Final Results

RNS Number : 2517J

Frontier Developments PLC

08 September 2016

 

8 September 2016

Frontier Developments plc

Year End Results

Poised to complete business transition; self-published revenue up 13%; strong financial position

Frontier Developments plc (AIM: FDEV, "Frontier", the "Group"), a leading developer of video games based in Cambridge, UK has published its full year results for the year to 31 May 2016.

Overview

It has been an important year for Frontier. Substantial progress has been made toward our corporate objective of becoming a business to consumer video game developer with multiple self-published revenue generating franchises. The necessary investment has been funded from Frontier's cash balances.

For the first time ever, almost all Frontier's revenue came from self publishing activities including over 1 million franchise unit sales of Elite Dangerous. The first phases of testing for our second franchise, Planet Coaster, have been well received and development is on track for full launch on 17 November 2016. 

The investments made through the year give Frontier the platform from which to achieve its corporate objective which will help the company generate long term growth and value.

Operational Highlights

• Substantially all Group revenues in the period were derived from self-publishing activities, which was up 13% at £21m (FY15: £18.6m). In addition the deferred income balance rose by £1.5m to £2.2m.
• 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.
• 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.
• 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.

Financial Highlights

	2016	2015
Net Cash Balance	£8.6m	£10.5m
Revenue	£21.4m	£22.8m
Self-published Revenue	£21.0m	£18.6m
EBITDA	£4.9m	£6.1m
Adjusted EBITDA	£6.2m	£7.0m
Adjusted Operating Result	(£2.7m)	£2.5m
Operating Profit	£1.2m	£1.6m
EPS	4.2p	4.9p
Adjusted (LPS)/ EPS	(8.0p)	7.4p
Deferred Income	£2.2m	£0.7m
Intangible Assets	£16.7m	£11.1m

Current Trading and Outlook

• The number of players of Frontier's games continues to grow:
  • The total Elite Dangerous franchise unit sales increased by over 1 million during the financial year, and are currently around 1.8 million.
  • Planet Coaster exceeded the Board's expectations, with around 25,000 pre-order unit sales during the period and around 50,000 to date.
• Net cash balance at 31 August was approximately £8.4 million.

Trading since the year end, in what is a seasonally quiet quarter for the Group, has exceeded the Board's expectations. 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.

The Board is excited about the growth opportunities ahead in the coming years, as existing franchises continue to be strengthened and new franchises developed.

David Braben, Chief Executive of Frontier Developments, said:

"We have successfully transformed our business model, continued to improve and expand the Elite Dangerous offering, and are making good progress towards the release of Planet Coaster in November.

The number of active Elite Dangerous players daily and monthly is consistently high. The game has strong and growing long-term support and a rich community behind it.

The release of Plant Coaster will complete our transition, and the positive feedback we are seeing from the Alpha process gives us confidence it will drive revenues to a new level."

Enquiries:

Frontier Developments	[phone]
David Braben, CEO David Walsh, COO Neil Armstrong, CFO
Numis - Nomad and Joint Broker	[phone]
Simon Willis/Jamie Lillywhite/Toby Adcock
Finncap	[phone]
Matt Goode/Giles Rolls
Tulchan Communications	[phone]
James Macey White/Matt Low

About Frontier Developments plc 

Frontier Developments plc, listed on the AIM stock market (AIM: FDEV), is a leading independent game developer founded in 1994 by David Braben, co-author of the seminal 'Elite' game. Based in Cambridge, Frontier uses its proprietary 'COBRA' game development technology to create innovative games across videogame consoles, computers, smartphones and tablets.

www.frontier.co.uk                    

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.

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 preparations 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.

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.

Chief Executive's Statement

OVERVIEW

We have had our first full year with Elite Dangerous, selling over 1m 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 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 £21.4m with deferred income of £2.2m. The Group remains in a strong financial position with a net cash balance of £8.6m. 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 £8.9m in our two major self-published franchises during the financial year (2015: £4.3m), with an increased proportion of development relating to titles yet to be released to 51% (2015: 30%).

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.

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.

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, also 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 early 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.

PLANET COASTER

Development of Planet Coaster remains on track for launch on 17 November 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 rich 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.

