Gfinity Regulatory News (GFIN)

27 November 2018

Gfinity plc

("Gfinity" or the "Company")

Final results for the year ended 30 June 2018

Period of strong revenue growth for one of the leaders in rapidly developing esports sector

Gfinity plc (AIM: GFIN), a world-leading esports solutions provider, announces its audited financial results for the year ended 30 June 2018.

Business Highlights:

· Partnered with Formula 1 and Codemasters to launch inaugural Formula 1 Esports Series

· Continued to deliver esports solutions for some of the world's largest games publishers, including EA SPORTS, Microsoft and Activision Blizzard

· Staged the inaugural Gfinity Elite Series in July 2017, with seasons 2 and 3 also taking place during the period:

o 10 leading esports franchises signed up to participate

o First major content rights partnership with Facebook

o Live viewership for season 3 of 12.5 million people, with a further 4.9 million viewing ancillary content

o First blue chip commercial partner: Unilever

o License of format, brand and underlying technology to Australia in conjunction with HT&E, with season 1 broadcast in conjunction with Twitch and Channel 10, attracting 4.8 million live viewers

· Planned investment in people, platform and product, to strengthen market leading position, providing platform for growth:

o New and experienced leadership team, including Executive Chairman Garry Cook, plus addition of Andy MacLeod and Preeti Mardia to board

o Completed two strategic acquisitions, significantly building development and digital community building capability:

§ CEVO, Inc ("CEVO") (July 2017)

§ Real SM Ltd ("Real Sport") (March 2018)

Financial Highlights:

· Increase in revenue of 82% to £4.3m (2017: £2.4m), driven by growth in both Gfinity's managed services business and its owned and operated properties

· Adjusted EBITDA loss increased to £12.5m, reflecting planned investment in people, product and technology platform

· Cash and cash equivalents at period end of £3.7m (2017: £4.5m)

Post-Period Highlights

· Further strengthened leadership group, with appointments to the board of Graham Wallace (Global Chief Operating Officer) and John Clarke (Independent Non-Executive Director)

· Announced multi-year deal with Domino's Pizza as Presenting Partner of the Gfinity Elite Series

· Completed season 2 of Formula 1 Esports Series

· Announced as Esports Tournament Operator for the inaugural ePremier League competition

· Staged Halo Championship Series and finals of flagship Forza Racing Championship live from Gfinity Arena in London

· Announced successful completion of fundraise to raise £6.0m in October 2018

Garry Cook, Executive Chairman, Gfinity plc, said: "It has been an exciting year for the company. We have further strengthened the foundations of our business by continuing to invest in our strategic priorities to generate future revenue growth. Over the past 12 months we have connected publishers such as EA and Microsoft, rights holders such as Formula 1 and global brands and media partners with the young, engaged and fast growing esports community. Gfinity is a trusted brand in one of the most exhilarating and fast-growing industry segments. In 2018 we will continue to focus on delivering an innovative tournament series, creating and hosting partner events, building our digital "Tribe" community, and helping to show the societal benefits of gaming through our corporate responsibility initiatives."

Annual Report and Accounts

The Company's Annual Report and Accounts for the year to 30 June 2018 will be posted to shareholders on 27 November and copies will be available on the Company's website then. Notice of the Annual General Meeting of the Company, which is scheduled to take place on 20 December 2018, will be posted to shareholders with the Annual Report.

About Gfinity

Gfinity (AIM: GFIN) is a world-leading esports solutions provider. Its business to business platform, "Powered by Gfinity", delivers managed services to game publishers, sports rights holders, commercial partners and media companies. Gfinity creates bespoke solutions, including competitions and industry leading content production, connecting its partners with the esports community in authentic and innovative ways. Partnerships include EA SPORTS, F1 Esports Series, Halo World Championship and the Forza Racing Championship.

Gfinity connects directly with competitive gaming consumers through its owned competition platform, the "Gfinity Elite Series". The Series enables competitive gamers to be part of the Gfinity community, testing themselves and developing new skills, while providing a pathway for those who aspire to a career in esports to join a leading professional team. "Gfinity Elite Series" content is distributed through linear and digital channels and is enjoyed by tens of millions of esports fans around the world.

All Gfinity managed service solutions and owned competitions are underpinned by its proprietary technology platform delivering a level playing field for all competitors and supporting scalable multi-format leagues, ladders and knock out competitions.

