BOARD OF DIRECTORS REPORT

The Board of directors and the CEO of MAG Interactive AB (publ), 556804-3524, hereby present the annual report for the financial year 2017/18 (ending 31 August 2018).

operations

MAG Interactive is a leading developer and publisher of casual mobile games for a global audience. MAG Interactive reaches over 10 million active players every month and the game portfolio consists of ten successful games with over 250 million downloads, including successful titles Ruzzle, Word Domination and WordBrain, all of which have reached #1 spots on the App Store and Google Play. With offices located in Stockholm and Brighton, MAG Interactive’s games are distributed through virtual app stores allowing for global reach with minimum effort.

the group

The MAG Interactive AB (publ) group consists of, in addition to the parent company, Feo Media AB (incorporated in Sweden with registration number 556888-6211 and with its site in Stockholm) and MAG Games Ltd (incorporated in United Kingdom and with its site in Brighton). The group has 70 employees as of the end of the financial year, of which Feo Media has eight (8) and MAG Games Ltd has 20. All games in the portfolio except Quiz Duel are published by MAG Interactive AB. Quiz Duel is published by Feo Media AB.

GROUP performance 2017/18

Operating income

The Group's operating income for the period was 240,213 KSEK (283,370 KSEK), a decrease of 15% compared to the previous year. The Group's Net sales for the period totalled 216,870 KSEK (260,405 KSEK), a decrease of 17%. Own work capitalised totalled 19,954 KSEK (20,205 KSEK). See below for further details of capitalised expenses as well as impairments and depreciation of the same. The group’s Net sales was primarily attributable to the games Quiz Duel, WordBrain, Wordalot, Ruzzle, WordBrain2 and Backpacker. Towards the end of the year PaintHit and Word Domination were also contributing strongly.

Operating expenses, EBITDA and operating profit/loss

Operating expenses totalled 280,556 KSEK (256,272 KSEK). Of these 61,744 KSEK (78,950 KSEK) were Sales-related costs, primarily originating from fees to Apple App Store and Google Play, as well as server costs. In addition to this 72,390 KSEK (111,146 KSEK) were costs of Direct marketing and 77,046 KSEK (23,740 KSEK) were Other external operating expenses. Included in Other external operating expenses are extra ordinary costs of 49,026 KSEK. Specifically 31,405 KSEK relating to final settlement of the acquisition of Delinquent and that has no effect och cashflows, see Note 32 for the Group.

Costs for Direct marketing decrease as a consequence of the focus on ROI. The lower costs are attributable to lower available volumes for the older games in the portfolio, and in particular Wordbrain that had significantly higher volumes in the previous financial year. The fourth quarter held higher costs than the average for the year as a consequence of the launch of themes Word Domination and PaintHit.

Personnel expenses totalled 69,377 KSEK (42,437 KSEK) an increase of 63%. The average number of employees during the financial year was 84 (52) an increase of 62%. The personnel costs includes a restructuring cost of 3.7 MSEK. EBITDA for the financial year was -40,343 KSEK (27,097 KSEK). Adjusted EBITDA was 8,683 KSEK (27,333 KSEK), see Note 34 for the Group. Depreciation and impairments of tangible and intangible assets totalled 26,539 KSEK (23,016 KSEK), of which 18,342 KSEK (13,194 KSEK) was depreciation of capitalised development expenses and 4,496 KSEK (6,744 KSEK) was depreciation of intangible assets.

The Group's operating profit was -66,883 KSEK (4,082 KSEK) and profit before tax -65,231 KSEK (3,552 KSEK).  Adjusted profit before tax was -16,205 KSEK (3,788 TSEK), see Note 34 for the Group. Profit after tax totalled -59,797 KSEK (573 KSEK). The profit after tax per share was -2.43 SEK/share (0.03 SEK/share) and the profit after tax per share fully diluted was -2.39 SEK/share (0.03 SEK/share). The average number of shares during the financial year was 24,598,653 (19,250,000) and the average number of shares fully diluted was 25,038,233 (19,318,534).

The group’s financial position at the end of the period

Total intangible non-current assets at the end of the financial year totalled 140,287 KSEK (38,952 KSEK), of which 77,415 KSEK (7,976 KSEK) relates to intellectual property and 62,872 KSEK (30,976 KSEK) to other intangible assets. The latter consists primarily of capitalised development expenses on own account and acquired IP. Cash and cash equivalents at the end of the financial year totalled 228,083 KSEK (40,561 KSEK). Equity totalled 344,179 KSEK (98,907 KSEK), corresponding to 13.1 SEK/share (5.1 SEK/ share). The equity/assets ratio at the same time was 82.4% (70.6%). The group has interest bearing debt of 31,112 KSEK (0 KSEK).

PARENT COMPANY performance 2017/18

Operating income

The parent company's Net sales for the financial year were 166,666 KSEK (260,405 KSEK), a decrease of 36% compared to the previous year.

Operating expenses and operating profit/loss

Operating expenses totalled 213,181 KSEK (257,057 KSEK). Of these 51,863 KSEK (79,036 KSEK) were Sales-related costs originating primarily from fees to Apple App Store and Google Play, costs of Performance based marketing were 71,617 KSEK (111,146 KSEK) and 35,832 KSEK (23,913 KSEK) was other external operating expenses. Depreciation and impairments of tangible and intangible assets totalled 5,309 KSEK (7,442 KSEK), of which 4,496 KSEK (6,744 KSEK) was depreciation of intangible assets. The parent company's operating profit for the financial year was -45,038 KSEK (-1,335 KSEK). Profit after tax totalled to -3,186 KSEK (-3,770 KSEK).

