SUMO.L Regulatory News (SUMO)

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

24 April 2018

Sumo Group plc

("Sumo Group", the "Company" or the "Group")

FINAL RESULTS 2017

Sumo Group (AIM: SUMO) announces its Final Results for the financial year ended 31 December 2017, which show material progress across the Group.

These results are the first since Sumo Group's IPO in December 2017. They cover the period in which the Group transitioned from the previous ownership structure when it was majority owned by funds under the management of Perwyn for more than 11 months of that financial year to the new status as a listed company 10 days before the financial year end. Accordingly, the financial information reflects the leveraged structure in place for most of that year and also the restructuring of the Group in preparation for the IPO together with the significant costs incurred in that process.

¹ Unaudited pro forma financial information is set out in note 17 of the Notes to this Final Results statement.

2 The adjustment to revenue is in respect of pass-through revenue on which Sumo does not charge a margin

3Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure.

4Adjusted profit before tax excludes exceptional items £2.7m (unaudited pro forma 2016: £0.9m), net finance costs relating to pre-IPO financial structure £5.4m (unaudited pro forma 2016: £3.0m) and amortisation of customer contracts and relationships and software £27.6m (unaudited pro forma 2016: £3.7m).

5 Includes amortisation of £27.6m (unaudited pro forma 2016: £3.7m), a non-cash and non-recurring charge resulting from a more appropriate approach to the useful economic life of historical intangible assets arising on the September 2016 change of ownership being taken in respect of client contracts from that date post IPO; IPO/transaction costs of £2.7m (unaudited pro forma 2016: transaction and other exceptional items £0.9m); and net finance costs of £5.4m (unaudited pro forma 2016: £3.0m)

Highlights:

· IPO in December 2017, raising £38.45 million for the Company from a total £78.15m fundraise

· Strong start to the current year with full year expectations now slightly ahead of consensus market forecasts

· Acquisition of Atomhawk Design Limited ("Atomhawk") in June 2017, which delivered H2 results well ahead of the Board's expectations prior to acquisition

· Sumo Digital successfully launched its first own-IP game, Snake Pass, winning the accolade of Best Arcade Game at the much coveted TIGA Awards

· Atomhawk opened new studio in Vancouver, creating access to new clients and markets

· The Board and management team strengthened for the IPO

· Sumo Digital took on Newcastle Studio of CCP Games post year end

· Strong balance sheet with net cash position of £12.4m (2016: net debt of £52.2m)

Carl Cavers, Chief Executive Officer of Sumo Group, said: "The new financial year ending 31 December 2018 has started strongly. Whilst it is still early in the year, the Board already expects to deliver full year results slightly ahead of market expectations. We are continuing to see strong demand for the Group's services and are well placed to take advantage of the considerable opportunities. Those of us who were at GDC (Game Developers Conference) in March 2018 saw at first hand the strength of growth in our chosen markets, with the associated opportunities this brings, and the Group's business development pipeline reflects this.

"We expect to continue our organic growth and are also keen to accelerate this by acquiring suitable, complementary businesses. My Board colleagues and I are confident about the outlook for the Group in the year ahead."

About Sumo Group - www.sumogroupplc.com 

Sumo Group's award-winning businesses provide creative and development services to the video games and entertainment industries, from studios in Sheffield, Newcastle, Nottingham, Pune (India) and Vancouver (Canada).

The Group's operating businesses include Sumo Digital and Atomhawk. Sumo Digital, its primary business, is one of the UK's largest independent developers of AAA-rated video games, providing both turnkey and co-development solutions to an international blue-chip client base. Atomhawk, a complementary business acquired in June 2017, is a multi-award winning visual design company, servicing the games, film and visual effects industries. Together, the Group delivers full-service visual and development solutions, which include initial concepts and pre-production, production and development, and post-release support.

CHAIRMAN'S STATEMENT

I am delighted to introduce Sumo Group's first Final Results as a quoted company, which show the material progress made by the business in 2017.