Strategic Priorities and Key Performance Indicators

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.

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 risks related to ongoing access to 3^rd 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 Virtual Reality and Augmented Reality.

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.

Investment in Self-Publishing and Technology (man months)

2016	2608
2015	1864
2014	1243
2013	566

This was the Group's first full year of investing in two self-published franchises.

Transition of Revenue Mix & Measure of Growth (£m)

	Self Published	Total Revenue
2016	21.1	21.4
2015	19.4	22.8
2014	0	9.5
2013	0	12.1

Self-published revenue grew to 99% of total revenue. It also grew in absolute terms to £21.1m, an increase of 13% on the previous year.

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.

Measure of profitability: Adjusted Operating Profit (£m)

2016	(2.7)
2015	2.5
2014	(3.5)
2013	1.8

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.

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.

1.4 CQC (October 2015) added an instant action 'Close Quarter Combat' 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 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.

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 improve 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' 'Close Quarter Combat' (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 Virtual Reality (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.

4. Planet Coaster Franchise

Planet Coaster Announcement

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 program 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.

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 1.8million 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 alpha and pre-order units of Planet Coaster. The net cash balance at 31 August was approximately £8.4 million.

Since the year end the Group has also received £0.2m of UK video game tax relief relating to its work for Amazon Game Studios. Frontier has submitted a further £0.7m of claims related to Elite Dangerous which was not recognised in FY16, and will continue to submit claims for eligible projects at the appropriate time. See note 25 in 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 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.

The Board is excited about the growth opportunities ahead in the coming years, as existing franchises continue to be strengthened and new franchises developed. 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.

Financial Review

Trading results

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.

During this transition year direct work-for-hire revenue fell to zero for the first time as planned (2015: £3.4m), and self-published revenue grew to over 99% of 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 £7.3m (2015: £7.3m) and its investment in non-current assets was £9.2m (2015: £4.7m), consequently net cash balance reduced in this investment phase to £8.6m from £10.5m.

Total revenue was 6% lower year-on-year at £21.4m (2015: £22.8m), although self-published revenue grew from £16.8m to £21.0m and EBITDA was £4.9m (2015: £6.1m).

The Group delivered an operating profit of £1.2m (2015: £1.6m).

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 £2.7m (2015: profit £2.5m), 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 expenses 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) continue 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 £8.6m (2015: £10.5m) with movements summarised as follows:

Summarised cash flow statement	31 May 2016 £m	31 May 2015 £m
CASH AT START OF PERIOD	10.5	8.6
Operating cashflow	7.3	7.3
Investing activities	(9.7)	(5.1)
Financing Activities	0.3	-
Exchange Differences	0.2	(0.3)
Movement in net cash balance inc borrowings	(1.9)	1.9
Cash at end of Period	8.6	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 £0.6m to meet the exercise of options related to the expiry options, mainly issued in 2005.

A working capital improvement of £2m was mainly supported by an increase in deferred income of £1.5m.Funding and other sources comprised share issues and tax credits received. Financing from share issues, warrants and options exercised amounted to £0.3m.

The overall result was a decrease of £1.9m in net cash and cash equivalents to £8.6m, 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	2016 £m	2015 £m
Customer receipts	19.4	21.1
Funding and other sources	0.7	0.3
Incoming funds	20.1	21.4
Salaries	11.9	11.3
Overhead, Other expenses, Tax and currency differences	10.1	8.2
Outgoing flows	22.0	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 over 99% of 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 £21.4m (2015: £22.8m).

	2016 £'000	2015 £'000	% Change	2014 £'000
Revenue	21,363	22,763	(6%)	9,541

Revenue mix	2016 £'000	2015 £'000	% change	2014 £'000
Self-published	20,958	18,558	13%	424
External publishers	-	3,429	(100%)	7,707
Royalties	241	322	(25%)	1,366
Merchandise and Other	164	454	(64%)	44
Total Revenue	21,36 3	22,76 3	(6%)	9, 5 41

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 £0.2m from prior Elite Dangerous lifetime pass sales was released to the income statement in the year from the brought forward balance of £0.7m. During the financial year £1.7m 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 £2.2m (2015: £0.7m)

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).

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 3^rd 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).

