Cloud Imperium Financials for 2023

Foreword

I am updating our followers and community on the 2023 Accounting. Consistent with previous years, we follow simple cost accounting rules without complicated adjustments like revenue recognition or intellectual property amortization. This is aimed at making the update straightforward and easy to understand.

The Accounting published here follows previous year formats showing “income,” net of sales taxes, as invoiced or accrued, and costs as incurred. We add to this capital expenditure as “spent.”

As usual, we aim to give more relevant details regarding how the income and costs are classified compared to what we would be required to do in published financial statements. The basis of this analysis remains the management accounts numbers that underpin the financial statements we provide to our auditors, upon which they perform their work for the annual audit.

Overall

2023 was a very eventful year in the history of Cloud Imperium.

Income grew again, up 9% to $143M, with regular sales up 5%, subscriptions up 23%, and other income up 50%, the latter owing both to the acquisition of Turbulent and a change in our operations as we intensified development in the UK.

However, our costs also grew considerably, arising from many strategic and tactical decisions that impacted during the year.

Our costs, including capex, increased 26% to $163M driven by:

· Increased UK-led development.

· Dedication of resources to Squadron 42 to push to feature complete.

· Acquisition of Turbulent and adding those c.200 people and overhead to our cost base.

· Largest CitizenCon ever in Los Angeles to showcase improvements coming to the game.

Thus, despite increasing our top-line income by $12M, we delivered a ($14M) loss before capex and a ($20M) loss after for the year, using our simple ‘cost accounting’ basis.

The Turbulent acquisition, after inward investment and cash and near cash assets acquired through the transaction, took a further ($2M) out of our cash reserves – but all of this was factored into our long-term planning with all expenditure vital in advancing us closer to our mid- and long-term goals.

The change in our worldwide operational setup did see a shift in the composition of our numbers, with the UK and Germany focusing on game technology and development, the US focusing on publishing and marketing, and Turbulent (hitherto run through the US, but acquired through the Rest of World side of the organization) feeding into all these functions. Thus, the US side of the group reduced its overall costs (including capex) by 12% to account for 33% of the total group expenditure (2022: 47%), whilst the Rest of World side increased by 59% to account for 67% of 2023 cost and capex expenditures (2022: 53%).

Income

Summary

In 2023, we experienced another year of sales growth, with sales increasing by 5% to $119M. However, this growth was not as predicted or uniform, probably unsurprisingly for a game being developed and released pre-alpha, but particularly with our development goals requiring us to introduce key new technology during the year into our live pre-alpha game. During the middle of the year this created technical issues (many not of our making), which impacted on the gaming experience and customer engagement. However, the nature of our open development also forced (and enabled) us to solve many of the key issues identified and we overcame them to finish the year stronger than ever, showcasing more new features we would soon be bringing to Star Citizen.

Subscriptions rose by 23% to $6.5M, while other income grew significantly by 50% to $17.1M, reflecting the service income and credits generated through Turbulent following the acquisition of that business in July 2023. Also, partly due to the expansion of UK development and the related credits thereof.

To recap, the top three lines describe our revenue sources:

Pledges / Sales (from Counter) This line is taken directly from our daily published Funding Stats Counter, showing the net receipts from our backers and customers. The vast majority of sales are of starter pack sales granting access to the Star Citizen alpha game, as well as spaceships and digital items immediately delivered and playable in the game. A smaller fraction of sales came from pledges for concept ships, which all come with an included “loaner” ship for immediate use and playability within Star Citizen alpha. Due to exchange differences and small items that are not included in the counter, such as shipping costs charged 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 sales received.

Subscriptions

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.

Other Income

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 to above.

Following the acquisition of Turbulent in 2023, it also includes their local incentives and their third-party web service business, where this was maintained following the acquisition.

Trading Costs

Summary

As noted above, 2023 was a busy year at Cloud Imperium.

At the beginning of the year, we made the decision to move Star Citizen onto our StarEngine so we could take it to the next stage in its development and add and improve more features and content that we knew our community and customers were and are keen to see realized. Internally we marked this as the end of the long prototyping phase we had been going through and, whilst not changing our open development philosophy, we recognized this change in our development focus as a further step on the roadmap to commercial release.