The year under review was a significant one. Having completed a secondary management buyout, backed by Perwyn LLP in September 2016, the business entered 2017 energised and with a clear plan to deliver strong organic and acquisitive growth. Not only were both these objectives met but the year culminated with the successful admission of shares in Sumo Group plc to AIM on 21 December 2017.

The listing route was chosen to provide a new and ready source of capital with which to deleverage the balance sheet, raise the profile of the Company, enable the incentivisation of its people and allow the management to execute its growth strategy. You will see from the rest of this announcement how those objectives have been achieved or are being advanced. I thank my Board colleagues and pay tribute to the wider management team for their dedication and hard work, throughout the year, which has allowed us to complete the highly time-consuming admission process while, at the same time, deliver an excellent operating performance.

Sumo Group plc's flotation also enabled private equity investor, Perwyn, to realise some of its investment, while keeping a significant shareholding in the newly quoted business going forward. We are grateful for their ongoing support.

In preparation for IPO, we welcomed David Wilton as Chief Financial Officer and, upon admission, Michael Sherwin also joined the Board as Senior Independent Non-Executive Director.

We completed the acquisition of Atomhawk, a multi award winning visual design company, servicing the videogames, film and visual effects industries, in June 2017, extending the range of premium services Sumo Group provides. Atomhawk had a very strong second half, out-performing our pre- acquisition expectations. Immediately after the year end, Sumo Group also took over the Newcastle studio of CCP Games, bringing a number of talented colleagues into the business and increasing our capacity to deliver high quality services to our clients.

As well as expanding and deepening client relationships throughout the year, Sumo Digital successfully launched its first own-IP game, Snake Pass, generating revenue of £1.7m in 2017. On the back of this success, the Group intends to continue the selective development of independent games based on original IP.

One of the important functions of any board is governance. As part of the move to becoming a listed company, new structures and processes have been put in place or extended by the Board, the details of which will be set out in the Annual Report 2017. These will continue to develop over the coming year.

The source of our success is our people; we value them highly and are committed to providing a positive working environment. We have invested significantly in our premises in Sheffield and recently moved the Atomhawk Canada operations into a larger site in Vancouver. Since IPO, the Board has begun a process to enable widescale employee participation in the Group's shares.

In summary, we made great progress during 2017 and Sumo Group is well positioned to repeat this as we move forward. Our success is due to the skill and dedication of colleagues across the Group and, on behalf of the Board, I would like to thank them all for their contribution.

Ken Beaty

Chairman

CHIEF EXECUTIVE'S REVIEW

Introduction

This is my first statement as CEO of Sumo Group plc and it gives me great pleasure to update our shareholders on what has been a momentous year for the Group.

In June 2018 we will celebrate the 15th anniversary of the foundation of Sumo Digital. The business has grown consistently throughout its history and it is now one of Europe's largest independent videogames developers.

In June 2017 we acquired Atomhawk, a multi award-winning visual design company, servicing the games, film and visual effects industries. This acquisition expanded our integrated videogame service offering and strengthens the Group's position in offering premium services to our clients.

Just prior to the close of the financial year, the Group achieved one of its key strategic ambitions and, following a successful IPO, was admitted to the London Stock Exchange's Alternative Investment Market (AIM) on 21 December 2017. Having been through three changes of ownership in the last three years, we are looking forward to the stability that this platform brings and the opportunity to focus wholly on the development of the business. Sumo Group is a people business offering premium videogame development services to its clients. Following the IPO, we have a strong balance sheet and a structure with which we can incentivise our people, as we continue to drive growth in the business.

We entered 2017 with 382 people operating from three locations in two countries. The year concluded with Sumo Group plc employing 489 people operating at five locations in three countries. Post year end, the Group extended its operations further when it took over the Newcastle studio of CCP Games, bringing a further 34 people to the business and an additional studio location.