Gross margin	2016 £'000	2015 £'000	% change
Self-published	16,061	17,078	(6%)
External publishers	-	3,429	(100%)
Royalties, Merchandise & Other	204	137	49%
Gross margin	16,265	20,644	(21%)

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 practise and as a result there are no costs attributed to External Publisher work in the comparative period shown above. Costs of £2.5m 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.

Profitability

At the Operating and pre tax level, Frontier continues to be a profitable operation whilst still in its planned transition. 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	2015 £'000	% Change	2014 £'000
Operating result	1,238	1,566	(21%)	(1,705)
Depreciation	262	271		225
Amortisation and impairment	3,376	4,246		1,802
EBITDA	4,876	6,083	(20%)	322
Share-based compensation	738	767		286
Fair value adjustments	551	72		32
Gain on sale of investment	-	1		(21)
Funding costs / listing expenses	-	-		217
Dilapidations provision	13	37		36
Subsidiary set-up fees	-	7		-
EBITDA adjusted	6,178	6,967	(11%)	872
R&D capitalised	(8,857)	(4,338)		4,035
Tax credits deducted from Administration costs	(13)	(163)		(307)
Adjusted Operating (Loss)/ profit	(2,692)	2,466	(209%)	(3,470)

Amortisation has reduced as in the period up to the release of Elite: Dangerous, 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 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 2.1 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 capitalized reflects the change to all development being for self-published projects.

FINANCE INCOME

Interest receivable from the Group's cash resources was £0.04m (2015: £0.05m), 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 2 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 £0.9m, £0.2m of which have been received post year end and thus recognised in full. The remaining £0.7m has not been recognised as we await acknowledgement from HMRC.

The Group had a tax credit of £0.16m for current taxes within which is a liability of £0.05m relating to overseas tax and tax credits of £0.21m recognized in the UK. In the prior year the Canadian operation incurred a £0.01m charge.

There is no deferred tax liability in the Group for the financial year ended May 2016 (prior year £0.04m in Canada).

The parent company continues to hold unused tax losses of £5.6m 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 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 £8.9m 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, £11.5m of self-published net book value is represented by the Elite Dangerous franchise, and £3.7m for Planet Coaster, (scheduled for Q4 2016).

Research and development expensed was £0.6m (2015: £0.8m).

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 £0.2m. 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 £10.0m dated 9 December 2014. At 31 May 2016 the loan balance drawn down was £1.4m, and the trust owned 230,400 Ordinary Shares.

CURRENT ASSETS

Trade and other receivables were £0.6m lower at £2.4m, 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 £3.1m (2015: £3.1m). 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 £2.2m (2015: 0.7m) with £1.1m (2015: £0.6m) being reported in non-current liabilities, being revenue from the sale of lifetime passes which are being recognized 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 £0.04m 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                          NEIL ARMSTRONG

Chief Operations Officer          Company Secretary and Chief Finance Officer

6 September 2016

CONSOLIDATED STATEMENT OF CASHFLOWS

FOR THE YEAR ENDED 31 MAY 2016

	31 May 2016 £'000	31 May 2015 £'000
Operating activities
Cash generated from operations (see below)	7,475	7,334
Finance income	(37)	(53)
Taxes (paid) / received	(121)	23
Cashflow from operating activities	7,317	7,304
Investing activities
Purchase of property, plant and equipment	(233)	(289)
Expenditure on intangible assets	(8,965)	(4,385)
Proceeds from disposal of non-derivative financial assets	-	36
Employee benefit trust investment	(563)	(551)
Interest received	37	53
Cashflow from investing activities	(9,724)	(5,136)
Financing activities
Repayment of interest-free loan	-	(158)
Proceeds from issue of share capital	276	159
Cashflow from financing activities	276	1
Net change in cash and cash equivalents from continuing operations	(2,131)	2,169
Cash and cash equivalents at beginning of period	10,478	8,612
Exchange differences on cash and cash equivalents	263	(303)
Cash and cash equivalents at end of period	8,610	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