More information about Gfinity is available at www.gfinityplc.com

Executive Chairman's Report:

I was delighted to be appointed Executive Chairman in May this year, after serving as a non-executive director since November 2017. It has been an exciting year for the company as we have further strengthened the foundations of our business by continuing to invest in our strategic priorities to generate future revenue growth.

I take it both as a significant responsibility but also as an endorsement of our professionalism that we are trusted by the world's leading publishers and rights holders to build their esports solutions and create compelling content for fans. Over the past 12 months we have connected publishers such as EA and Microsoft, rights holders such as Formula 1 and global brands and media partners with the young, engaged and fast growing esports community.

We operate in one of the world's most dynamic industry sectors. There are now more than 2 billion people gaming, the majority under the age of 35. This form of entertainment and participation is at the centre of young people's lives. The number of esports enthusiasts; those who compete, watch, follow, consume content is currently 380 million, growing close to 15% per annum. This creates opportunity. Gfinity has a track record for excellence in the market and this is generating additional opportunities with existing partners and significant new relationships.

Managed Services Solutions: Powered by Gfinity

We saw continued growth in our esports solution business. Gfinity's strong execution track record and proprietary tournament and broadcast platform remains a key differentiator in the market and key reason why we are the partner of choice for the biggest names in gaming and sports.

During the year we deepened our relationship with Microsoft. We delivered two major Halo events and were appointed Tournament Operator for the Global Forza programme, with the finals broadcast live from the Gfinity Arena in London. We also continued to build our partnership with EA, launching Battlefield V live from the Gfinity Arena.

A further highlight for the year was our partnership with one of the world's most iconic brands, Formula 1. We launched the F1 Esports Series which included two live events - the semi-finals at the Gfinity Arena and then the finals in Abu Dhabi in November. More than 60,000 fans entered the competition and the races were viewed in 123 countries. Based on this success we have been appointed to deliver and grow the F1 Esports Series in 2018, which now features nine out of the 10 teams

Owned Content: Gfinity Elite Series

During 2017 we delivered three Gfinity Elite Series competitions. The Gfinity Elite Series is a proprietary tournament format featuring 10 of the world's leading esports team franchises playing three different games, including EA SPORTS FIFA 18, Rocket League and Street Fighter V. Broadcast partners for Elite Series 1 and 2 included BBC3 and BT Sport. In March we signed an exclusive digital broadcast agreement with Facebook, granting it global online streaming rights for the Gfinity Elite Series until the end of 2018, starting with Series 3.

We announced at the start of the 2018/2019 financial year that we had signed a multi-season agreement with Domino's Pizza to become Presenting Partner of the Gfinity Challenger and Elite Series UK.

The strength of the Elite Series is that it has built a connection with millions of consumers and that it is adaptable to any publisher, rights holder or branded solution. We have flexibility to mould the product into any format we believe delivers the greatest value to our Tribe, our partners and our business model.

Strategic acquisitions

In July 2017 Gfinity acquired CEVO, a US based specialist esports platform architecture developer. The CEVO team has an innate understanding of the technology needs for successful esports competitions, making them a respected leader in this specialised, fast growing field. The CEVO team has been fully integrated into Gfinity.

In March 2018 Gfinity acquired London based Real SM Ltd (Real Sport). Founded in January 2016, Real Sport's platform features original content, including news documentaries, podcasts, analysis and opinions. The young and dynamic Real Sport team are experts in on-line community, based on creating searchable digital esports content and delivering a superior consumer experience. The platform attracts more than a million visitors per month. Real Sport is now fully integrated into Gfinity.

International expansion

In August 2017 Gfinity announced the launch of the Gfinity Elite Series in Australia. The Gfinity Elite Series Australia was created through a newly formed joint venture, Gfinity Esports Australia, in conjunction with HT&E Events Limited, itself a joint venture between HT&E Limited ('Here, There & Everywhere') a leading, ASX-listed, media and entertainment business, and IKON Media & Entertainment. Gfinity Elite Series Australia 1 took place in June and July 2018.

Corporate Social Responsibility

Gaming has a positive role to play in our society, from connecting young people with like-minded gamers across the globe; to building self-esteem through the mastery of new skills. There are also negative connotations associated with gaming. Gfinity is committed to understanding these concerns and to use its platform and voice to help find answers. I firmly believe there is a space within the education system to utilise gaming skills to teach young people through a medium they understand and have passion for. This is very much the future.