Results

In the year ended 31 December 2017, revenue rose by 27% to £30.6m (unaudited pro forma 2016: £24.1m). This was driven by continuing strong organic growth at Sumo Digital, the release of its first own-IP title, Snake Pass, and the acquisition of Atomhawk, which contributed revenue of £1.3m in the six months following its acquisition on 29 June 2017. Development fees for the year were £28.4m (unaudited pro forma 2016: £23.8m), an increase of 19.5% on the prior year and an increase of 33.5% on a like for like basis excluding pass-through revenue. The Group generated own intellectual property title revenue for the first time in 2017 of £1.7m (2016: nil) and royalty income was £0.5m (unaudited pro forma 2016: £0.3m).

Gross profit for the year was £13.3m (unaudited pro forma 2016: £9.0m), an increase of 47.2% on the in the prior year, and we achieved a gross margin of 43.3% (unaudited pro forma 2016: 37.4%).

The Group achieved Adjusted EBITDA of £8.4m in 2017, a substantial increase on the unaudited pro forma £6.0m reported in 2016.

Cash flow was strong during the year with cash generated from operations of £3.3m (unaudited pro forma 2016: £3.3m). Cash balances at the year end were £12.4m, following the repayment of bank and shareholder debt with the proceeds of the IPO.

Further details of the Group's financial results including the non-cash cost arising on the amortisation of intangible assets are set out in the Chief Financial Officer's Review, which follows.

Operational review

Sumo Digital

Sumo Digital, the Group's largest business representing 96% of revenue, is a developer of AAA-rated videogames, providing both turnkey and co-development solutions to an international blue-chip client base. Its full-service development solution includes initial concept and pre-production, production and development and post release support.

Following the post year end takeover of CCP's Newcastle Studio on 1 January 2018, the business now operates from studios in Sheffield, Nottingham, Newcastle and Pune in India. We acquired an additional 11,000 sq ft of office space in Sheffield during the year and began a significant refurbishment programme in September 2017 to provide a larger and better working environment for our people. This work is ongoing and completion is expected shortly. We also acquired a further 2,700 sq ft of space in Nottingham in May 2017, which gives us the capacity to deliver headcount growth, although we are constantly reviewing opportunities to accelerate growth by opening studios in other key locations.

In January 2017, Sumo Digital celebrated ten years of operating in India. Our India studio was founded to provide additional skilled resources. Pune offered an appealing cost base to help underpin EBITDA performance. This part of the business has grown consistently since its foundation, relocating to larger premises in December 2016, which allows for growth in line with our other territories. This studio continues to perform strongly.

It is always pleasing when a business' strengths are recognised externally. In January 2017, Sumo Digital was awarded a 1 star rating in Best Companies™ Survey. This accreditation demonstrates "very good levels of workplace engagement". We shall continue to strive for excellence and the associated 3 star rating. In November, Sumo Digital's first revenue generating own-IP game, Snake Pass, won the industry accolade of Best Arcade Game at the much coveted TIGA Awards. TIGA is The Independent Game Developers' Association, a network for games developers and digital publishers and a trade association representing the videogames industry.

Throughout the year under review, Sumo Digital continued to work with some of the largest publishers in the world. Over the past few years, we have worked with Sony, Microsoft, Sega, Deep Silver, IO Interactive and CCP Games, who announced their co-development relationship with Sumo Digital in October 2017.

Sumo Digital remains focused on investing in its key relationships to develop and deliver high quality videogames, while maintaining a high level of staff utilisation in excess of 95% in the UK over recent years. This proven model gives Sumo Digital high quality and visible earnings. During the year, the shift towards more royalty arrangements continued on our contracts. We are always keen to align our interests with those of our clients and see the opportunity for financial out-performance on new iterations of proven games.

Atomhawk

Atomhawk was acquired on 29 June 2017, at which time it was operating from a single studio in Newcastle. We announced the opening of Atomhawk's new Vancouver studio in September and, in February 2018, post year end, the team moved to larger premises in the city.

This business provides visual development (concept art) and marketing art, as well as motion graphics and user interface design. Its expertise is in helping clients define a visual look for their products, from inception through development and, at the final point of sale, through marketing imagery, videos and box packaging design. Atomhawk primarily serves the creative industries, working with videogames studios, as well as in film and television.

