Monday, October 25, 2021

Cloud Imperium UK Ltd.'s 2020 Financial Report And 86 Pence Dividend

Last week at MassivelyOP, Chris Neal reported about a Reddit kerfuffle concerning Cloud Imperium UK Limited's 2020 financial submission to the taxing authorities in the United Kingdom. Since the pro- and anti-Star Citizen mobs tend to obfuscate issues, I decided to dive into the report for myself. I've done similar looks at past CCP and Pearl Abyss financial statements, so why not for Cloud Imperium Games?

First, a couple of items to note. The financial report covers the operations of the entity operating in the U.K.  As the report notes:

Established since December 2013, Cloud Imperium UK Limited operates from the UK, managing the Worldwind rights to the Star Citizen and Squadron 42 PC video games outside of America. Through its revenues it directly funds the Cloud Imperium Games Limited development team, the largest development presence within the Cloud Imperium Group, and Roberts Space Industries International Limited's publishing activities, supporting all markets outside of the USA. (p. 1)

Those interested in a complete total for 2020 will still need to wait for December when CIG is due to release the overall financial numbers for 2020.

For the purposes of this post, I will use the conversion rate found on 31 December 2020 from the pound to the U.S. dollar of 1.37. I took the liberty of rounding the fraction up to the nearest hundredth.

Now on to the report itself. I picked out a few choice paragraphs not filled with boiler plate language and/or addressing requirements of law. I think quoting paragraphs will help keep statements in context. First, comments about profits and losses.

As reported on the profit and loss account on page 12, the Group has achieved record turnover in 2020 at £31.7m (2019: £23.1m) following the success of the quarterly releases of Star Citizen and an increase in user engagement in videogaming during the pandemic. Costs have risen to £32.1m (2019: £30.5m) as the Group continues to progress the development and publishing of the games. Other income is marginally lower at £5m (2019: £5.4m) but despite this the Group has achieved a profit of £4.8m (2019: £1.9m loss). (p.1)

That is not a good sign. The $43.4 million in ship and other types of sales, at least outside the Americas, did not cover $44 million in development costs incurred in the U.K. and Germany. The company still operated in the black due to other sources of income, mainly the £4.7 million the company received from the U.K. government in the form of the video games tax credit. Hopefully the Americas market will have better news.

The exceptional performance in 2020 is testament to the company's continued objective of developing and delivering a AAA gaming experience. The impact of global lockdowns due to the coronavirus pandemic has enabled the group to benefit from growth in new users. The business continues to invest in Squadron 42, set within the larger Star Citizen universe, in line with the revenue raised and its operating reserves. It continues to progress game development through Cloud Imperium Games Limited and publishing activities through Roberts Space Industries International Limited. [emphasis mine] (p. 1)

I don't really know what to say about the Squadron 42 situation. In July Chris Roberts announced in a video he was moving back to the U.K. in order to oversee the finishing of the game's development. But the financial statement, signed by Erin Roberts on 30 September, indicates Squadron 42 will receive development resources depending on if anything is left over from Star Citizen needs. Perhaps I am just too pessimistic about the statement.

The economic and competitive environment is expected to remain challenging during the year ahead as the pandemic enters its next phase, exposing the economic impact and presenting new challenges as lockdown restrictions ease following the global roll out of vaccines. Whilst monitoring and being prepared for what may come, the directors have little influence over the macro risks presenting themselves in these unprecedented times. The exceptional performance enjoyed by Cloud Imperium and indeed many video game developers and publishers in 2020 has strengthened the financial position of the group. Going forward the directors are aiming to minimize risks with continued improvements to build robustness and added features and through the strengthening of the underlying technology, in part buoyed by securing perpetual use of the Cryengine through a deal with Crytek reached during the year reported on. [emphasis mine]

Stop the presses! The last sentence refers to Cryteks's lawsuit against Cloud Imperium Games. According to Eurogamer's coverage on 22 February 2020:

It also further disputed CIG's claim that it had switched from CryEngine to Lumberyard, saying the Star Citizen developer had been "forced to confirm during this litigation that no such switch had taken place."