Outlook

Gfinity is a trusted brand in one of the most exhilarating and fast-growing industry segments. Gaming is at the heart of many young people's lives. By continuing in 2018 to focus on our strategic priorities - delivering innovative tournament series; creating and hosting partner events; building our digital community, our Tribe; and playing a positive role in society through our corporate responsibility initiatives - we have a pathway to significant revenue growth. I am excited to be part of this industry and proud to lead the Gfinity team. It is a team of dedicated and passionate professionals. I would like to take this opportunity to thank them for all that they do and to thank all our business partners for their continued trust and support.

Garry Cook

Executive Chairman

26 November 2018

Chief Financial Officer's Report

Summary:

The results for the year to 30 June 2018 reflect a period of strong revenue growth for the company, coupled with planned investment in people, product and technology platform to further strengthen Gfinity's position as a market leader in the fast-growing esports sector. A position that is reflected in our growing blue-chip client base.

Period Review:

Revenue across the Gfinity group of £4.3m (2017: £2.4m) represents a year on year increase of 82%. On a like for like basis, excluding the impact of acquisitions, year on year revenue growth was 53.5%. The revenue growth came from both managed services and Gfinity's owned and operated properties and included the addition of two major new clients, Formula 1 and Facebook, alongside our existing strong client relations.

The results are heavily impacted by our investment in the launch of the Gfinity Elite Series in UK, the first three seasons of which all took place in the year to 30 June 2018. As a result of this investment, in March 2018 we were delighted to welcome Facebook as a content partner from season 3 onwards, with only one season's worth of income from this partnership falling into the period. Following the year end we were also very pleased to announce that Domino's Pizza would be joining the Gfinity Elite Series as Presenting Partner from Season 4 onwards. None of the income from this partnership therefore forms part of these results. Overall, the net investment in the launch of Gfinity Elite Series in the period amounted to £4.7m, with a positive contribution of £1.3m from other activities.

Administrative expenses include £1.3m of non-cash items; depreciation £0.4m (2017: £0.2m), amortisation £0.4m (2017: £0.0m) and share option charge £0.4m (2017: £0.1m). Excluding these items, Administrative Expenses amount to £8.7m (2017: £4.6m). This year on year increase has been driven by an increase in staff costs, both through targeted recruitment of high calibre individuals and through the acquisitions of CEVO and Real Sport (CEVO's post-acquisition admin expenses in the year were £0.7m and Real Sport's £0.1m).

On the same basis, excluding the non-cash items, the adjusted EBITDA loss for the full year was £12.5m, representing an improvement of £2.0m in the second half of the year, with £7.4m loss for the first half of the year reducing to £5.0m for the second half of the year.

Year-end cash of £3.7m (2017: £4.5m) was supplemented by an oversubscribed fundraise completed in November 2018, comprising of both new and existing holders, leaving the business well capitalised as we move into 2019.

Financial outlook

The Company targets Adjusted EBITDA break-even operating results within the next few years. Revenue is expected to be driven by significant increased activity in managed services, both service fees and content revenue from esports solutions for sports rights holders and commercial brands in collaboration with publishers and distribution partners. The Company also expects significant contribution from its owned and operated properties, hereunder the Gfinity Elite Series and its digital "Tribe" community under development.

Annual administrative expenditure, adjusted for non-cash items, is expected to reach and remain relatively stable around £10-12 million in the medium term, as the majority of investment in the esports solutions platform, commercial delivery and content production is completed. Increasing value of esports content through a growing audience and stable opex is expected to drive material operational scalability. As such, the Company targets a long-term group gross margin of 30-40% and an Adjusted EBITDA margin in the range of 15-25% on a normalised basis.

Jonathan Hall

Chief Financial Officer

26 November 2018 

Group Statement of Profit or Loss

Group Statement of Comprehensive Income

Group Statement of Financial Position

Company Statement of Financial Position

The notes on pages 19 to 51 form an integral part of these financial statements.

As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of these financial statements. The parent Company's loss for the year amounts to £12,864,958 (2017: loss of £5,228,164).