	31 May 2016 £'000	31 May 2015 £'000
Profit after tax	1,432	1,647
Depreciation and amortisation	3,638	4,517
Fair value adjustments	551	31
Profit on disposal of fixed assets and available for sale assets	-	1
Proceeds from the sale of non-current assets	-	16
Share-based payment expenses	738	767
Taxation	(162)	(190)
Foreign exchange	(267)	242
Operating cashflow before changes in working capital	5,930	7,031
Net changes in working capital:
Change in inventories	4	2
Change in trade and other receivables	603	74
Change in trade and other payables	925	190
Change in provisions	13	37
Cash generated from operations	7,475	7,334

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 MAY 2016

	Notes	31 May 2016 £'000	31 May 2015 £'000
Revenue	5	21,363	22,763
Cost of sales		(5,098)	(2,119)
Gross profit		16,265	20,644
Other income		3	3
Selling and distribution expenses		(3,887)	(2,749)
Administrative expenses		(4,154)	(4,561)
Research and development expenses		(6,989)	(11,771)
Operating profit		1,238	1,566
Finance income	24	37	53
Profit before tax	6	1,275	1,619
Income tax	25	157	28
Profit for the period attributable to the equity holders of the parent		1,432	1,647

All the activities of the Group are classified as continuing.

	Notes	31 May 2016 p	31 May 2015 p
Earnings per share	26
Basic earnings per share		4.2	4.9
Diluted earnings per share		4.1	4.7

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MAY 2016

	31 May 2016 £'000	31 May 2015  £'000
Profit for the period	1,434	1,647
Other comprehensive income:
Items that will be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations	(4)	(27)
Total comprehensive income for the period attributable to the equity holders of the parent	1,428	1,620

The accompanying accounting policies and notes form part of this financial information.

CONSOLIDATED 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	7	16,690	11,101
Property, plant and equipment	9	304	333
Total non-current assets		16,994	11,434
Current assets
Inventories	13	9	13
Trade and other receivables	14	2,443	3,046
Other short-term assets	15	376	50
Cash and cash equivalents	16	8,610	10,478
Total current assets		11,438	13,587
Total assets		28,432	25,021
Equity and liabilities
Equity
Share capital	17	170	168
Share premium account		14,476	13,963
Equity reserve		579	633
Foreign exchange reserve		(61)	(57)
Retained earnings		7,600	6,180
Total equity		22,764	20,887
Liabilities
Current
Trade and other payables	20	3,073	3,107
Deferred income	22	1,085	96
Current tax liabilities	21	89	-
Total current liabilities		4,247	3,203
Non-current
Provisions	23	273	260
Deferred income	22	1,148	627
Deferred tax	12	-	44
Total non-current liabilities		1,421	931
Total liabilities		5,668	4,134
Total equity and liabilities		28,432	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.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MAY 2016

	Share capital £'000	Share premium account £'000	Equity reserve £'000	Foreign exchange reserve £'000	Retained earnings £'000	Total equity £'000
At 31 May 2014	167	13,805	790	(30)	4,160	18,892
Increase in equity in relation to options issued	-	-	767	-	-	767
Net loss on EBT shares	-	-	(495)	-	-	(495)
Own shares held by the EBT	-	-	(56)	-	-	(56)
Share-based payment transfer	-	-	(373)	-	373	-
Issue of share capital less expenses	1	158	-	-	-	159
Transactions with owners	1	158	(157)	-	373	375
Profit for the year	-	-	-	-	1,647	1,647
Other comprehensive income:
Exchange differences on translation of foreign operations	-	-	-	(27)	-	(27)
Total comprehensive income for the year	-	-	-	(27)	1,647	1,620
At 31 May 2015	168	13,963	633	(57)	6,180	20,887
Increase in equity in relation to options issued	-	-	738	-	-	738
Net loss on EBT shares	-	-	(412)	-	-	(412)
Own shares held by the EBT	-	-	(392)	-	-	(392)
Share-based payment transfer	-	-	12	-	(12)	-
Issue of share capital less expenses	2	513	-	-	-	515
Transactions with owners	2	513	(54)	-	(12)	449
Profit for the year	-	-	-	-	1,432	1,432
Other comprehensive income:
Exchange differences on translation of foreign operations	-	-	-	(4)	-	(4)
Total comprehensive income for the year	-	-	-	(4)	1,432	1,428
At 31 May 2016	170	14,476	579	(61)	7,600	22,764

The accompanying accounting policies and notes form part of this financial information.