As set out in my last report, we also made the decision at the start of 2023 that we needed to dedicate and ringfence more resources for our Squadron 42 game in order to get that game to feature complete by the end of the year – again a significant step on its roadmap to full commercial release. Hitherto it was all too easy to divert resources earmarked for Squadron onto Star Citizen to tackle live issues raised by our customers and community stemming from our latest releases, but this was at the expense of the Squadron development plan. So, although an expensive commitment, the decision was taken to devote

these planned and required resources to Squadron 42 in the interests of making solid progress towards our ultimate goals.

Additionally, as also referenced in my last report, we completed in July 2023 the acquisition of Turbulent, whom we have worked with for over a decade, to provide not just the online customer and platform focused web services technology and support that we had initially engaged them for back in 2012, but to also tap into their game development talent that we had more recently grown with them and now brought in-house through this transaction.

As if that was not enough, towards the end of the year we held the biggest live CitizenCon event in our history to 3,000+ people in Los Angeles, where we were able to showcase the new elements we could now bring to the game with our StarEngine and demonstrated what those features might look like, many of which had been developed ‘behind closed doors’ as part of our Squadron 42 work.

This goes to explain the 26% increase in our expenditure, including capex, over 2022 with all cost categories up on 2022 except for capex, which was lower as 2022 included the bulk of the investment in the Rest of World Offices and facilities as outlined in the last report.

Salaries and people grew as the acquisition of Turbulent took us to slightly over 1,100 people at its peak before settling down to 1,085 by the end of the year. Overheads, now reflecting almost full costs in our Rest of World locations to which we added Turbulent, also grew significantly and only contracted game development. That previously included Turbulent contracted services but from July 2023 onward did not, as this resource was internalized, did not grow as significantly as other cost categories, and will in fact fall considerably in 2024.

Salaries and related on-costs

Salaries and related on-costs represent the total employee cost within the Group, excluding service-oriented publishing, community, and marketing personnel – whose salaries and related costs are included within that cost line.

This shows that salary costs increased markedly outside of the USA (+44%), representing both a growth in UK development and, through the second half of the year, all development and related costs incurred in Montreal, Canada following the Turbulent transaction. Including Turbulent, the Rest of World non-publishing and marketing headcount increased by 153 people (27%).

In contrast, US salary costs decreased by 20% following a 30% reduction in US development headcount during the year.

Other group costs (overheads)

Other group costs include expenses for studio operations such as office rental, maintenance, travel, accommodation, IT, and other costs not included in the other cost categories. In 2023, these costs rose by 80% to $33.1M.

US offices and overheads grew by less than 5% as the group's US presence remained stable in 2023. The composition of the US operations changed somewhat with a reduction in development (as noted above) and only a small increase in publishing and marketing headcount. Consequently, the US offices were not

expanded, and we would have reduced our overheads in the US were it not for our continued investment into our IT infrastructure, hardware, and software.

In contrast, the Rest of World overhead costs more than doubled, which was largely driven by three main factors:

· The Turbulent transaction during the year, which added almost 200 people to our group and over 13,000 sq ft of office space in Montreal, Canada.

· The improved office facilities of over 30,000 sq ft in Frankfurt, referred to in my previous report, which came fully on-line during 2023.

· And the same only more so with respect to Manchester, to which we added an additional 35,000 sq ft floor during 2023 to accommodate the planned growth expected there, for what is now by far the largest office in the group and the hub of our development operations.

Contracted Game Development Costs

These represent the costs of contracted services supporting game development work. In 2023, contracted game development costs rose to $12.4M, a 15% increase. The Rest of the World region, headed by the UK, leads all development activities, including Turbulent development, that was previously managed out of the US.

From July onward, the Turbulent team became part of our internal group, reporting into the UK, although we still maintain external services where it makes sense and is efficient to do so. From 2024, Contracted Game Development costs will therefore be a smaller but still important part of our total costs, including elements such as head scanning, shoot and motion capture, as well as music composition and orchestration.

Publishing Operations, Community, Events, and Marketing

These costs are associated with running the game, deploying online services, and providing customer support. It also includes the costs of running our platform, publishing, data hosting, and server costs. It includes sales collection, customer liaison costs, and the costs of our marketing and community events. Many elements of this cost line correlate closely with income and user engagement but in 2023 we also had two additional factors driving the 33% growth in this cost category to $39.7M.

· From July, the acquisition of Turbulent added 98 people in this area of the business (although this includes web services for third parties – generating incremental sales as noted earlier) now employed but supplying those services that were hitherto invoiced to the US.