Signed on behalf of the board on 26 November 2018:

Garry Cook Jonathan Hall

Executive Chairman Chief Financial Officer 

Group Statement of Changes in Equity

Company Statement of Changes in Equity

Group Statement of Cash Flows

Company Statement of Cash Flows

Notes to the Financial Statements

1. GENERAL INFORMATION

Gfinity plc ("the Company") is a public company limited by shares incorporated in the United Kingdom under the Companies Act 2006, registered in England and Wales and is AIM listed. The address of the registered office is given on page 2. The registered number of the company is 08232509.

The functional and presentational currency is £ sterling because that is the currency of the primary economic environment in which the group operates. Foreign operations are included in accordance with the policies set out in note 2.

2. ACCOUNTING POLICIES

Basis of preparation

The Company has prepared the accounts on the basis of all applicable International Financial Reporting Standards (IFRS), including all International Accounting Standards (IAS), Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Board (IASB) with effective dates for accounting periods beginning on or after 1 July 2017, together with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounts have been prepared on the historical cost basis, except for Share Based Payments which are accounted for at fair value. The principal accounting policies, which have been consistently applied throughout the period presented, are set out below.

The preparation of financial statements in conformity with IFRS requires the use of certain estimates. It also requires management to exercise its judgement in the process of applying the company's accounting policies. Estimates and judgements are continually reviewed and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.

Interpretations and amendments to published standards effective in the accounts

For the purposes of the preparation of the accounts, the Group has applied all standards and interpretations that will be effective for the accounting periods commencing on or after 1 July 2017.

The following standards and interpretations have been adopted:

• Annual improvements 2014-2016 (effective for accounting periods beginning on or after 1 January 2017);

• IAS Amendments to IAS 7, 'Statement of cash flows' on disclosure initiative (effective for accounting periods beginning on or after 1 January 2017);

• Amendments to IAS 12, 'Income taxes' on recognition of deferred tax assets for unrealised losses (effective for accounting periods beginning on or after 1 January 2017);

Standards, interpretations and amendments to published standards that are not yet effective

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Company's accounting periods beginning on or after 1 July 2017 or later periods but which the Company has not adopted early are as follows:

• Amendments to IFRS 2, 'Share based payments', on clarifying how to account for certain types of share-based payment transactions (effective for accounting periods beginning on or after 1 January 2018);

• IFRS 9 'Financial instruments' (effective for accounting periods beginning on or after 1 January 2018);

• IFRS 15 'Revenue from contracts with customers' (effective for accounting periods beginning on or after 1 January 2018);

• IFRS 16 'Leases' (effective for accounting periods beginning on or after 1 January 2019);

• IFRIC 22, 'Foreign currency transactions and advance consideration' (effective for accounting periods beginning on or after 1 January 2018);

• IFRIC 23, 'Uncertainty over income tax treatments' (effective for accounting periods beginning on or after 1 January 2019)

Management continues to monitor the IASB's on-going work on improvements to financial reporting but does not currently believe that the amendments and interpretations listed above will have a material effect on the Company's reported income or net assets.

Going concern

At the end of the period the Group had cash and cash equivalents amounting to £3,679,288 and the Company had cash and cash equivalents amounting to £3,563,217. On 23rd October 2018 the Group announced its intention to raise a further £6.0 million (prior to deduction of expenses) via a placing of shares on AIM. This placing was approved by shareholders on 8 November 2018, with shares being admitted to AIM and funds received by the Group on 9 November and 12 November respectively. The placing leaves the Group with a strong cash position from which to pursue its objectives. The oversubscribed nature of recent placings and continued strong shareholder support gives the Directors confidence over future as well as present cash reserves.

Accordingly, these accounts have been prepared on a going concern basis.

Basis of consolidation

The Group accounts consolidate those of the Company and all of its subsidiary undertakings drawn up to 30 June each year. Subsidiary undertakings are those entities over which the Group has the ability to govern the financial and operating policies through the exercise of voting rights. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passed. Acquisitions are accounted for under the acquisition method.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

All intra group balances, transactions, income and expenses and profit and losses on transactions between the Company and its subsidiaries and between subsidiaries are eliminated.

Goodwill

Goodwill is initially recognised and measured as set out above.

Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units ('CGUs') expected to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Investment in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or join control over those policies.

The Group's interests in jointly controlled entities are incorporated in the financial information using the equity method of accounting. Investments in joint ventures are carried in the balance sheet at cost as adjusted by post acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of the individual investments. The Group's share of the net profit or loss of the joint venture is shown as a single line item in the Consolidated Statement of Comprehensive Income.

