Following on from last year, we are publishing the Financial Year 2018 Accounting for the Cloud Imperium Group. This continues our policy of openness and transparency, a key company value since our inception and one of the pillars fueling our growth and success to date.
This report follows the same simple cost accounting rules adopted in last year’s report, without layering in revenue recognition or intellectual property amortization entries. We continue to adopt straight line recognition of “income” as invoiced or accrued and costs as incurred, adding capital expenditure as “spent.”
Our auditors have reviewed these numbers and verified the approach we have taken, tracing the numbers herein to our filed, and in the UK published, financial statements. Generally, we have tried to make the Accounting as easy to read and comprehensible as possible. Hence, it is not set out in a standard financial statement format but is instead focused upon the trading position of the Group following a cost accounting basis.
The 2018 accounting shows the continued growth of the Group with a record-breaking year for new customers and community engagement. Following the minority investment received in 2018 (and as stated at the time) we have targeted investment into the marketing and infrastructure of the business, to prepare for the future launch and promotional activities of the games in development. This generated a $2.4M increase in direct cost over 2017, as well as an increase in salaries for staff in those areas, which created a reduction in our retained profit reserve. Without such expansion the net cash-out for 2018 would have been less than in 2017.
The minority investment has strengthened the Group’s balance sheet, providing security to the business and most importantly has generated an increased reserve from which Cloud Imperium will market and promote the ground-breaking projects our community are allowing us to develop.
2018 was a record year to date for income with pledges up 8% to $37.8M and subscriptions up $7% to $3.3M. Other income reached its highest level to date up $2.2M to $7.9M, providing a pledges and income total of $48.9M, 12% up on 2017.
To recap, the top three lines describe our revenue sources:
Pledges / Counter
This line is taken directly from our daily published Funding Stats Counter, showing the net receipts from our backers and customers. However due to exchange differences and small items that are not included in the counter, such as collected shipping costs on physical goods, the counter does not completely represent all revenue received. Other than subscriptions (referred below) these differences are included in the final income line, to give an accurate representation of total revenue received.
The subscriptions line is the value of our subscriptions using standard exchange rates. Again, any differences due to exchange rate movements have been accounted for in the final income line.
The other income line represents partnership income with various hardware and software vendors, sponsorship income and various local incentives based upon the nature and location of our development and production activities. It also includes any exchange differences as referred above.
Trading costs are broken down by territory and year into 5 broad categories.
In 2018, Cloud Imperium continued to grow as a company, ramping up for the delivery and launch of our projects. This growth in content delivery costs primarily occurred in the “Rest of the World” group, as opposed to the US, as this is the most cost-effective way to continue to develop and deliver content for both projects.
The Publishing and Marketing side of the business has also grown in the Rest of the World but continues to be driven from the US. Whilst much of this growth in cost was caused by increased customer numbers and engagement, a substantial part of the higher cost can also be attributed to additional investment into our marketing infrastructure. This prepares Cloud Imperium for future initiatives and is consistent with the goals articulated during the announcement of the minority investment in May 2018.
Salaries and related on-costs
Salaries and related on-costs represent the total employee cost within the Group, excluding Community and Marketing personnel – whose salaries and related costs are included within their associated cost line.
This shows that salary costs increased in both territories, but mainly in the Rest of World territories, which increased 17%, driven by a 6% increase in non-marketing staff hires, who were generally at a senior level, plus promotion and merit pay increases. US salaries and related costs are up 5% compared to 2017, primarily driven by a 5% increase in G&A staff hires, added to other cost of living increases in the year.
As planned, the Rest of World development operations continued to increase, particularly in the UK, whilst the relatively more expensive US development team remained static. General and Admin salaries increased in both territories, particularly following the investment received in 2018, which allowed the business to bolster its hitherto under-resourced G&A function.
Other game development costs (overheads)
Other game development costs, representing the costs of operating the various studios and including such expenses as office rental and maintenance, travel and accommodation, IT, and other costs not included elsewhere, increased by 16% to $7.6M. The Rest of the World remains the largest element of this expense category, to cater for the growth in that territory and prepare for the projected growth to come. However, the Austin office, center for the group’s publishing operations, was also expanded in the period, contributing to the 20% increase in US overhead costs in 2018.