Atomhawk has been involved in the creation of many high profile projects, including the movies Guardians of the Galaxy, Thor II and Avengers II, as well as the games Mortal Kombat, Injustice, RYSE and Killzone. Atomhawk also provides creative design and content of J.K. Rowling's Pottermore and is a regular creative vendor for global brands such as Lego, Microsoft, Sony, Amazon, Marvel and Warner Bros.

Atomhawk's clients include a number of high profile videogame developers, movie studios and product designers, including NetherRealm Studios, CCP, Rebellion, Deep Silver, Rock Steady Studios, Square Enix, Ninja Theory, BBC, Rare and Ubisoft.

Atomhawk delivered a strong performance in the six months to 31 December 2017, well ahead of the Board's original expectations at the time of acquisition.

Strategy

There are four parts to Sumo Group's strategy: to deliver and expand, to win new clients, to add complementary revenue streams and to develop our own-IP.

· We plan to deliver and expand by developing subsequent franchise titles, by developing downloadable content, managing online communities (collectively referred to as "games as a service") and generating royalties, where our interests are clearly aligned with our clients;

· We plan to win new clients through the expansion of our publisher portfolio, collaborating with other developers and extending our co-development relationships, and also through selective acquisitions;

· We seek to develop complementary revenue streams through moving into new premium services, possibly through acquisition, as we have successfully done with Atomhawk; and

· Finally, following the highly successful release of Snake Pass in 2017, we will continue to develop our own-IP through applying AAA mentality to indie games, although no releases are planned in 2018.

It is important to emphasise that own-IP is expected to remain a relatively small part of the Group's overall activities. It is, however, a useful activity that provides an additional, creative outlet for our highly talented people, while generating a significant return on investment. In 2017, Snake Pass received critical acclaim and became No.1 on the Nintendo e-shop charts in Europe.

Acquisitions

We are very pleased with Atomhawk, which performed strongly in the six months following its acquisition. This was the first acquisition completed by Sumo Digital and has provided a useful template for future acquisitions which complement Sumo Digital's proven organic growth model.

The Board is particularly keen to acquire owner-managed businesses, where the vendors remain with the business post acquisition and where we can use our quoted share structure to provide suitable ongoing incentive arrangements.

The IPO

We were delighted to achieve a successful IPO and join AIM in December 2017. This was a longstanding objective and an important milestone in the development of Sumo Group. The management team holds a significant shareholding in the business and I am grateful to our people and our advisers, who worked so hard to make the IPO happen, and also to Perwyn and our new investors for their support. 

People

Sumo Group is a people business and we are investing in our people and will continue to do so. This investment includes recruiting new joiners and incentivising our staff. During the year, our headcount increased by 107, appointing new people in each of our operating locations. The management team was strengthened to address our market opportunities and to prepare for the IPO. New roles were created, including Portfolio Director, Senior Development Director and General Counsel & Company Secretary.

Since IPO, we have taken steps to incentivise our staff, which include providing opportunities to participate in our newly listed equity, and we are investing in our premises to provide a quality working environment.

It was pleasing for Darren Mills, a co-founder of Sumo Digital, and me to feature in GamesIndustry.biz's Top 100 Most Influential in 2017 and I was particularly gratified to receive an honorary doctorate from Sheffield Hallam University. Sheffield is a burgeoning tech hub in the UK and we take our local heritage very seriously.

I would like to extend my personal thanks and appreciation to all our people for their hard work in 2017. In August, we had our regular Sumo Big Day Out, which is a celebration event for all the families involved with making Sumo great! I am already looking forward to our next Big Day Out this coming summer.

The market

2017 lived up to expectations, proving to be a productive year for videogame developers and publishers. The launch of the Nintendo Switch™ and Microsoft's Xbox One X demonstrated the buoyancy of the premium console market and demand for premium content on these devices reached an all-time high. Xbox One X, the third release of new hardware under the Xbox One name, confirms Microsoft's commitment to iterative hardware. Nintendo Switch™ has proved to be a prime target for "indie developers". 25 of the top 30¹ most downloaded titles were developed by "Indies". Sumo Digital directly benefitted from this platform, being rewarded with a No.1 for Snake Pass on Nintendo Europe's eShop.