Where the Group transacts with a joint venture any profit or loss arising is eliminated to the extent of the Group's interest in the relevant joint venture.

The carrying amount of equity-accounted investments is tested for impairment at least annually.

Investment in Subsidiaries

Investments in subsidiaries are held in the Company balance sheet at cost and reviewed annually for impairment.

Revenue

Revenue comprises the fair value of the consideration received or receivable for the sale of services in the normal course of the Company's activities. Revenue is shown net of value added tax.

The Company recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity, the stage of completion of the transaction at the balance sheet date can be measured reliably and the costs incurred and the costs required to complete the services in respect of the revenue can be measured reliably. If the amounts have been invoiced in advanced for services, these amounts are deferred until the service is delivered to the client at which point the income is recognised. The Company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue comprises of:

• Partner event fees: Revenue recognised in line with the date at which work is performed.

• Sponsorship revenues: Revenue is recognised on the date the relevant sponsored event takes place. In the event of long-term sponsorship contracts, the revenue is released on a straight-line basis across the term of the contract, except in instances where a significant proportion of the revenue relates to specific activation activities, in which case the revenue is released in line with when that work is performed.

• Advertising revenues: Fees are earned each time a user clicks on one of the ads that are displayed on the website. Revenue is recognised on a pay-per-click basis.

• Ticket sales: Revenue is recognised on the date the relevant event is delivered.

• Broadcaster revenues: Rights fees are received from linear broadcasters and online streaming platforms in return for rights to access broadcast content. Revenue is recognised in line with the dates the content is created

• Website subscriptions: Revenue is invoiced in advance and deferred on a straight-line basis over the subscription period.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Foreign currencies

Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the year.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period. Exchange differences arising from the translation of the Group's foreign operations are recognised in other comprehensive income.

Taxation

The taxation expense represents the sum of the tax currently payable and deferred tax.

The charge for current tax is based on the results for the period as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computations of taxable profit and is accounted for using the balance sheet liability method.

Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or any discount on acquisition) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that the directors do not have a high degree of certainty that sufficient taxable profits will be available in the medium term to allow all or part of the asset to be recovered.

Share Based Payments

The Company provides equity-settled share-based payments in the form of share options. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the date of grant is expensed on a straight line basis over the vesting period, based on the Company's estimate of shares which will eventually vest and adjusted for the effect of non-market based vesting conditions. The Company uses an appropriate valuation model utilising a Black-Scholes model in order to arrive at a fair value at the date share options are granted.

In instances when shares are used as consideration for goods or services the shares are valued at the fair value of the goods or services provided. The expense to the company is recognised at the point the goods or services are received.

Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the carrying amount of the asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and that the cost of the item can be measured reliably. The carrying amount of parts that are replaced is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

Depreciation is calculated using the straight-line method to allocate the cost or revalued amounts of tangible fixed assets to their residual values over their useful economic lives, as follows:

The residual values and useful economic lives of the assets are reviewed, and adjusted if appropriate, at each balance sheet date. The carrying amount of an asset is written down immediately to its recoverable amount if the carrying amount is greater than its estimated recoverable value. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other gains or losses in the income statement.

Intangible fixed assets

Intangible assets other than goodwill are recognised where the purchase or internal development of such assets are expected to directly contribute towards the company's ability to generate revenues over a multiple years.

Intangible fixed assets are stated at historical cost less accumulated amortisation and impairment, if any. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Where the cost is not clearly identifiable discounted cash flows are utilised to estimate either the cost to develop the resource or, where there are already profits attributable the asset, to estimate future cash inflows. Historical cost includes expenditure that is directly attributable to the acquisition or development of the items. Subsequent costs are included in the carrying amount of the asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and that the cost of the item can be measured reliably.

Amortisation is charged on a straight-line basis over the estimated useful economic life of the asset as follows:

Research and development costs

Development expenditure is capitalised as an intangible asset, only if the development costs can be measured reliably and it is anticipated that the product being built will be completed and will generate future economic benefits in the form of cash flows to the Group.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. These are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity

Financial liabilities are obligations to pay cash or other financial instruments and are recognised when the company becomes a party to the contractual provisions of the instrument. Financial liabilities are classified according to the substance of the contractual arrangements entered into. All interest-related charges are recognised as an expense in the income statement.

