GMD.L Regulatory News (GMD)

21 March 2019

GAME DIGITAL PLC

Interim results for the 26 weeks ended 26 January 2019

GAME Digital plc ('GAME' or the 'Group') today announces its interim results for the 26 week period ended 26 January 2019 (the 'period'). All comparator periods are for the 26 weeks ended 27 January 2018 ('2018') unless otherwise stated.

Financial Headlines

Operational and Strategic Headlines

Martyn Gibbs, Chief Executive Officer, said:

"We are pleased with our performance in the first half delivering a 22% growth in Adjusted EBITDA and a material improvement in cash and liquidity during the period. Our core retail businesses are facing a challenging retail environment that continues to evolve at pace, but we have set ourselves up well with our transformation programme and continued focus on costs and efficiencies.

"Despite the market backdrop, the Group delivered a solid GTV performance and maintained its gross profit rate. Exclusives on new game releases, sales growth in higher margin categories and focusing on our multichannel and specialist customer offerings helped to offset a weaker console hardware market and the continued structural decline of the preowned market.

"During the period the UK Retail business delivered further efficiency improvements and achieved considerable cost savings across all areas including store operating and fixed costs, distribution and head office costs. Our flexible lease profile gives us a unique opportunity to work closely with landlords to manage our store portfolio and we continue to deliver, and anticipate ongoing, rent reductions.

"BELONG remains core to our transformation strategy and we have continued to pursue the expansion of this business through enlarging current arenas, opening new arenas and are planning for bigger arenas in more locations. We expect the property market to further favour the tenant leading to improved deals being available for the rollout. Esports shows strong growth potential and we will capitalise on our unique position in the market to further expand our opportunities.

"The improved Group profitability in the half and strong cash position means that we are well placed to advance our strategic priorities in the coming months whilst managing our business closely in the current challenging retail environment."

Market Update and Outlook

The retail sector is facing further challenges over the coming months with considerable economic uncertainty and weakening consumer confidence. Our retail performance is also impacted by the console cycle which has entered its sixth year and is likely to lead to a decline in low margin console sales, however, physical software sales have held up well. For the 6 weeks ended 9 March 2019, the mint market in the UK was down 5.9% and in Spain it was down 3.8% (down 2.3% on a constant currency basis).

The current market expectations are for a new PlayStation console to launch in 2020. Alongside this we are managing the low point of the cycle through our cost savings programme and investment and growth in BELONG.

Gaming continues to change and the development of ways for more players to access games has been evolving rapidly. Apex Legends launched in February 2019 and is a disrupter in this ever-changing market, however, as we demonstrated with Fortnite, we have the opportunity to monetise through digital currency, high-end accessories and licensed merchandise.

Our focus remains on our transformational strategy to move from a seller of physical products to providing gaming experiences and services. As more consumer focus and spend moves to experiences, we are well advanced in delivering unique, world class gaming at both local and national level.

The Board were pleased with the performance of the Group in the period and the progress made in its transformation strategy. We believe there will be ongoing economic uncertainty and market headwinds which are expected to affect the performance of the Group in the near term, however we remain confident in the longer term growth prospects of the Group.

The Board will announce its full year results for the 52 weeks ending 27 July 2019 in November 2019.

Results Presentation

Management will be hosting a presentation for analysts and investors at 9.30 a.m. today at Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, EC2M 5SY. A live audio webcast of the presentation will be available via the Company's website at www.gamedigitalplc.com/investor-relations.  A recording of the presentation will be made available later today.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement this inside information is now considered to be in the public domain.

Enquiries

Notes:

1. Gross Transaction Value ('GTV') is a non-IFRS measure defined as total retail receipts and all other Group revenue excluding VAT and before the deduction of revenue deferral relating to loyalty points and other accounting adjustments. Gross Transaction Value reflects the full retail sales value of digital sales, agency sales (including sales by business partners on GAME's Marketplace website) and other similar arrangements and thereby includes the publishers' and sellers' shares of those transactions (see note 1 to the condensed financial statements). GTV provides the most reliable measure of activity in an environment where more sales are expected to move from physical to digital.

2. Gross profit rate calculated as statutory gross profit as a percentage of GTV.

3. Adjusted EBITDA is a non-IFRS measure defined by the Group as operating profit before tax, depreciation, amortisation, net finance costs, exceptional and adjusting items (see note 1 to the condensed financial statements).

4. Adjusted EBITDA for Events & Esports includes Multiplay Digital in the previous period up to the date of the disposal on 28 November 2017.

5. The calculation of Adjusted profit before tax excludes all exceptional and adjusting items (see note 1 to the condensed financial statements).

6. Adjusted basic earnings per share is calculated as set out in note 6 to the condensed financial statements.

Forward Looking Statements

This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

Notification of Home Member State

Following changes made to the Disclosure Rules and Transparency Rules ("DTR") as a result of the Transparency Directive Amending Directive (2013/50/EU), the Company is required to disclose its Home State. Accordingly, pursuant to DTR 6.4.2, the Company announces that its Home State is the United Kingdom.

