of the loans have been 1% per annum. Therefore, there is a favorable interest rate element in the loans which has to be separately accounted for under IFRS. Next Games uses amortized cost method to calculate the valuation of the loan, which causes differences with nominal amount method, which is used in FAS.

The projects that governmental loans are directed to, had occurred in 2014 and 2016. Therefore the governmental grants have been recognized as other operating income in 2016 and retained earnings to opening balance sheet.

  • As at 1 January 2016, IFRS loan balance was EUR 380 thousand (FAS: EUR 426 thousand). Other receivables were decreased by EUR 12 thousand. Retained earnings were increased by EUR 27 thousand. Deferred tax liabilities were increased by EUR 7 thousand.
  • In the financial year 2016, other operating income was increased by EUR 49 thousand. Interest expenses were increased by EUR -15 thousand. Change in deferred taxes were EUR -7 thousand.
  • As at 31 December 2016, IFRS loan balance was EUR 707 thousand (FAS: EUR 775 thousand). Retained earnings were increased by EUR 27 thousand. Deferred tax liabilities were increased by EUR 14 thousand.
  • In the financial year 2017, IFRS interest expenses were increased by EUR -20 thousand comparing FAS. Change in deferred taxes was EUR 4 thousand.
  • As at 31 December 2017, IFRS loan balance was EUR 726 thousand (FAS: EUR 775 thousand). Retained earnings were increased by EUR 55 thousand. Deferred tax liability was increased by EUR 10 thousand.
  • In the financial period January 1 – June 30, 2018, IFRS interest expenses were increased by EUR 14 thousand and change in deferred taxes (income) EUR 3 thousand.
  • As at 30 June 2018, IFRS loan balance was EUR 740 (FAS: EUR 775 thousand). Retained earnings were increased by EUR 28 thousand. Deferred tax liability was EUR 7 thousand.

Bad debt provision:

Under FAS, Next Games has not recorded any bad debt provisions in the financial statements. Under IFRS, Next Games adopts IFRS 9 standard, which requires the Company to continuously assess its financial assets. Next Games has assessed its accounts receivables and recorded a bad debt provision of EUR -14 thousand in 2016 financial statements. For 2017, Next Games recorded a bad debt provision of EUR -9 thousand.

Additional information:
Saara Bergström
CMO
investors@nextgames.com
+358 (0)50 483 3896

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. For more information head to www.nextgames.com