Contracted Game Development Costs
These represent the costs of contracted services supporting game development work. Costs followed a similar pattern to 2017 with only $0.3M of contracted services in the US, whilst the Rest of World increased its contracted services spend by $0.3M (+10%) to $3.3M.
Publishing Operations, Community, Events and Marketing
These costs are associated with running game and development online services, customer support and marketing (including salaries) as well as the cost of the platform and publishing and data hosting and server costs. It also includes sales collection and customer liaison costs. This cost area will move directly with income and unsurprisingly showed a large growth over 2017, increasing by 27% to $9M. These costs were hitherto concentrated in the US, but have expanded into the Rest of the World in 2018, where cost increased 13% to $1.8M, despite CitizenCon switching to the US in this year. US costs increased by 31%, impacted by the change in venue for CitizenCon, which was held in Austin in 2018 to record audiences, but also owing to increased customer engagement levels and specifically a targeted growth in our marketing infrastructure.
General and Admin
These costs represent insurances, accountancy and other professional and legal fees not apportioned directly into the cost areas identified previously. Leading up to and following the minority investment in 2018, the group increased its spend in this area to introduce tighter governance, increased insurance and a general strengthening of its legal and accountancy engagements.
Capex and Investments
This represents capital expenditure in areas such as hardware and software, fixtures, fittings, office refurbishment and build out. It is heavily influenced by staff numbers and hardware renewals as well as server upgrades and other infrastructure costs required for the efficient deployment of the game.
Whilst this is capital in nature, it is included in this accounting as it represents an outlay for the materials required to develop and publish the game. Since the total capital expenditure amount is included here, we do not list the depreciation portion of such expenditure subsequently in the cost.
Capex spend in 2018 was down on 2017 and low compared to prior years. Mainly this was due to a slowing in internal recruitment (staff numbers in 2018 are only up 12% on 2017, which is a rate of increase lower than previous years). However, the Austin office expansion and upgrades to the group IT systems saw US spend rise, contributing to the $0.9M total for the year.
As before, the headcount analysis at the bottom of the accounting represents the people working under the noted disciplines as of the end of the year. It is not average people numbers for the year.
Employee numbers increased again in 2018 but the growth has slowed compared to prior years, up only 57 in total on 2017 numbers. Also, much of this increase was in the marketing and publishing disciplines, with additional recruitment into general and admin, with development only increasing in the rest of the world. This reflects the consolidation and increasing maturity of Cloud Imperium’s operations with a growing marketing and publishing activity.
The 2018 Accounting shows the Group has continued to push forward on game development and publishing in this year – increasing its headcount and costs as it targets future releases and to maintain its steady build delivery program, with each quarter’s release demonstrating gradual improvement and new features.
The injection of capital through a minority investment in 2018 has afforded the business the opportunity to bolster its Marketing and General and Admin areas, which hitherto it was reluctant to invest in as it focused customer and backer contributions into the development and publishing of the game.
Without such investment the business would not have spent as much on those areas in 2018 as it did, as it is constantly mindful of balancing its development and publishing spend to its current and projected income.
In that regard, at the time of writing, I am pleased to report that we are ending 2019 with again a record -breaking year for us, which looks like it will surpass 2018 by a significant margin. This is testimony to the growing maturity of the game being made and how it is being received by our new and existing customers.
We have continued to bolster our marketing function throughout 2019 and have grown our development and G&A teams further, but we remain focused on the game and delivering to our customers and community the product they want.
The unique way we have built this company, engaging our customers in the very process of the development and carrying them with us throughout, is the life blood of the business and fundamental to our continued success. Now, with a little more capital behind us, we hope to have the means to get this message out to even more to join in the ride and become part of something truly groundbreaking. Like our Chairman said “I’m excited for the journey ahead.”
Simon Elms, Chief Financial Officer
December 20, 2019