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., based in Canada and Frontier Developments Inc. 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. 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.

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)

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 recognized 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:

	31 May 2016 £'000	31 May 2015 £'000
United Kingdom	3,271	5,795
United States of America	8,787	7,687
Rest of the world	9,305	9,281
	21,363	22,763

The Group's gross profit by each revenue stream is as follows:

	31 May 2016 £'000	31 May 2015 £'000
Self-published	16,061	17,078
External publishers	-	3,429
Royalties, merchandise and other income	204	137
	16,265	20,644

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'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', royalties, or Merchandise and other

	31 May 2016 £'000	31 May 2015 £'000
External publishers	-	3,429
Self-published	20,958	18,558
Royalties	241	322
Other	164	454
	21,363	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:

	31 May 2016 £'000	31 May 2015 £'000
Operating profit	1,238	1,566
Depreciation	262	271
Amortisation and impairment	3,376	4,246
EBITDA	4,876	6,083
Share-based compensation	738	767
Dilapidation provision	13	37
Fair value adjustments	551	72
Gain on investment	-	1
US set-up fees	-	7
Adjusted EBITDA	6,178	6,967
R&D capitalized	(8,857)	(4,338)
Tax credits deducted from Administration costs	(13)	(163)
Adjusted Operating (loss)/profit	(2,692)	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.

SIGNIFICANT ACCOUNTING ESTIMATE

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 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

	31 May 2016 £'000	31 May 2015 £'000
This is stated after charging / (crediting):
Amortisation and impairment on intangibles	3,376	4,246
Depreciation of owned property, plant and equipment:	262	271
Research and development costs expensed	609	287
Auditor remuneration:
Audit of the parent and group	40	39
Audit related assurance services	10	8
Operating leases - land and buildings	655	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

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

	Development tools and licenses £'000	Self-published software £'000	Third party software £'000	Total £'000
Cost
At 31 May 2014	4,527	9,466	956	14,949
Additions - arising from internal development	663	3,675	47	4,385
Disposals	(848)	-	(9)	(857)
At 31 May 2015	4,342	13,141	994	18,477
Additions - arising from internal development	398	8,459	108	8,965
Disposals	(774)	-	-	(774)
At 31 May 2016	3,966	21,600	1,102	26,668
Amortisation and Impairment
At 31 May 2014	2,025	1,166	796	3,987
Charge for the period	1,075	2,680	116	3,871
Charge for the period for acquired rights	-	375	-	375
Disposals	(848)	-	(9)	(857)
At 31 May 2015	2,252	4,221	903	7,376
Charge for the period	1,127	1,509	96	2,732
Charge for the period for acquired rights	-	644	-	644
Disposals	(744)	-	-	(774)
At 31 May 2016	2,605	6,374	999	9,978
Net book value at 31 May 2016	1,361	15,226	103	16,690
Net book value at 31 May 2015	2,090	8,920	91	11,101

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.

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
• 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
• 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 their 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 value of the Group's intangible assets including rights acquired at 31 May 2016 is £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.

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

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

In respect to amortisation, normally self-published titles are amortised on completion of the game, however an exception to this occurs when project funding is obtained via innovative crowd-funded platforms, such as Kickstarter. Such funding is generally seen as 'contributing to make the game happen' and requires the Group to set up a number of pledge levels which include a donation element. When 'donation and intangible' elements of pledge levels are recognised as revenue, an equivalent amount of amortisation charged 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 6 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 Group includes Frontier Developments Inc., a company registered in Canada and Frontier Developments Inc., a company registered in the US. These companies are engaged in publisher support services for the group.