2017 was also the first full year of sales for Sony's Playstation® VR, for which Sumo Newcastle, under its previous owners CCP Games, saw the release of their critically acclaimed title "Eve Valkyrie". Sumo Digital is well positioned to pursue opportunities in this space as the installed base grows to what will eventually become a mass-market proposition. Another exciting platform for Sumo Digital is Esports, where we were part of the team that developed Forza Motorsport in 2017.

With the global videogames market worth over $113bn in 2017 (up c.8% on 2016) with a forecast CAGR of c. 8% to 2021², this is an exciting time to be providing videogame development services.

¹ UKIE ² PwC Global Media and Entertainment Outlook

Outlook

The new financial year ending 31 December 2018 has started strongly. Whilst it is still early in the year, the Board already expects to deliver full year results slightly ahead of market expectations. We are continuing to see strong demand for the Group's services and we are well placed to take advantage of the considerable opportunities. Those of us who were at GDC in March 2018 saw at first hand the strength of growth in our chosen markets, with the associated opportunities this brings, and the Group's business development pipeline reflects this.

We expect to continue our organic growth and are also keen to accelerate this by acquiring suitable, complementary businesses. My Board colleagues and I are confident about the outlook for the Group in the year ahead.

Carl Cavers

Chief Executive Officer

GROUP FINANCIAL REVIEW

These financial statements are the first to be prepared since Sumo Group's IPO in December 2017. They cover the period in which the Group transitioned from the previous ownership structure, when it was majority owned by funds under the management of Perwyn LLP for more than 11 months, to the new status as a listed company, 10 days before the financial year end. Accordingly, the financial information reflects the leveraged structure in place for most of the year and also the reorganisation of the Group in preparation for the IPO, together with the significant costs incurred in the process and also the non-cash and non-recurring amortisation charge from a change of accounting estimate regarding the useful economic life of intangible assets arising on the transaction with Perwyn in September 2016.

Basis of preparation of the financial statements

Sumo Group plc was incorporated as a private limited company with the name Aghoco 1611 Limited on 20 November 2017 and was re- registered as a public limited company with the name Sumo Group plc on 14 December 2017 and was inserted as a new holding company by way of a share for share exchange which constituted a group reorganisation. The transaction is accounted for as a capital reorganisation and merger accounting applied. Accordingly, the financial statements represent 12 months results for the year ended 31 December 2017 with a comparative period for the four months from 26 August 2016, being the date shortly before the transaction with Perwyn, to 31 December 2016. For the purpose of providing full year information for 2016 and to help users of this information to assess the underlying financial performance of the Group, we have set out in note 17 unaudited pro forma information derived from Part Three: Historical Financial Information of the Admission Document dated 15 December 2017.

¹ Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure.

² Figures are calculated from the unaudited pro forma information set out in note 17.

Results overview

The underlying trading of the Group was strong in the year under review. Revenue for the year was £30.6m (unaudited pro forma 2016: £24.1m), which includes £2.0m (unaudited pro forma 2016: £3.6m) of pass-through revenue on which Sumo does not charge a margin.

These figures reflect continuing strong organic growth at Sumo Digital and the acquisition of Atomhawk on 29 June 2017. Atomhawk contributed £1.3m and £0.4m of revenue and EBITDA respectively in the period since acquisition. The like for like increase in revenue, excluding pass-through revenue, was £6.9m, an increase on the prior year of 33.5%.

Adjusted EBITDA was £8.4m on revenue of £30.6m. This was in line with the Board's expectation at the time of the IPO and was significantly ahead of the unaudited pro forma Adjusted EBITDA in 2016 of £6.0m. The underlying adjusted profit before tax, exceptional items and amortisation for the year was £7.5m (2016: £5.3m) and reported loss before tax was £28.0m (2016: loss of £2.1m), as set out in the table below.