Trade and other payables are not interest bearing and are recorded initially at fair value net of transactions costs and thereafter at amortised cost using the effective interest rate method.

An equity instrument is any contract that evidence a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Financial assets

Financial assets are recognised in the balance sheet when the Company becomes a party to the contractual provisions of the instrument and are recognised in the balance sheet at the lower of cost and net realisable value.

Provision is made for diminution in value where appropriate.

Income and expenditure arising on financial instruments is recognised on the accruals basis and credited or charged to the statement of comprehensive income in the financial period to which it relates.

Trade receivables do not carry any interest and are initially recognised at fair value, subsequently reduced by appropriate allowances for estimated irrecoverable amounts.

Derivative Financial Instruments

Derivative financial assets and financial liabilities are recognised on the Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Derivatives are initially recorded at fair value and are subsequently remeasured to fair value based on mid-market prices, estimated future cash flows and forward rates as appropriate.

3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of financial statements in conformity with IFRS requires the use of certain estimates. It also requires management to exercise its judgement in the process of applying the company's accounting policies. Estimates and judgements are continually reviewed and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.

Revenue recognition:

The Group's revenue recognition policy is based on separating contracts into discrete performance obligations with revenue then recognised based on the percentage completion of each one. Where the value of each distinct performance obligation is not set out in a contract Management estimate the value of each performance obligation based on what are deemed to be appropriate criteria. For example, if a contract did not stipulate the value by region of a broadcast agreement management would use appropriate weighting (e.g. audience size) to estimate the value of each region, with each region viewed as a separate performance obligation. Revenue would then be recognised based on the percentage completion of each performance obligation. In instances where there is no other readily available proxy Management will estimate the value of each performance obligation based on the relative cost to deliver.

Revenue settled by means other than cash (e.g. via equity in a associate) is recognised based on the value stipulated in the contract for goods or services, which would be deemed to be set at fair value, with the revenue then recognised based performance obligations in the manner described above.

Intangible assets recognised on business combinations:

Intangible assets in business combinations are recognised when the asset is separately identifiable and based on the probable future economic benefit that arises owing to the Group's control of the asset. Typically, the Group will utilise a discounted cash flow to establish the future economic benefits and therefore the fair value of the asset.

The Group have identified three intangible assets in relation to the two acquisitions undertaken in the year:

Cevo customer relationships: Cevo's customer relationships have been valued based on the revenue less associated costs over a five-year period. The cash flow has then been discounted at a rate of 13%. Discount rate has been calculated using the Capital Asset Pricing model with reference to the value of UK 10-year gilts as a proxy for a risk-free rate and the volatility of Gfinity's share price relative to that of AIM since listing.

Revenues have been calculated based on the assumed number of hours of development time for each client and Cevo's chargeable rate per hour. Costs have been derived based on the number of employees required to fulfil each contract, with salaries to support headcount growth based on market rates, along with estimates of associated technology costs. The valuation is sensitive to changes in the chargeable hour rate, which is assumed to grow at a compound annual growth rate ("CAGR") of 15%, the number of chargeable hours and changes in salary costs for developers over the next five years. If billable rates remain flat over the next five years the value of the asset would reduce by £0.6m.

Cevo gaming platform: The gaming platform has been valued based on a discounted cash flow using the same cost of capital as the customer relationship. Revenue has been based on licencing the software, tournament admission fees and subscriptions. The values have been established with reference to the 18 months prior to acquisition with the six monthly average annualised. The costs associated with the platform have been based on prize money, staff time and server costs. The value is assumed to decline by 20% per annum over a five-year period with the platform assumed to then be completely replaced. If the useful economic life was reduced to 3 years then the value would reduce by £0.1m.

Real Sport web traffic: Real Sport are in a pre-revenue phase therefore the intangible assets have been valued based on the estimated cost to acquire their organic traffic. The value of traffic was established based on the cost per click ("CPC") of the key words that had driven users to the site and the web traffic in the quarter prior to acquisition. It was then assumed that any paid traffic would be subject to a 40% rate of cannibalisation of organic traffic. This was then valued over a three-year period with an assumed rate of decline of 33% per annum. The rate of decline was chosen to reflect potential changes in search algorithms.

Impairment testing:

The Group tests goodwill for impairment annually. The recoverable amounts of cash generating units have been determined based on value-in-use calculations which require the use of estimates. Management has prepared discounted cash flows based on the latest strategic plan.