ACCOUNTING POLICY

Employee Benefit Trust

As the Group 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

	Fixtures and fittings £'000	Computer equipment £'000	Leasehold improvements £'000	Total £'000
Cost
At 31 May 2014	273	1,399	10	1,682
Additions	76	213	-	289
Disposals	(116)	(267)	(6)	(389)
At 31 May 2015	233	1,345	4	1,582
Additions	2	231	-	233
Disposals	-	-	-	-
At 31 May 2016	235	1,576	4	1,815
Depreciation
At 31 May 2014	230	1,118	6	1,354
Charge for the period	52	216	3	271
Disposals	(110)	(261)	(5)	(376)
At 31 May 2015	172	1,073	4	1,249
Charge for the period	41	221	-	262
Disposals	-	-	-	-
At 31 May 2016	213	1,294	4	1,511
Net book value at 31 May 2016	22	282	-	304
Net book value at 31 May 2015	61	272	-	333

Depreciation charges are apportioned to the income statement as follows:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Charge
Cost of sales	253	241
Administration expenses	9	30
Total	262	271

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	5 years
Computer equipment	2½ years - 5 years
Leasehold improvements	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.

10.       OPERATING LEASES AS LESSEE

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

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Minimum lease payments due within one year	692	670
Minimum lease payments due within one to five years	2,037	2,669
Minimum lease payments due in greater than five years	-	43
Total	2,729	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, 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.

Group 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 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:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Loans and Receivables
Trade and other receivables	1,598	1,592
Cash and cash equivalents	8,610	10,478
Total	10,208	12,070

Derivative Financial Instruments

The Group's financial instruments measured at fair value are summarised below:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Derivative financial (liabilities)/assets
Total - Forward exchange contracts - held for trading	(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.

	Consolidated year ended
	31 May 2016 £'000		31 May 2015 £'000
Financial liabilities
Financial liabilities measured at amortised cost:
Trade and other payables	2,336	2,806
Total	2,336	2,806

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 assets 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).

12.       DEFERRED TAX ASSETS AND LIABILITIES

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

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Accelerated capital allowances	1,885	1,493
Short-term temporary differences (restricted)	(267)	(483)
Tax losses (restricted)	(1,618)	(966)
Total liability	-	44
Balance brought forward	44	74
Effect of tax rate change on opening balance	-	-
Effect of exchange rate change on opening balance	-	(2)
Movement in year	(44)	(28)
Balance carried forward liability	-	44

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 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). 

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Deferred tax asset not provided
Losses and Video Games Tax Relief	(893)	(1,122)
Total	(893)	(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:

	Group year ended
	31 May 2016 £'000	31 May 2015 £'000
Merchandise	9	13
Total inventory	9	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.

14.       TRADE AND OTHER RECEIVABLES

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

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Trade receivables, net	106	134
Derivative financial instruments	-	163
Other receivables	1,492	1,458
Financial assets	1,598	1,755
Prepayments	779	770
VAT and other taxes	66	521
Non-financial assets	845	1,291
Trade and other receivables	2,443	3,046

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:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Other short-term assets - current tax assets	376	50

16.       CASH AND CASH EQUIVALENTS

Cash and cash equivalents include the following components:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Cash at bank and in hand
GBP	6,352	7,944
USD	1,404	2,229
EUR	301	55
CAD	553	250
Financial assets	8,610	10,478

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.

17.       EQUITY

Share Capital

Group movements in share capital

Movements in Ordinary Shares are as follows:

	2016		2015
	Number '000	Value £'000	Number '000	Value £'000
At 1 June 2014 and 31 May 2015
Ordinary Shares of 0.5 pence	33,580	168	33,384	167
Shares issued on option exercises	217	1	196	1
Shares issued to Employee Benefit Trust	300	1	-	-
At 31 May 2016	34,097	170	33,580	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 - 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 - This 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 - This represents the exchange difference on consolidation of overseas subsidiaries. Retained earnings - 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:

	31 May 2016 £'000	31 May 2015 £'000
Wages and salaries	10,603	10,933
Social security costs	1,084	1,048
Pension costs	92	84
Share-based compensation	738	767
	12,517	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:

	31 May 2016 £'000	31 May 2015 £'000
Research and development	267	258
General and administrative	14	15
	281	273

Remuneration of Directors

	31 May 2016 £'000	31 May 2015 £'000
Directors' emoluments	609	540
Non-Executive fees	20	20
Non-Executive consultancy fees	60	60

Emoluments of Highest Paid Director

	31 May 2016 £'000	31 May 2015 £'000
Emoluments	209	180

Remuneration of Key Management Personnel

	31 May 2016 £'000	31 May 2015 £'000
Short-term employee benefits
Salaries including bonuses	1,401	1,321
Social security	178	168
Pension contributions	13	12
Benefits in kind	8	7
Total short-term employee benefits	1,600	1,508
Non-Executive fees	60	50
Share-based compensation charge	351	488
Total	2,011	2,046
Key management of the Group are the Board and senior management (functional heads). Number of key management personnel, including Directors, at the statement of financial position date	13	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.