Notes to editors

Listed on the London Stock Exchange in June 2014, GAME Digital plc is dedicated to delivering an authoritative range of specialist gaming products and services to the gaming communities of the UK, Spain and beyond, providing more ways for gamers to enjoy more games and unique gaming experiences, more often. GAME's UK and Spanish retail businesses are the market leaders in those geographical areas, operating a total of over 540 stores across the two areas, a fully integrated multichannel offer including the multi-award winning GAME App, and over 4.4 million active customers across its Reward programmes. GAME is developing its proposition with the continued expansion of BELONG, the Group's leisure experience, which brings video-gaming to high streets, shopping centres and communities nationwide. Through its esports and events activities the Group is delivering unparalleled consumer gaming experiences directly, and on behalf of third parties, including its flagship event, Insomnia, the UK's largest gaming festival. The Group's visual recognition and augmented reality business, Ads Reality, is pioneering the use of new technologies to reach gamers and business partners outside its main markets.

For more information please visit:

www.gamedigitalplc.com, www.game.co.uk, www.game.es, www.insomniagamingfestival.com or www.adsreality.com

CHIEF EXECUTIVE'S STATEMENT

The video games markets in the UK and Spain have continued to evolve rapidly and our strategy has ensured that we have met the needs of our customers and supplier partners over this key period, whilst advancing the profitability and cash position of the Group. This provides us with a sound base for further investment and development of the business in the future.

Group GTV declined by just 1.4% in the period with continued growth in Digital at 21.7% and Core Accessories & Other up 14.5%, offsetting the decline in Preowned (down 20.9%) and Hardware (down 9.3%) while Physical Software held its own as the Group secured exclusives on the majority of new releases in the period. Revenue was £492.9 million (2018: £517.4 million), down £24.5 million or 4.7% in the period. The growth in Digital and Accessories & Other reflects the demand for console & PC accessories associated with Fortnite and other Battle Royale games and of people spending longer playing individual games.

The growth in sales of higher margin categories, such as new release exclusives, console and PC accessories and licensed merchandise, helped to maintain our gross profit rate (calculated as gross profit as a percentage of GTV) at 21.0% (2018: 21.0%). The overall Group gross profit was £1.5 million lower than last year, but with the UK cost saving programme generating c.£4.9 million of savings and reduced operating costs associated with the sale of Multiplay Digital last year, the Group Adjusted EBITDA increased by £4.6 million to £25.8 million (2018: £21.2 million).

Profit before tax was a solid performance of £14.8 million (2018: £12.3 million, which included £6.0 million of exceptional income on the sale of Multiplay Digital). The basic earnings per share was 7.0 pence (2018: 5.4 pence) whilst on an adjusted basis, this was 9.8 pence (2018: 6.4 pence).

Segmental performance

Core Retail delivered a positive performance for the half given the current retail landscape and this demonstrates the success of our strategic pillars.

UK Retail delivered a 49.5% growth in Adjusted EBITDA to £14.8 million (2018: £9.9 million). GTV saw a decline of 1.8% which was broadly flat on a like-for-like basis. Revenue declined 5.4% to £302.8 million (2018: £320.0 million), impacted by lower Preowned and Hardware sales. In spite of this, both gross profit and the gross profit rate were up year-on-year, primarily due to a higher rate on Software, driven by new release exclusives. Cost saving actions delivered improvements in many areas and resulted in a £4.9 million reduction in underlying operating expenses compared to the previous period.

Spain Retail saw GTV increase by 0.7% although a decline in revenue of 2.1%. Accessories & Other and Digital both performed strongly, and the gross profit rate was largely maintained at 20.1% (2018: 20.2%) despite the change in category mix. Underlying operating expenses were marginally higher year-on-year and this resulted in an Adjusted EBITDA of £12.1 million (2018: £12.4 million).

Events & Esports (which includes the results of Multiplay Digital up to the date of the sale in November 2017) had a mixed performance in the period. BELONG saw revenue and gross profit growth including a 52.2% increase in pay-to-play revenue which has a 100% margin rate. Events experienced a decline in overall profitability from the reduction in the level of UK activity and focused on growing our international franchise proposition which led to lower revenue and profitability. Adjusted EBITDA for this segment was a loss of £1.1 million (2018 loss: £1.1 million) though this position is expected to improve for the full year results as we see further growth in BELONG.

The improvement in profitability and strong working capital management have resulted in total net cash of £95.5 million (2018: £84.9 million) and there were no facilities drawn in the UK and Spain as at the balance sheet date (2018: £nil). The UK business did not utilise any of its facilities during the period.

Our mint markets

¹ Source: GfK Chart-Track; based on value of retail sales of mint console hardware, software, digital and accessories. 26 weeks ended 26 January 2019 vs. 26 weeks ended 27 January 2018 (restated - prior year market information in the UK has been restated by GfK Chart-Track)

² UK and Spanish markets combined. Spain converted into sterling equivalent

The mint console markets in the UK and Spain have both seen growth in the period, reflecting the continued strong demand for digital currency and console accessories associated with Fortnite and other Battle Royale games, and the total gaming market in which we operate grew by 3.2% in the first half.