Cash flow was strong with cash generated from operations of £3.3m (unaudited pro forma 2016: £3.3m). Cash balances at the year end were £12.4m, following the repayment of bank and shareholder debt with the proceeds of the IPO.

The unaudited pro forma 2016 figures are extracted from note 17 in the Notes to the Final Results

The adjustment to revenue is in respect of pass-through revenue on which Sumo does not charge a margin

The adjustment in respect of interest cost is to reflect the ungeared structure of the Group as it is following the IPO in December 2017

The amortisation charge in respect of software in 2016 is extracted from Historical Financial Information in the Admission Document dated 15 December 2017.

This table is presented to help users of this information to assess the underlying financial performance of the Group in a period of significant change, mainly arising from the IPO and where the comparative period is unusual. At the time of the IPO, the pass-through revenue was separately identified in the Admission Document and hence consistent disclosure is considered appropriate. The adjustment in respect of net finance costs is to illustrate how the results may have been impacted if the Group had operated with no net debt as was the position at 31 December 2017 following the IPO.

Trading

Development fees for the year were £28.4m, an increase of 19.5% on the unaudited pro forma figure of £23.8m in 2016. In 2017 Sumo Digital successfully released its first own intellectual property title, Snake Pass, which generated £1.7m of revenue in the year. Sumo Group also received £0.5m (unaudited pro forma 2016: £0.3m) of royalty income.

Gross profit for the year was £13.3m, an increase of 47.2% on the unaudited pro forma £9.0m in the prior year. We include Video Games Tax Relief (VGTR) within our cost of sales and accordingly, for both years, our gross profit and gross margin reflect these amounts. We believe this is the appropriate treatment of these credits, as gross margin is best considered after taking account of the effect of the VGTR.

Gross margin was 43.3% (unaudited pro forma 2016: 37.4%). If we exclude pass-through revenue the gross margin was 46.4% (unaudited pro forma 2016: 44.0%).

Operating expenses for the year were £35.8m (unaudited pro forma 2016: £8.1m). Included within operating expenses were amortisation and depreciation of £27.6m and £0.7m respectively (unaudited pro forma 2016: £3.7m and £0.6m respectively). The non-cash amortisation charge is explained below. The overall increase in operating expenses other than amortisation and depreciation was primarily due to investment in people and systems ahead of and in anticipation of the IPO, the inclusion of Atomhawk for the second six months of the year and increased premises costs on the newly acquired leasehold units in Sheffield. The Group spent £0.9m on research and development, all of which was incurred as expense.

The net finance charge for the year was £5.4m (unaudited pro forma 2016: £3.0m), arising on the debt structure in place until the receipt of the proceeds of the IPO.

The Corporation Tax credit for the year was £4.5m (unaudited pro forma 2016: £0.9m credit).

Treatment of IPO and acquisition costs

Transaction costs were incurred in a number of areas in relation to the IPO and raising of new financing. The accounting treatment is governed by IFRS3. Accordingly, £1.9m and £2.4m of transaction costs were charged to equity and through the income statement respectively.

The consideration of £2.9m paid for the acquisition of Atomhawk has been capitalised and goodwill and other intangible assets of £2.2m are carried on the balance sheet as at 31 December 2017. £0.2m of transaction costs were charged through the income statement.

The cash performance in the year was strong.

Cash generated from operations was £3.3m (unaudited pro forma 2016: £3.3m). Capital expenditure in the year was £1.6m (2016: £0.9m) most of which related either to the refitting of the premises in Sheffield, which was ongoing over the year end, or to the purchase of IT equipment and systems. The cash cost of the acquisition of Atomhawk was £2.9m and it had cash balances of £0.6m at the date of acquisition.