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 the 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	Scheme type	Period when exercisable	Price in pence	2016 Number	2015 Number
6 December 2005	2002 EMI scheme	2006-2015	67	-	443,400
30 July 2012	2013 EMI scheme	2012-2022	89	722,523	789,223
15 May 2013	2013 EMI scheme	2014-2023	95	224,000	228,000
21 March 2014	Company Share Option Plan	2017-2024	224.5	206,000	228,000
15 September 2014	Company Share Option Plan	2017-2024	257.5	283,950	291,950
15 September 2014	Unapproved	2017-2024	257.5	626,850	649,850
15 September 2014	Unapproved	2015-2024	257.5	288,350	288,350
10 March 2015	Company Share Option Plan	2018-2025	230	175,600	232,100
10 March 2015	Unapproved	2018-2025	230	8,200	8,200
21 September 2015	Company Share Option Plan	2018-2025	193.5	144,800	-
21 September 2015	Unapproved	2018-2025	193.5	47,400	-
				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	Warrant type	Period when exercisable	Price in pence		2016 Number	2015 Number
8 July 2013	Unapproved pre-IPO warrants*	2013-2023	95	65,790		65,790
15 July 2013	Unapproved IPO warrants**	2013-2015	127	15,748		232,832
15 July 2013	Unapproved IPO warrants*	2013-2023	127	147,638		147,638
10 March 2015	Unapproved Options	2018-2025	193.5	25,000
				254,176		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.

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

	Consolidated year ended
		31 May 2016		31 May 2015
		Number	Weighted average exercise price in pence	Number	Weighted average exercise price in pence
Opening balance		3,372,501	181.9	2,440,426	100.0
Granted		193,200	193.5	1,512,450	216.6
Exercised		(508,100)	70.9	(496,375)	78.7
Forfeited		(91,500)	226.3	(84,000)	210.4
Closing balance		2,966,101	157.0	3,372,501	181.9
Exercisable at the year end		1,159,951	95.3	1,674,051	87.6

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:

		Consolidated year ended
		31 May 2016		31 May 2015
Expiry date	Exercise price per share Pence	Options Number	Weighted average remaining contractual life Months	Options Number	Weighted average remaining contractual life Months
December 2015	67	-	-	443,400	7
July 2022	89	722,523	72	789,223	84
May 2023	95	224,000	84	228,000	96
July 2023	95	65,790	86	65,790	98
July 2023	127	147,638	86	147,638	98
March 2024	224.5	206,000	94	228,000	106
September 2024	257.5	1,199,150	100	1,230,150	112
March 2025	230.0	208,800	106	240,300	118
September 2025	193.5	192,200	111	-	-
Total		2,966,101	91	3,372,501	90

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:

	September 2015	March 2015
Share price at date of grant (pence)	193.5	230
Exercise price	193.5	230
Expected time to expiry (years)	8.25	8.47
Risk-free interest rate (%)	2.9	4.3
Expected dividend yield on shares (%)	0	0
Expected volatility of share price (%)	34	38
Fair value of options granted (pence)	86.8	123.4

The assumptions of volatility for the September 2015 round is based on statistical analysis of share price data from the listing on AIM.

Employee Benefit Trust (EBT)

On 5 December 2014 the Parent 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 parent 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 that estimated on vesting. Upon exercise of share options, the proceeds received up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. 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:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Trade payables	702	1,014
Accruals	1,635	1,792
Financial liabilities	2,337	2,806
Derivative financial instruments	388	-
Other taxation and social security	348	301
Total trade and other payables	3,073	3,107

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:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Current tax liabilities	89	-

The Group current tax liability is £89,136. This is represented by a UK tax liability of £nil and the remainder attributed to Canada.