In the UK, the software market value was down marginally versus the prior year, however, our market share in this category grew year-on-year in part due to the exclusives secured on new game releases which help to drive higher sales at higher prices. Strong competition on hardware and accessories sales led to our overall market share for the period falling one percentage point to 26% (2018: 27%). Black Friday is a highly competitive time for retail sales in the UK with significant discounting across the market. We decided to reduce the level of promotional activity over this week and, although our sales were lower which reduced market share, our gross profit was not negatively impacted due to a higher gross profit rate achieved versus the prior year.

The Spanish market experienced a decline in total software and hardware sales in comparison to the previous year. The market share for our Spanish business was 37% (2018: 38%) and the reduction was from a combination of discounting by competitors and a further shift to online as this channel is less well developed in Spain.

Consumer demand for Digital content and PC & console accessories is expected to remain strong, particularly with the recent release of Apex Legends. There are a number of new releases in the second half of the financial year to drive software sales (e.g. Kingdom Hearts III and The Division 2) and other significant new releases anticipated for later in the calendar year. However, the economic uncertainty and reduced consumer confidence continues to impact the wider retail market.

Strategic update

In building the most valuable community for gamers we have three key pillars:

1. Improving the core specialist retail offering

As a specialist retailer in the video gaming market, we continue to enhance our proposition and differentiate ourselves based on the changing needs and behaviours of customers, in order to maximise our profitability.

We continued to work with our supplier partners to expand our exclusive proposition across new game releases and licensed merchandise and these higher margin products have contributed to maintaining the Group's gross profit rate at 21.0% (2018: 21.0%) for the period and also helped to drive sales in a challenging and competitive market despite the continued decline in preowned revenues.

Our product proposition has been enhanced and PC accessories will continue to be a core focus area alongside further development of our gaming services.

Further enhancements to the online customer journey and delivery options have led to an improved online conversion and market share. New initiatives for our multichannel proposition are planned to launch later this year to further enhance the online offering.

Active loyalty scheme members across the Group totalled 4.4 million (2018: 4.6 million) and the number of registered app users has increased to 2.3 million (2018: 2.0 million), both of which drive engagement and sales growth and demonstrate our importance to our customers.

2. Optimising the organisation to deliver efficiencies

A total of £4.9 million of cost savings have been achieved in the UK in the period, including £1.4 million of store rent savings. Initiatives and actions in the period delivered efficiencies across all areas of the business and we completed the head office reorganisation that commenced in the previous financial year.

The store optimisation programme has continued in the UK and our flexible lease profile gives us a unique opportunity to work closely with our landlords, renegotiating rent and other store fixed costs. As a result of these ongoing lease negotiations, £0.5 million of additional annualised rent savings were agreed in the period and store rent costs were £1.4 million lower than the previous year. Our average lease length to break was 0.8 years (2018: 1.1 years) and we have 190 potential lease events before the end of 2019, of which over 70% are on short-term flexible arrangements, and thus well-placed to constantly review our store portfolio and associated cost base in the challenging retail market.

A significant number of notices were recently served on landlords to accelerate this programme of savings and the annualised rent reductions to date now equates to £2.2 million with further potential opportunities continuing to be negotiated.

The store estate in Spain is similarly reviewed and the average period to earliest break is also 0.8 years (2018: 0.9 years). Stores are opened, closed and relocated when appropriate, although the 'bricks and mortar' retail market remains much stronger in Spain than the UK so opportunities to renegotiate rent costs are more limited.

The Group has maintained strong cash and working capital discipline across the period and net cash at 26 January 2019 was £95.5 million (2018: £84.9 million). All facilities in the UK and Spain were undrawn at the balance sheet date and in conjunction with the net cash balance, this places the Group in a good position for the future to focus on the expansion and growth of BELONG and to deliver long-term returns to shareholders.

3. Expanding the Group's live gaming services

The expansion of the Group's live gaming service, BELONG, remains a key objective and we increased the number of stations by 20% in the half and by 44% year on year. We continue to focus on station growth through new and larger locations for future arenas.

Like-for-like arenas saw pay-to-play revenue growth of 32% while those arenas which increased station count saw revenue grow 72%. This was compared to 17% pay-to-play revenue growth in the arenas that did not have an increase in stations.

The total number of stations at 26 January 2019 was 4401 (27 January 2018: 3051) and the utilisation rate for the period was 28.0% compared to 28.5% in the prior year period. The average price per hour was up 6.3% to £4.71. We are looking to drive a higher utilisation rate by introducing a subscription model that is currently being trialled. Initial results have shown an increase at current low utilisation times without impacting high utilisation times, driving a net revenue upside through higher utilisation at a reduced price per hour.

With the aid of our BELONG customer segment analysis we are gaining increased insight in to the different types of gamers frequenting our arenas and we then adapt the local gaming experiences and focus to drive utilisation. These segmentation types are also being used to plan for new arenas.