Financial position at the end of the period

The parent company's intangible non-current assets at the end of the financial year totalled 0 KSEK (4,496 KSEK) Cash and cash equivalents at the end of the financial year totalled 181,305 KSEK (37,523 KSEK). Equity at the end of the financial year totalled 349,826 KSEK (49,900 KSEK).

Key indicators for the business Period September until August 2018

Distribution of revenues by business model

The Group’s Net sales are distributed primarily between in app purchases (purchases made inside games via the Apple App Store or Google Play) and in app advertising. The Group's Net sales from In app purchases for the financial year were 129,434 KSEK (210,941 KSEK), a decrease of 39% compared to the same period the previous year. The Group's Net sales from In app advertising were 86,824 KSEK (49,460 KSEK), an increase of 76% compared to the previous year.

Contribution from sales activities

Games that are marketed by MAG Interactive have different cost levels in their distribution cost (Sales-related costs) and marketing cost (Performance-based marketing), not least relating to which phase the games are in. The Group therefore reports the total contribution from games activities according to the following model: Net income minus platform-fees and performance-based marketing. Performance-based marketing includes digital advertising and other advertising associated directly with the company’s products, as well as services and charges directly attributable to performance-based marketing. General marketing of the company and brand is not included in the cost of direct marketing.

The Group's contribution from sales activities for the financial year was 105,648 MSEK (85,977 MSEK), an increase of 23% compared to the previous year. The split in Net sales between In app purchases and In app advertising is changing due to lower sales in the games mostly monetized by In app purchases and the high share of advertising sales in Quiz Duel. During the last quarter of the financial year the share of ad revenue is above 50%. The increased contribution is due to the high contribution in Quiz Duel. Contribution from sales activities is up 20% compared to the previous financial year after relatively large investment in marketing for the games Word Domination and PaintHit.

Other key indicators

The company monitors its operations according to a number of key performance indicators that reflect how the games industry in general measures its business activities. These indicators are defined as; DAU and MAU are defined as the number of unique daily and monthly users respectively that use one of the company’s products, presented as an average over the period, adjusted for the number of days in the months in the period. Each individual game’s unique users are summed up to present the company’s total unique users. MUP is the number of unique users who made a purchase in one of the company’s products. A purchase is defined as a purchase in accordance with the above definition of In app purchases and to a value greater than zero. The value is reported as an average value over the three months in the period. ARPDAU is calculated as the company’s daily average of Net sales during the period divided by DAU. Riksbanken’s average exchange rate per month is used for translation into USD.

DAU for the financial year was 2.7 million (1.7 million), an increase of 57% compared with the previous year. MAU for the financial year was 10.9 million (7.4 million), an increase of 48% compared to the previous year. MUP for was 130 thousand (183 thousand), a decrease of 29% compared with the previous year. ARPDAU for the financial year was 2.7 cent (4.8 cent), a decrease of 45%. The significant changes in the player base (MAU and DAU) and the average income per player (ARPDAU) are due in the first three quarters of the year to the acquisition of Feo Media with the game Quiz Duel, and in thelast quarter of the year also to the global launch of the two new games Word Domination and PaintHit.

Corporate governance

For details about MAG Interactive AB (publ) corporate governance please refer to the section Corporate governance in this report.

Notable events during the year 

• On 27 September 2017 the board resolved, based on the mandate given by the annual general meeting 28 February 2017, to issue 144,375 warrants. The warrants were subscribed for and paid on 14 November 2017.
• On 12 October 2017 the game Backpacker was launched globally. Backpacker is published by MAG Interactive and is developed and owned by WeAreQiiwi Interactive AB
• During October a share purchase agreement was signed regarding the purchase of all shares in FEO Media AB. On 7 November 2017 the acquisition was closed and FEO Media is now a fully owned subsidiary in the group. The acquisition was financed through a new issue of 1,811,764 shares, 80 MSEK, and debt of 35 MSEK from Danske Bank
• On 27 November 2017 the extraordinary general meeting resolved to issue 714 175 common shares with deviation from preferential rights. The share issue was subscribed for by the the sellers of MAG Games Ltd (Delinquent) and constitutes final consideration for the acquisition of MAG Games UK
• In the beginning of December MAG Interactive was listed on NASDAQ First North Premier with first day of trading on 8 December 2017
• In conjunction with the listing the company issued a total of 4,545,454 shared and thereby raised 200 MSEK, before transaction costs all previous preference shares were converted to common shares. The total number of shares and common shares after the issue is 26,321,393
• On 17 January 2018 the subsidiary company FEO Media AB notified of a planned reduction of 25 out of 42 employees
• On 31 May 2018 the game Word Domination was released to a global audience
• On 11 June 2018 the company announced the release of the game Paint Hit
• On 11 June 2018 the company announced its nomination committee
• On 27 August 2018 the company announced that the agreement with WeAreQiiwi Interactive AB regarding publishing of the game Backpacker had been terminated. The publishing responsibility was transferred to Qiiwi per 1 September 2018

Notable events after the end of the year 

• No notable events have occured after the end of the year

Proposed distribution of earnings

The Board of Directors and the Chief Executive Officer propose that the profits be appropriated as follows:

Dividend

The board of directors propose to the annual general meeting on 18 December 2018 that no dividend will be paid out for the financial year 2017/18.

Annual general meeting

The annual general meeting for MAG Interactive AB (publ) is planned to be at 7A Odenplan, Norrtullsgatan 6, at 10am on 18 December 2018. For more details see the section Annual general meeting in Corporate governance.