22.       DEFERRED INCOME

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

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Deferred Income - Self-published activities	2,233	723

£1,085,612 of deferred income is to be recognised within one year with the remaining £1,147,767 due within the next 5.5 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

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Opening balance	260	223
Provided for in period	13	37
At period end	273	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	31 May 2015 £'000
Interest income from cash and cash equivalents	37	53

25.       TAXATION ON ORDINARY ACTIVITIES

a)   Analysis of the charge in the period

	31 May 2016 £'000	31 May 2015 £'000
UK corporation tax based on the results for the year
Overseas tax on the results for the period	94	-
Video Games Tax Relief credits (UK)	(207)	-
Deferred tax	(44)	(28)
Tax on profit on ordinary activities	(157)	(28)

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:

	31 May 2016 £'000	31 May 2015 £'000
Profit on ordinary activities before taxation	1,275	1,619
Tax on profit on ordinary activities at standard rate	250	347
Factors affecting tax expense for the year:
Expenses not deductible for tax purposes	297	236
Adjustments for opening deferred tax average rate	-	(2)
Research and development tax credits	(410)	(282)
Deferred Tax	44	-
Exercise of share options	(159)	(163)
Losses to carry forward	(179)	(164)
Total amount of tax	(157)	(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 recognized, 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.

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.

	31 May 2016	31 May 2015
Profit attributable to Shareholders (£'000)	1,432	1,647
Weighted average number of shares	33,812,840	33,513,575
Basic earnings per share (pence)	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. 

	31 May 2016	31 May 2015
Profit attributable to Shareholders (£'000)	1,432	1,647
Diluted weighted average number of shares	35,302,973	35,346,221
Diluted earnings per share (pence)	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	31 May 2016	31 May 2015
Ordinary Shares	33,812,840	33,513,575
Under option	1,490,133	1,832,647
Diluted average number of shares	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:

	31 May 2016	31 May 2015
Adjusted Operating (loss) / profit attributable to shareholders (£'000)	(2,691)	2,466
Weighted average number of shares	33,812,840	33,513,575
Adjusted basic (loss) / earnings per share (pence)	(8.0)	7.4
Weighted average number of shares (diluted)	35,302,973	35,346,222
Adjusted diluted earnings per share (pence)	(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.

	Consolidated year ended
	Expense paid 31 May 2016 £'000	Creditor balance 31 May 2016 £'000	Expense paid 31 May 2015 £'000	Creditor balance 31 May 2015 £'000
Chris Sawyer - royalties	84	-	58	-
Marjacq Micros Limited - sales Commission	19	-	33	-

	Consolidated year ended
Connected party	Change in value of loan expense paid  31 May 2016 £'000	Change in value of Loan  31 May 2015 £'000
Employee Benefit Trust - Share Options exercised by employees	129	(63)
Employee Benefit Trust - Shares issued and market purchases	675	614
Movement in Year	804	551
Opening Loan balance	550	-
Closing Loan balance	1,354	551

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				Consolidated year ended
	31 May 2016				31 May 2015
	CAD	USD	Euro	CAD		USD	Euro
	£'000	£'000	£'000	£'000		£'000	£'000
Assets	553	1,404	301	9		2,229	55

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.

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Effect of a 5% change in relevant exchange rate on:
Income statement	298	202
Equity	188	192

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:

	Current			Non-current
	Within 6 months £'000	Between 6 and 12 months £'000	Between 1 and 5 years £'000		Later than 5 years £'000
As at 31 May 2016
Trade and other payables	2,281	56	-		-
As at 31 May 2015
Trade and other payables	2,748	58	-		-

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

	Current		Non-Current
	Within 6 months £'000	Between 6 and 12 months £'000	Between 1 and 5 years £'000	Later than 5 years £'000
As at 31 May 2016
Trade and other payables	2,311	56	-	-
As at 31 May 2015
Trade and other payables	2,721	58	-	-

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:

	Consolidated year ended
	31 May 2016 £'000	31 May 2015 £'000
Total equity	22,764	20,887
Borrowings (includes current element)	-	-
Less cash and cash equivalent	(8,610)	(10,478)
Total Capital	14,154	10,409

30.       ULTIMATE CONTROL

The Directors consider that David Braben has a majority control of the Group by reference to his shareholding interest.

 

END

 

 

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