Arena Clash, whereby the arena tribe teams compete against one another is growing in adoption and the Spring season has seen the addition of FIFA 19 and Rainbow Six to the line-up alongside League of Legends, Tekken 7 and Overwatch. 22 arenas participated and in one arena alone we saw 40 gamers competing for a place in the League of Legends Championship team. In the second half of this financial year, we will be launching Arena Rivals, a new competitive gaming offer in Arena Clash off season times.

The first international Insomnia franchise event took place in Egypt in October 2018 and achieved a footfall of over 10,000. Insomnia Dubai has also been announced for October 2019, Insomnia Dublin in November 2019 and we are having further discussions with new and existing franchise partners on potential new territories.

Notes:

1. Excludes ALT Gaming Lounge, Nottingham which was refitted and rebranded to BELONG, and its Arena Clash tribe announced, in January 2019.

Conclusion

The Group has produced a solid sales and gross profit performance in the period, despite the challenges in the retail sector. We have been able to capitalise on our position as a specialist retailer to enhance our customer proposition and work collaboratively with our supplier partners. Our cost optimisation programme has produced further savings and we continue to look at ways to reshape our retail businesses for the future. BELONG remains the key focus for the transformation of the Group and we are pursuing the rollout of additional stations.

FINANCIAL REVIEW

Group Results

Revenue and Gross Transaction Value

Group revenue for the 26 week period was £492.9 million (2018: £517.4 million) and was impacted by the continued decline of the Preowned category in the UK and the growth in digital sales which are recorded at the net commission element earned. Gross Transaction Value ('GTV') includes the full retail sales value of digital sales and therefore provides a more reliable measure of activity where more sales are moving from physical to digital.

The Group GTV by category is analysed in the table below and a reconciliation to revenue is provided in note 1 to the condensed financial statements.

Content GTV, which includes both physical and digital gaming content, increased by 5.8% to £280.8 million (2018: £265.3 million). Within this total, the GTV of all physical software formats was in line with the previous year, with a decline in Xbox One and older generation format games being offset by growth in Nintendo Switch™ sales. Digital sales have continued to grow at a similar rate to that seen in the second half of last year and, within this category, console digital sales were up 28.9% versus the previous year, driven by the demand for currency and additional content.

Hardware GTV was £133.1 million (2018: £146.7 million) where sales of Nintendo Switch and PlayStation 4 consoles grew year-on-year, were offset by a decline in Xbox One and older formats sales, particularly in the UK business.

The GTV of the Accessories & Other category increased £8.0 million to £95.3 million (2018: £87.3 million). Console and PC accessories were up 16.7% and licensed merchandise performed well, boosted by sales of Fortnite and new gaming titles-related merchandise. These categories more than compensated for lower sales from Toys-to-Life and VR. Events & Esports GTV was impacted by a different line-up and scope of events and from the sale of Multiplay Digital during the prior year.

The Preowned Group GTV declined by 20.9% to £69.2 million (2018: £87.5 million), largely due to the structural decline of the market in the UK. Preowned software sales were down 18.5%, in part due to a lack of titles from a weaker mint market in the previous year. Sales of preowned mobile phones (GAMEtronics) were also down 25.5% as consumers are now keeping phones for longer.

Gross profit

The Group gross profit for the period was £121.6 million (2018: £123.1 million), down £1.5 million or 1.2% from the previous period, compared to a 4.7% decline in revenue. The change in mix of products sold in the period, particularly the decline in lower margin Hardware sales and an increase in Accessories & Other as indicated in the GTV table above, has helped to mitigate the fall in revenue.

The gross profit rate (calculated as gross profit as a percentage of GTV) for the Group was flat at 21.0% (2018: 21.0%). This calculation of the rate provides a more consistent approach to measuring gross profit where more sales are moving from physical to digital.

The Content gross profit rate improved by 0.1 percentage points to 21.7%, despite the increase in lower margin Digital sales in the period. The rates achieved on new generation Software (PlayStation 4 and Xbox One), particularly in the UK, were up versus the previous period, in part due to the Group's strategy to secure exclusives on new releases which typically result in a higher margin. The Group also took the decision to reduce the level of promotional activity over Black Friday and, although this resulted in lower sales compared to the previous year, the gross profit value was maintained and the rate improved year-on-year, particularly on Software and Hardware sales.

The gross profit rate in the Accessories & Other category, which comprises a mix of products and services at different margin rates, from low margin VR to the 100% margin rate of BELONG pay-to-play, decreased by 2.8 percentage points to 30.1% (2018: 32.9%). Although higher rates were achieved on categories such as console and PC accessories and licensed merchandise, the Events business and other categories saw a drop in the level of profitability in the period.

The Preowned gross profit rate for the period was 31.5%, 1.0 percentage point better than the previous year. Although sales in this category have fallen, improved controls over trade-in and sale prices and additional products available online, have helped to improve the overall profitability.

Operating expenses

Underlying operating expenses (before adjusting and exceptional items) decreased by £7.2 million or 6.6% to £101.1 million (2018: £108.3 million), driven by further cost saving initiatives and actions in the UK retail business. Total underlying operating expenses in the Spain Retail business were marginally higher than the previous period although the impact of statutory wage increases was largely absorbed by savings across other areas.

