Inner Workings (IWG)

The Company has now been delisted and gone into liquidation.

Company Background
Glasgow-based Inner Workings was established in 1991 as a content developer for the ill-fated Philips CDi machine. As it became clear that the CDi would not become a major platform, the Company moved into PC CD-ROM development and have to date had 1 games title (Plane Crazy) and  4 edutainment titles published. The Company currently has five games titles in development and continues to explore non-games products with an edutainment title due at the beginning of 1999. The company has to date relied heavily on equity for working capital having raised £1m in a pre-float placing, £1.8m in August 1996, £1m in November 1997 and a further £1.1m in November 1998. The Company has now been delisted and gone into liquidation.

Activities
The Company retains over 60 development personnel in-house of which the majority are developing games software. Having created Plane Crazy, the company are developing five new titles: a sequel to Plane Crazy, a multiplayer title (both due during 2000) and three low-cost games (a puzzle game, a RPG and an arcade game) -due during 1999. In addition the Company have an edutainment title due in early 1999 around which time it will begin to develop a new edutainment range.

Key Titles
Plane Crazy 2

News
20/08/97 Europress sign up global retail and OEM publishing rights to Plane Crazy.
COMMENT: Plane Crazy has excited a number of publishers and has a good chance of proving very profitable for Inner Workings. Europress is relatively new to the publishing business and have only achieved one major success in a driving game, Rally Championship, which has sold in excess of 200,000 units world-wide. The rights secured by Europress are for the PC and Playstation retail and OEM versions only so the Company can expect further revenue streams from arcade sales. The overall value of the deal is not known although the company funded the cost of the development internally (so should expect royalties of around £4-£5 per unit sold at retail) and has been guaranteed minimum royalties of £750,000 payable by 31/12/98.

28/11/97 Interim results and placing details

COMMENT: The results, which were in line with the Company's expectations, show a marked improvement in turnover whilst the increased development activity has resulted in higher admin expenses and this, in particular, explains the increased loss. The Company's increased turnover is attributable to royalties on published titles and contract work. The Company's policy of carrying forward directly attributable development costs and expensing them when the title is released over the duration of the title (up to 2 years) will result in balance sheet stocks building up. This is a common policy within the industry but not considered the most prudent although it will result in smoother year to year P/L performance.
In order to finance the Company's high net cash outflow (£660,615 with only £612, 892 in cash assets for the 6m to 30/09/97), the Company has successfully completed its third fund-raising, this time of £1m. This should help finance the Company until revenues start to arrive from Plane Crazy in 1998.

29/06/98 1998 Year-end results
The Company's 1998 year-end results (see table, top) are in line with forecasts, showing only marginal improvement in sales from the half year and a considerable increase in cost of sales resulting in a loss before tax approaching £1m.
The Company also announced changes to the Europress publishing deal for Plane Crazy. During the last six months, Europress has stated it is to downgrade its focus on the games market and has even pulled out of PSX publishing in the UK. The publishing rights to Plane Crazy have been renegotiated by the Company and although it has forfeited the £750,000 of guaranteed sales, the Company is free to seek publishing and distribution deals for individual territories (a strategy being employed by Gremlin). Whilst the PSX rights have yet to be signed, the North American PC (and online) rights have been signed to SegaSoft, a joint venture between Sega of America and CSK corporation. In return the Company is to receive advanced royalties of $205,000. Europress retain the European PC publishing rights and although the title has met with mixed success in some European territories so far, the Company is confident that royalties will exceed the £750,000 originally guaranteed by Europress.
The strategy for the arcade version of Plane Crazy has also altered following "delays" experienced by the US distributor. The aim now is to create a version of the title suitable for motion-simulation rides, a new but growing segment of the arcade market.

11/11/98 £1m fund-raising via a placing
The Company have raised an additional £1.075m of new funds via a deep discounted placing at 35p. The extent of the discount (around 40% to the market price at the time of announcement) indicates a degree of urgency to the fund-raising. Cash levels were low as Plane Crazy failed to make a significant imprint on sales charts in Europe and the USA. Recently SegaSoft, the US publisher of Plane Crazy, followed Europress in announcing its intentions to exit the retail publishing market although the Company maintains that SegaSoft will continue to support its existing portfolio.
The funds (which were necessary to keep the Company running) will be used to fund further games development to a stage where the titles can be pre-sold to publishers.

18/11/98 Appointment of sales and marketing experts
The Company has appointed UK consultancy Vector to assist them in their market, retail and OEM efforts on future releases. Vector is run by Neil Critchlow and Ian Richardson who, in their last roles at Rage Software, were largely responsible for the spectacular OEM sales achieved by Incoming. Vector are likely to work on a number of projects in a number of capacities for Inner Workings. Future versions of Plane Crazy, being graphically strong and easy to play, are the most obvious immediate candidates for OEM deals.

29/01/99 Interim results show increased losses

Although the Company's interim revenue has increased over last year (principally comprising royalties from Europress and advances from SegaSoft for European and North American distribution of Plane Crazy), its losses have deepened as its newer games development gets under way. The Company revealed that it has 5 titles which it hopes to have released during the second half of 1999 and 2000: an internet game, a sequel to Plane Crazy and three low-budget titles. As yet, none have been signed up to publishers although the company has begun to parade various of them to potential partners.

15/06/99 Shares suspended
The Company has requested that its shares be suspended (at 18.5p) whilst it seeks a buyer. Effectively, this means that the Company has run out of cash and has to find a partner before it can continue operations. The Company is thought to have sought a further round of investment earlier in the year, but as stated following the previous fund raising in November, this was always going to be difficult to achieve. Although the Company clearly has sellable assets, it is likely that any acquisition that might result from its current talks would value the company well below its current valuation of £4.5m.

Conclusion
The Company's continued reliance on equity finance to maintain a sufficient level of working capital did indeed prove to be its downfall and reflected the company's failure to generate adequate ongoing revenues. The Company's edutainment titles had been critically well received but limited in sales, partly due to the immature nature of the edutainment market. The Company's first move into the games market met with limited success also, despite the strength of the product. Its exploitation of the potentially lucrative arcade and LBE markets also failed to materialise. The Company  it must be said, did meet with a degree of bad fortune with Europress, SegaSoft and its unnamed arcade partner all having pulled out, to varying degrees, of markets critical to Plane Crazy's success.
At the time of the suspension of dealings, the Company had 6 titles in development but little to show for it in the form of publishing contracts. The Company had taken development of other major games titles to prototype stages but the fact that the major publishers had not shown interest enough to offer the Company any publishing deals suggests that the titles were simply not strong enough. This coupled with that fact that the Company had a significant rate of cash burn (over £1m/annum) due to its high (60+developers) staffing levels resulted in a dangerous reliance on equity funding. The 40% discount rights issue of last November smacked of desperation (the unusually high % reflected the need to make the offer as attractive as they could) and ultimately signaled the beginning of the end as it was always going to be difficult to persuade investors in any further fund-raising efforts. 

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