· The CitizenCon event in Los Angeles, which attracted over 3,000 people to witness the unveiling of StarEngine and showcased what was therefore coming shortly to the Star Citizen game as a consequence of this technological advancement.

Despite internalizing our Turbulent Publishing services through the ROW from July, the bulk of our publishing and marketing operations continue to be run through the US, which accounted for 65% of spend in this cost category.

It should not be surprising that this spend category is increasing as our game reaches a wider audience, despite, from our perspective, it only just getting out of the prototyping phase. It is essential for us to support our expanding community and customer base while ensuring player engagement in the rich

environment we are developing. Therefore, we continue to prioritize investment in our servers, platform, and community tools to enhance the Star Citizen experience, making it comprehensive, secure, and enjoyable.

General and Admin

These costs represent insurance, accountancy, and other professional and legal fees not apportioned directly into the cost areas identified previously. An increase in our cyber security insurance cover and operations generally worldwide, adding fees associated with the Merger and Acquisition activities undertaken in 2023, meant these costs increased by £1.2M to $2.6M in 2023.

Capex and Investments

This includes capital expenditure on hardware, software, fixtures, fittings, and offices. It varies with staff numbers and includes expenses for hardware renewals, server upgrades, and other security and infrastructure purchases.

It is included in this accounting as it represents an outlay for the materials required to develop and publish the games. Since the total capital expenditure amount is included here, we do not list the depreciation portion of such expenditure subsequently in the cost analysis.

Capex spending in 2023 was $7M, representing the tail end of the fit-out phases in the Rest of World locations that peaked in 2022 and was highlighted in the 2022 report. Also, more computers and furniture were needed for our increasing staff.

Headcount Analysis

The headcount analysis represents the people working at the end of the year under the broad disciplines identified. (Note: It is not average people numbers for the year).

Employee numbers increased by 225 (25%) to 1,085 worldwide by the end of 2023. As identified in much of the commentary above, a large proportion of this increase has arisen from the acquisition of Turbulent in July 2023, which added 198 people to our end-of-year headcount. These are separately identified above in the various disciplines.

US headcount decreased by 25 people (10%) as development reduced, being taken up elsewhere in the group, and publishing and marketing operations only marginally increased. Excluding the Turbulent headcount added in Canada, the Rest of the World headcount grew by 52 (8%) mainly in development, including some relocation from within the group. By the end of the year, the Rest of the World represented 80% of Global headcount (up from 73% last year) although this includes our studio in Montreal which is 18% of our global workforce.

Overall

In 2023, the Group made substantial investments in strategic and tactical areas to progress towards its mid- and long-term objectives. The acquisition of Turbulent brought approximately 200 people into the group, along with the associated overhead and related costs, while securing essential skills in key areas. Gearing up and dedicating development resources, particularly in the UK, advanced us to our release objectives, with the greater effectiveness that stemmed from this change in our development operations, but it did add to our costs. Thus, 2023 was a year where we expended some of our accumulated reserves to accelerate and further our business.

This investment bore fruit in the latter part of 2024 when we released Star Citizen 4.0, which included the initial phase of the Server Meshing technology we demonstrated at the 2023 Los Angeles CitizenCon event. But, this was at the expense of regular releases throughout the year and, whilst it allowed us to end the year well, sales were only comparable with the prior year.

At the 2024 CitizenCon in Manchester, we were also able to demonstrate the roadmap and plan for what we believe will be the 1.0 version of Star Citizen. We also showed the progress made on Squadron 42 by playing through live a chapter in the game and announcing a 2026 release date. Yet all these factors require investment at a time when the macroeconomic environment is unfavorable and the games industry is demonstrating it is not immune to these economic headwinds. Thus 2024’s results,

when released, whilst showing some cost rationalization as we bed in the changes made in 2023, will follow a similar pattern.

However, we firmly believe and are demonstrating that the investments we are making are worthwhile and our investor shareholders share our beliefs evidenced by their recent equity investments and financing – as referenced in our 2023 UK filings. This funding supports the business and replenishes our reserves ready for this next exciting phase in our life cycle.

So, 2023 involved significant expenses and similar costs are anticipated for 2024. However, progress is being made towards our goals, with a focus on achieving our key objectives. We are working towards delivering a high-quality gaming experience and universe of substantial scale and fidelity, which is made possible through the support of our current and future players and community.