Excluding depreciation and amortisation, underlying operating expenses decreased by £6.1m and comprised £4.9m reduction in the UK Retail business, £1.5m reduction in Events & Esports and an increase of £0.3m in Spain Retail.

Group selling and distribution costs were £76.7 million, down £3.8 million from the previous year. Events & Esports saw a small increase in costs from the continued investment in BELONG, while Core Retail costs were £4.0 million lower. This reduction reflected the cost savings in the UK on store rent and payroll costs plus distribution and other store efficiencies.

Group administrative expenses fell £3.4 million to £24.4 million (2018: £27.8 million). Events & Esports accounted for £1.8 million of this reduction and the majority of the improvement resulted from the sale of Multiplay Digital and lower costs in the Events business. Core Retail costs were lower because of the head office reorganisation that commenced in the second half of the previous year and continued into the current period.

Depreciation and amortisation charges for the Group were £5.3 million, down £1.1 million. Total Group capital expenditure has fallen in the last couple of years and been focused on BELONG and other strategic spend only, thereby resulting in these depreciation and amortisation costs to gradually fall.

Adjusted EBITDA

A reconciliation of Adjusted EBITDA to the profit before tax is provided in note 1 to the condensed financial statements.

The Group delivered an Adjusted EBITDA of £25.8 million (2018: £21.2 million) for the period, an improvement of £4.6 million. UK Retail was the driver of the improved profitability and although market conditions were challenging in terms of revenue, the annualisation of prior year cost saving actions plus further initiatives and efficiencies in the year have led to this positive result. Spain Retail Adjusted EBITDA of £12.1 million (2018: £12.4 million) was largely in line with the previous period.

Events & Esports Adjusted EBITDA loss of £1.1 million (2018 loss: £1.1 million) was in line with the previous period. The Events business saw a reduction in the number of events in the period as it focused on its key Insomnia franchise which led to lower profitability whereas BELONG saw an improvement in its profitability.

Segmental results

Core Retail

UK

UK Retail saw GTV decline by 1.8% and revenue was down 5.4% or £17.2 million to £302.8 million (2018: £320.0 million) with the higher percentage reduction in revenue due to the recording of Digital sales on a net commission basis (Digital GTV was up 20.0%). Revenue in both the Preowned and Hardware categories was down versus the previous period, although this was partially mitigated by an increase in Software revenue, driven by the performance of new releases and demand for Nintendo Switch games. Due to this change in sales category mix and a focus on improved terms, the gross profit rate improved by 0.4 percentage points to 21.5%.

Underlying operating expenses before depreciation and amortisation charges were down £4.9 million and this net reduction included the following operating cost savings:

Despite the fall in revenue, the improved gross profit rate percentage and the reduction in operating expenses led to an Adjusted EBITDA of £14.8 million (2018: £9.9 million).

Core Retail

Spain

¹ LC- local currency basis. Calculated based on original Euro amounts

The Spanish Retail business delivered GTV growth of 0.7%, but with significant growth in Digital as per UK Retail, this led to a 2.1% decline in revenue to £184.6 million. Accessories & Other performed strongly which more than compensated for a decline in Hardware revenue, and although Preowned revenue was marginally down versus the previous period, the decline of this category was not to the same extent experienced in the UK. The total gross profit rate was broadly maintained at 20.1% and a lower rate in Content, driven by Digital growth, was offset by an improved rate in Accessories & Other.

Underlying operating expenses (excluding depreciation and amortisation charges) increased £0.3 million to £30.9 million for the period. Statutory wage increases impacted on store and head office salary costs although these were mitigated by small savings in other areas. The Adjusted EBITDA of £12.1 million (2018: £12.4 million) was in line with the previous period.

Events & Esports

GTV and revenue for Events & Esports decreased by £3.4 million to £5.5 million, impacted by the sale of Multiplay Digital during the prior year and a different line-up of events in the Events business, which also led to the lower gross profit rate percentage. BELONG revenue grew year-on-year with the addition of two new larger arenas in the first half of the period.

Underlying operating expenses before depreciation and amortisation fell £1.5 million due to lower costs in the Events business and the sale of Multiplay Digital last year. The Adjusted EBITDA loss was £1.1 million (2018 loss: £1.1 million).

Exceptional and adjusting items

Exceptional and adjusting items are detailed in note 1 to the condensed financial statements and other exceptional income in note 3.

Adjusting items for the 26 weeks ended 26 January 2019 comprised amortisation charges on acquired intangibles of £4.3 million (2018: £4.7 million). These are a significant recurring cost to the Group and therefore are not classified as exceptional, however, as they are non-cash items that are not reflective of the underlying trading of the businesses they are presented as adjusting items. The previous year included post-acquisition remuneration charges of £1.2 million associated with the original acquisition of Multiplay (UK) Limited and these ceased in March 2018 with the payment of cash and the issue of shares in final settlement of this liability.

Exceptional costs included £0.5 million (2018: £0.6 million) of redundancy and related costs, incurred as part of the UK reorganisation, with several senior roles removed from the organisation structure in the period. The Group has also undertaken or commenced several key strategic projects and initiatives and incurred costs of £0.3 million (2018: £1.4 million) including legal and professional fees for the proposed but unapproved move to AIM.