Cloud Imperium hit back in a strongly worded court document just a few weeks later, calling Crytek's lawsuit "meritless in light of CIG's separate licence with Amazon". Not only did it claim the licence expressly granted CIG the right to use CryEngine and to develop Squadron 42, it said Crytek had even received confirmation from Amazon that CryEngine was included in the Lumberyard licence granted to CIG in 2016.

The highlighted portion from the financial filing sure sounds like CIG is still using Cryengine and not Lumberyard.

On to the dividend. I'm pretty sure some would look askance at a developer paying out dividends before ever launching a game. But Cloud Imperium Games is not just making any game. The Star Citizen/Squadron 42 project, with a current lifetime revenue stream of over $514 million and counting, will soon surpass Red Dead Redemption 2 as the most expensive video game project ever devised. One of the criticisms of Chris Roberts is he profits inordinately from the project. Receiving a huge dividend payout would cement that belief in many minds. Defenders of Roberts point to outside investors (i.e. the Calders) demanding such a payment. The financial report helps clear up some facts.

A key piece of information from the report is the number of issued shares, 1,171,580. Along with the total dividend payout of £1,007,559 ($1,380,356), we know the dividend comes out to 86 pence, or $1.18, per share. Now the hard part: figuring out who owns how much?

CIG, in the press release announcing the Calders' initial investment, revealed the investment group purchased 113,861 shares, or almost 10% of the company. So far, so good, as 113,861 is 9.7% of 1,171,580. GameRant at the time reported that after the deal, Roberts would retain 75% of the ownership of CIG. The problem is the second investment tranche. I was not able to find any details beyond this statement from CIG:

March 27, 2020 – Today, Cloud Imperium announced that existing investors – the Calder Family Office, Snoot Entertainment, and ITG Investment – have exercised a one-time option to purchase further shares in the company. The share prices reflect a discounted option price for existing shareholders that was pre-negotiated at the time of the initial investment in 2018. There were no changes to the Board composition as a result of this transaction. Chris Roberts continues to maintain full control of the Board and Group.

What is the discounted price? From here on, we need to make some assumptions that I hope are not far off the mark. Let's assume the discount is not larger than 50%. In that case, the Calders purchased somewhere between 42,698 and 85,396 shares in March 2020, giving them a total ownership of between 156,559 and 199,257 shares. Or between 13.4% and 17% of CIG. The total dividend the Calders investment group received thus was probably somewhere between £134,640 and £171,361 ($184,457 - $234,764).

What about CIG's biggest shareholder, Chris Roberts? How much did he receive? I can make an estimate based on the reported 75% of the company Roberts owned in 2018. But in 2018, we only know who owned 85% of the shares. Did the shares purchased by the Calders in 2020 come directly from Roberts' holdings, or from the 15% owned by other entities? Once again, I can make an educated estimate that Roberts owns between 67.5% and 75% of CIG's shares. A rough estimate of Roberts' dividend payment is £680,000 and £755,000 ($930,000 - $1,035,000). 

I need to emphasis two things about the above analysis. First, the numbers used are very rough, although I think close to reality. The second is, we don't know that Chris Roberts didn't roll his dividend payment directly back into CIG. All we know is that he would have received a very large payment.

Overall, I don't think the statement really puts CI UK in a really good light. I'd be wary of investing in such a company. The dividend payment of 86 pence I believe many will focus on really isn't that big. Of course, those who are still under the mistaken impression that the numbers on the funding page represent some sort of pledge to see the game developed and not sales are in for a rude awakening. No, my concern is around some of the other news such as the use of the Crytek engine instead of Lumberyard. I don't trust Chris Roberts, and such information does nothing to allay those feelings. But I still hope he gets $1 billion in funding.

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