Goodwill carried in relation to Cevo: The key assumptions in evaluating whether there was any impairment of the goodwill in relation to Cevo was the discount factor (13%) which was calculated in the manner outlined above and the volume of development work to be undertaken on behalf of the group. This was then compared against the cost to fulfil this work by paying a third party with the subsequent cost savings being a key determinant in whether there was any evidence of impairment. This was then evaluated over a ten-year period using a discounted cash flow.

The third-party cost for work was determined with reference to Cevo's own charge out rates and the volume of work to be undertaken was based on Management's estimates. This indicated a value of £6.1m higher than the carrying value of goodwill in relation to Cevo. Reducing development time by 10% has an impact of £0.6m.

Goodwill carried in relation to Real Sport: The key assumptions in evaluating whether there was any impairment of the goodwill in relation to Real Sport was the discount factor (13%) which was calculated in the manner outlined above, the prospective growth in users (13% CAGR, per Newzoo the esports industry grew 38% from 2017 to 2018) and execution of traffic monetisation strategies. Key costs related to content creation, staff, marketing and traffic acquisition. Where possible all assumptions in relation to revenue generating activities have been benchmarked based on desk based research however given the nascent esports industry is still testing various monetisation strategies many assumptions have been based on publicly available information for other online media and entertainment forums.

Based on the above the value of Real Sports was £8.1m higher than the carrying value. Reducing the CAGR for traffic growth by 5% has an impact of £7.5m, £0.6m higher than the carrying value of goodwill.

Valuation of investments:

Investments held in the company statement of financial position have been tested in line with the goodwill impairments described above

Deferred tax:

The Company has not recognised a deferred tax asset in respect of its losses given that there is no track record of taxable profits at this time. Deferred tax assets will be recognised when the Company has established a track record of expected future taxable profit. Detail of the unrecognised asset as at the period end are provided in note 6(c).

Share based payments:

The Company issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. This fair value is measured by use of a Black-Scholes model.

The key assumptions used as inputs into this model are outlined in [note 20] on Share Based Payments. In addition, the company has issued share options as partial consideration for services provided. The cost of these has been recognised based on the timing of the delivery of the service and the fair value.

4. SEGMENTAL INFORMATION

The Group manage the business based on two segments: Gfinity and Cevo. The two reportable segments operate as follows:

Gfinity: This segment is the largest part of the business and encompasses the majority of esports related activities and broadcast and production capabilities.

Cevo: The in-house development capabilities which are key to delivering both Gfinity PLC's strategy and online esports solutions for third parties. This segment also includes several US based technology revenue streams

Gfinity principally operate in the UK and Cevo principally in the US. Cevo were purchased during the year ending June 2018 and there is therefore no comparative information.

Segmental information for the statement of financial position has not been presented as management do not view this information on a segmental basis. Intra-group recharges are not considered when monitoring performance with central charges (such as senior management costs) retained in Gfinity PLC rather than being apportioned across segments.

5. OPERATING EXPENSES

Operating loss is stated after charging:

6. PARTICULARS OF EMPLOYEES

Number of employees

The average number of people (including directors) employed by the company during the financial period was:

The aggregate payroll costs of staff (including directors) were:

Total remuneration for Directors during the year was £572,910 (2017: £375,925).

The board of directors comprise the only persons having authority and responsibility for planning, directing and controlling the activities of the Group.

7. FINANCE INCOME/COSTS

8. TAXATION

(a) Major components of taxation expense for the period ended 30 June 2018 are:

(b) Factors affecting tax charge for the period

A reconciliation of taxation expense applicable to accounting profit before taxation at the statutory tax rate of 19% (2017: 19.75%), to taxation expense at the Company's effective tax rate for the period is as follows:

(c) Unrecognised deferred tax asset

The Company has an unrecognised deferred tax asset arising from trading losses carried forward of £4,666,946 (2017: £2,449,025) calculated at the substantively enacted Corporation tax rate at the balance sheet date of 19% (2017: 19%). These trading losses will reverse against future taxable trading profits and no asset has been recognised due to uncertainties over the timing and nature of such gains in accordance with IAS 12.

9. PROPERTY PLANT AND EQUIPMENT

Group Property Plant and Equipment

Group Property, Plant and Equipment Continued