Exceptional income of £6.0 million in the previous period represented the gain on sale of Multiplay (UK) Limited, which was sold on 28 November 2017.

Net finance costs

Net finance costs totalled £0.6 million (2018: £0.6 million) for the period. While the UK facilities were undrawn over the period, commitment fees and the amortisation of arrangement fees were incurred together with interest costs on finance leases. The Spanish business utilised its facilities during the period.

Profit before tax

The Group profit before tax for the period amounted to £14.8 million (2018: £12.3 million). Profit before tax for Core Retail was £16.6 million (2018: £9.7 million) and the movement was due to the improved profitability of the UK Retail business. Events & Esports reported a loss before tax of £1.8 million (2018 profit: £2.6 million) with the variance due to the inclusion of the £6.0 million gain on sale of Multiplay (UK) Limited in the previous year.

Tax

The effective tax rate (defined as the tax charge divided by the profit before tax) was 18.2% (2018: 25.2%). The change in the tax rate reflects the change in mix of profitability of companies in the Group.

A corporation tax charge of £2.8 million (2018: £2.9 million) has been recorded for Spain where the tax rate is 25%. No corporation tax is forecast to be payable in the UK in the current year and no deferred tax asset is forecast to be recognised on losses brought forward and the full year taxable loss.

Earnings per share

In order to give a better view of underlying earnings, adjustments to earnings per share have been made to remove the impact of adjusting and exceptional items as follows:

¹ Excludes shares held in trust (EBT and SIP)

The Group delivered Adjusted basic earnings per share of 9.8 pence (2018: 6.4 pence). On a statutory basis, the basic earnings per share for the 26 weeks ended 26 January 2019 was 7.0 pence (2018: 5.4 pence). The increase in both earnings per share measures resulted from the improved profitability of the Group in the period.

Cash flow and net cash

Cash generated by operations amounted to £42.8 million (2018: £36.3 million) and the increase was driven by the higher profits and improvement in working capital. Inventories increased in comparison to the previous period, but this was more than offset by higher payables and lower receivables balances.

Corporation tax payments decreased from £3.7 million last year to £0.7 million in the current year due to the timing and value of payments on account for the Spanish business, plus refunds were received in the UK in respect of previous years.

Group capital expenditure totalled £4.0 million (2018: £6.2 million) and was primarily incurred on store relocations and improvements and further development of the online infrastructure.

The sale of Multiplay Digital in the previous period resulted in net proceeds of £14.9 million. A further £1.9 million of consideration on the disposal is held in Escrow and has been recorded in other receivables, as it is subject to any warranty claims, and is receivable on 28 June 2019.

Cash resources and financing

As at 26 January 2019 the Group had cash and cash equivalents of £95.5 million (2018: £84.9 million) and the UK and Spanish banking and other facilities were undrawn.

The Group has access to combined facilities across the UK and Spain of up to £110 million (2018: £75 million) as follows:

Dividends

Reflecting the decision to continue to focus on the expansion and investment in the Group, including on BELONG, the Board has taken the decision not to declare an interim dividend for the period.

The interim dividend of £1.7 million in respect of the 52 weeks ended 29 July 2017 was paid in the previous period.

Going concern

The Directors have considered the activities and performance of the Group together with factors which could potentially affect future developments. After careful consideration the Directors believe that the Group has sufficient cash resources and appropriate financing facilities to ensure payments can be made as they fall due for a period of not less than 12 months from the approval of these condensed financial statements. In making their assessment the Directors have reviewed the Group's latest forecasts and considered reasonably possible downside sensitivities in performance together with mitigating action. Accordingly the condensed financial statements have been prepared on the going concern basis.

Principal risks and uncertainties

The Board has considered the principal risks and uncertainties for the remaining six months of the financial year and determined that the risks presented in the 2018 Annual Report, also remain relevant to the rest of the financial year: Core Retail strategy, competition and digital disintermediation, key supplier dependency, market dynamics and gaming trends, key partner dependency, core systems and investment, data protection and cyber security, people (talent management and succession), funding and financial management and the EU referendum and economic uncertainty.

Responsibility statement

The Directors confirm, to the best of their knowledge and belief, that the interim condensed consolidated financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and that the interim management report herein includes a fair review of the information required by the DTR 4.2.7 and DTR 4.2.8 namely:

A copy of the Company's 2018 Annual Report and Accounts is available on GAME's website www.gamedigitalplc.com

This responsibility statement was approved by the Board of Directors on 20 March 2019 and is signed on its behalf by:

Martyn Gibbs Ray Kavanagh

Chief Executive Officer Chief Financial Officer

Condensed Consolidated Statement of Comprehensive Income

For the 26 weeks ended 26 January 2019

All results relate to continuing operations (note 1).

The condensed consolidated financial statements should be read in conjunction with the accompanying notes.

Condensed Consolidated Statement of Financial Position

As at 26 January 2019

The condensed consolidated financial statements should be read in conjunction with the accompanying notes.

Condensed Consolidated Statement of Changes in Equity

For the 26 weeks ended 26 January 2019

The condensed consolidated financial statements should be read in conjunction with the accompanying notes.

Condensed Consolidated Statement of Cash Flows

For the 26 weeks ended 26 January 2019

The condensed consolidated financial statements should be read in conjunction with the accompanying notes.

Notes to the Condensed Consolidated Financial Statements

For the 26 weeks ended 26 January 2019

General information

The financial information included in the interim condensed consolidated financial statements does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory accounts for the 52 week period ended 28 July 2018 have been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Basis of preparation

GAME Digital plc (the 'Company') is a company incorporated in England. The interim condensed consolidated financial statements of the Company for the 26 week period ended 26 January 2019 comprise the Company and its subsidiaries (together referred to as the 'Group'). The interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. They are unaudited but have been reviewed by the Company's auditor and should be read in conjunction with the consolidated financial statements of the Group for the 52 week period ended 28 July 2018.

Accounting policies

The accounting policies adopted in the preparation of the condensed consolidated financial statements are the same as those set out in the Group's annual financial statements for the 52 weeks ended 28 July 2018 except for the adoption of new standards as set out below.

IFRS 9 Financial Instruments

The Group has adopted IFRS 9 with effect from 29 July 2018 and it has had no material impact on the classification of financial assets and financial liabilities on the consolidated statement of financial position. An element of trade receivables has been offset against trade payables as these balances with suppliers are settled net. The methodology for this reclassification has not changed under IFRS 9.

The impairment of financial assets under the expected credit loss model has not resulted in a difference to the impairment provision. The Group applied the simplified approach and calculated a provision matrix to measure the expected credit losses. However, as the impairment allowance calculated was lower than the provision required for specific bad debts, these additional amounts were added which resulted in the same provision under IFRS 9 to the previous accounting policy.

IFRS 15 Revenue from Contracts with Customers

The Group has adopted IFRS 15 with effect from 29 July 2018 and adopted the cumulative effect method therefore the comparative information is presented under the previous accounting policies.

Revenue from the sale of games and gaming-related products in retail stores is recognised at the point of sale and has been unaffected by IFRS 15. Online revenue was previously recognised when the goods were despatched to the customer, however, in accordance with IFRS 15, revenue is now recognised when control passes to the customer, which is on receipt of the goods.

IFRS 15 has impacted on the accounting for the Group's loyalty schemes. Previously a portion of the sales transaction price was allocated to the loyalty scheme using the fair value of points awarded whereas under IFRS 15, the fair value is now determined relative to the total transaction price.

The estimated breakage on gift cards is recognised in line with the spend on the gift card in accordance with IFRS 15 whereas the previous accounting policy recognised breakage immediately on the sale of the gift card.

See note 13 for further details on the impact that IFRS 15 has had on the interim condensed consolidated financial statements.

New standards effective for periods beginning on or after 1 January 2019, that have not been applied in preparing these interim condensed consolidated financial statements.

IFRS 16 Leases

IFRS 16 is effective for periods beginning on or after 1 January 2019 and will be adopted by the Group on 28 July 2019. Leases previously accounted for as operating leases will be brought onto the balance sheet as right-to-use assets and an obligation recorded for the lease liabilities. Lease costs will no longer be part of the Group's Adjusted EBITDA due to the recognition of depreciation charges on the assets and finance costs on the lease liability. The total expense recognised in the statement of comprehensive income over the life of a lease will be unaffected by IFRS 16, however, it will result in the acceleration of costs with higher finance costs in the earlier years of the lease.

From the work performed to date, this standard will have a significant impact on the assets and liabilities reported on the Group's balance sheet given the number of store and other leases, but it will not affect the cash flow generated for the year. The impact on the overall profitability of the Group in the statement of comprehensive income is expected to be less material due to the short-term nature of many of the store leases, hence not leading to a significant acceleration of costs. One of the key judgement areas for the Group is determining the lease term where it is reasonably certain that a lease will continue to be extended despite a rolling break within the contract. Establishing the discount rate is the other key judgement as rates tend not to be implicit in the leases therefore the incremental borrowing rate will be applied to calculate the present value of the lease obligations.

Lease data is currently being collated across the UK and Spain and the Group has invested in new software to calculate the initial entries on adoption of IFRS 16 and to manage the continuing accounting that will be required going forwards. Given the frequent lease renegotiations that have taken place in the UK in the last few years and the additional data requirements that this involves, the Group has not yet determined which transition approach will be taken and therefore cannot provide an estimate of the impact until this work has been completed. An update on this work will be provided in the consolidated financial statements for the year ending 27 July 2019.

Going concern

The Directors have a reasonable expectation that the Group and the Company has adequate financial resources to ensure it continues to operate for a period of not less than 12 months from the approval of condensed financial statements. In reaching their conclusion the Directors have carefully considered the cash resources and financing facilities available to the Group and have reviewed budgets and forecasts including downside sensitivities. On that basis they continue to adopt the going concern basis of accounting in preparing the condensed financial statements.

Forward-looking statements

This announcement contains certain forward-looking statements which have been made by the Directors in good faith using information available up until the date they approved the announcement. Forward-looking statements should be regarded with caution as by their nature such statements involve risk and uncertainties relating to events and circumstances that may occur in the future. Actual results may differ from those expressed in such statements, depending on the outcome of these uncertain future events.

1 Operating segments

The Group's operating segments have been determined based on the management information reviewed by the Group's Chief Executive Officer.

The Chief Executive Officer considers the business from a geographic perspective for the retail businesses, namely the UK and Spain and these segments are separately managed. Recent acquisitions and new business ventures, comprising BELONG, Game Esports and Events, Ads Reality and Game Esports Spain, are presented as a separate segment titled 'Events & Esports'. The performance of this segment is reviewed separately by the Chief Executive Officer, the activities are different to those of the retail segments and significant growth is expected in the next few years.

Multiplay (UK) Limited, comprising the Multiplay Digital business, was sold on 28 November 2017 but has been presented within continuing operations in the comparative period as it was part of the Events & Esports segment and not a significant part of the business to be classified as a discontinued operation.

The Group uses certain Alternative Performance Measures ('APMs') that are not required to be presented in accordance with IFRS nor are defined under IFRS and these included Gross Transaction Value ('GTV') and Adjusted EBITDA. The APMs provide additional and more consistent measures of underlying activity and performance by removing items that are not reflective of the Group's underlying trading.

The performance of operating segments is assessed based on GTV, Revenue and Adjusted EBITDA defined as follows:

The segment information provided to the Chief Executive Officer for the reportable segments is as follows:

Other accounting adjustments comprise movements in provisions and estimates (including accounting for gift card, returns and deposits) and other revenue adjustments for the Core Retail segment.

Revenue, and hence profitability, of the Core Retail division is more heavily weighted towards the first half of the financial year which includes the Christmas period and many of the key new games releases each year.

Adjusting items:

Brand amortisation arose in the UK on the purchase of the trade and assets from the former GAME Group plc and in Spain on consolidation of the company, plus other acquired intangibles were recognised on the acquisitions of Multiplay (UK) Limited and Ads Reality. These amortisation charges are recurring costs to the Group and therefore not classified as exceptional, however, as they are significant non-cash items and are not reflective of the underlying trading of the businesses they are presented as adjusting items.

Post-acquisition remuneration charges related to cash and shares payable to certain selling shareholders agreed at the time of the original acquisition of Multiplay (UK) Limited and this cost was in addition to recurring annual remuneration for these employees. The total post-acquisition remuneration was paid on 2 March 2018, representing £2.4 million of cash and the issue of 2,079,002 ordinary shares in GAME Digital plc. No further post-acquisition remuneration accrued on the Multiplay acquisition after 2 March 2018.

Exceptional costs:

During the period, the Group has undertaken several key strategic projects and initiatives, plus incurred other one-off costs, which has resulted in £0.3 million (2018: £1.4 million) of non-recurring costs. In addition, £0.5 million (2018: £0.6 million) of redundancy and related costs have been incurred as part of the UK reorganisation.

For the purposes of monitoring segmental performance and allocating resources between segments, the Group's Chief Executive Officer monitors the current and non-current assets and current and non-current liabilities attributable to each segment. All assets and liabilities are allocated to reportable segments.

Revenues from major products and services

The Group's revenues from its major products and services were as follows:

Content revenue includes income relating to the sale of gaming products for use on hardware platforms, including both physical and digital content. Digital content is reported on a commission basis and is recognised net of associated purchase costs. Hardware revenue represents the sale of console platforms. Accessories & Other includes the sale of console accessories, PC, VR and related accessories, licensed merchandise and all other retail revenue and revenue from the Events & Esports segment including 'pay-to-play' activities in BELONG arenas. Preowned includes the sale of preowned content, hardware, accessories and mobile devices.

2 Other operating expenses

3 Other exceptional income

On 28 November 2017, the Company sold its entire shareholding in Multiplay (UK) Limited to Unity Technologies APS for cash consideration of £19.0 million of which £17.1 million was received and the remaining £1.9 million is held in escrow for 19 months until June 2019. Transactions costs totalled £1.5 million and the settlement of the finance lease liability was £0.7 million which resulted in net proceeds of £14.9 million.

4 Operating profit

5 Taxation

Tax for the period ended 26 January 2019 is charged at the best estimate of the average annual effective tax rate for the UK and Spain expected for the full year, applied to the pre-tax profit of the 26 week period of those entities. The effective tax rate for the UK is nil due to forecast losses for the year and the corporation tax charge for the period of £2.8 million (2018: £2.9 million) relates entirely to the Spanish business.

The Group is impacted by the uneven generation of taxable profits throughout the year as it typically generates a much higher level of profits in the first half of the financial year. It is anticipated that the tax expense will reduce in the full year results.

Deferred tax movements in the period amounted to a credit of £0.1 million (2018: charge of £0.2 million).

6 Earnings per share

Earnings per share has been calculated by dividing the profit for the period by the weighted average number of ordinary shares in issue during the period.

Basic earnings per share

Diluted earnings per share

Adjusted earnings per share