Sumo Group is a people business and, as such, has a relatively simple balance sheet. The balance sheet has been dominated by the intangible assets arising from the acquisition by Perwyn in September 2016, more than 15 months before the accounting reference date. These intangible assets consisted of client contracts, client relationships and goodwill. In the past, the intangible assets held in respect of the former two categories were amortised over five years and ten years respectively, while goodwill was tested annually for impairment. The assets arose in respect of contracts and relationships as at September 2016 and do not reflect contracts signed or relationships developed since that date. As a public listed company, we have reviewed the policy for these historical intangible assets in respect of client contracts and client relationships. Following this review, we now value these intangible assets by reference to the specific time period for each of the client contracts in place at September 2016 and an assessment of the appropriate time period for the client relationship from that date, which we now consider to be two years. We have also taken account of changes in the scope of the client contracts and client relationships.

These amendments constitute a change in accounting estimate, not a change in policy, and the effect is to amortise the historical intangible assets arising on the September 2016 change of ownership over a shorter period. Goodwill and other intangibles reduced by £25.3m, reflecting the non-cash goodwill and amortisation charge of £27.6m less the increase in goodwill and other intangibles arising from the acquisition of Atomhawk in the period.

Current assets increased to £22.6m (2016: £14.6m), primarily as a result of cash increasing from £4.5m at 31 December 2016 to £12.4m at 31 December 2017. Trade and other receivables were £10.2m (2016: £10.1m).

The Group used the proceeds of the IPO to repay its bank borrowings and finished the year with net cash of £12.4m. At the prior year end, it had borrowings of £56.7m. On 15 December 2017, the Group entered into a £13m revolving credit facilities agreement with Clydesdale Bank plc. Interest is payable on amounts drawn down at the rate of one and a half to two percent above LIBOR and the term of the agreement is five years. As at the date of this document, this facility remains undrawn.

Trade and other payables increased by £3.4m from £7.4m at 31 December 2016.

Dividend

In line with the strategy set out at the time of the flotation, the Directors intend to reinvest a significant portion of the Group's earnings to facilitate plans for future growth. Accordingly, the Directors do not propose a dividend at the present time but it remains the Board's intention, should the Group generate a sustained level of distributable profits, to consider a dividend policy in future years.

Share issues

Following the IPO, options were granted under the LTIP scheme on 21 December 2017 to myself, David Wilton, over 500,000 shares and to two other employees over an aggregate of 450,000. These options are exercisable in respect of 875,000 and 75,000 shares on 21 June 2019 and 21 December 2020 respectively.

Subsequent to the year end, further options over 7,891,246 shares in aggregate have been granted to employees including Carl Cavers and myself, David Wilton.

The Group is in the process of implementing a Group-wide Share Incentive Plan.

Post balance sheet date events

On 1 January 2018, Sumo Digital Limited took on the Newcastle studio of CCP Games under an asset purchase agreement for nominal consideration. All 34 staff working at the studio became employees of the Group on that date and the lease for the property in which the studio was located was assigned to Sumo Digital Limited, although the vendor will continue to pay the rent until 23 July 2018.

David Wilton

Chief Financial Officer

CONSOLIDATED INCOME STATEMENT

Note 1: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure

Note 2: As explained in note 15, the presentation of Video Game Tax Credit has been restated and is now presented within Direct costs (net) rather than operating expenses

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET

as at 31 December 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2017

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2017

NOTES TO THE FINAL RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2017

1. GENERAL INFORMATION

Sumo Group plc ("the Company") was incorporated and registered in England and Wales on 20 November 2017 as a private company limited by shares under the Companies Act 2006 with the name Aghoco 1611 Limited and with the registered number 1107913. The Company was re-registered as a public limited company with the name Sumo Group plc on 14 December 2017. The address of its registered office is 32 Jessops Riverside, Brightside Lane, Sheffield S9 2RX.

The principal activity of the Company and its subsidiaries (together the 'Group') is that of video games development.

The Group financial statements present 12 months results for the year ended 31 December 2017, with a comparative period for the four months from 26 August 2016 to 31 December 2016 and were approved by the Directors on 23 April 2018.

26 August 2016 is the date shortly before ownership of the former Sumo Group, then headed by Sumo Digital Holdings Limited, passed to its new owners. At the date of the reorganisation the ownership of the new entity was the same as the previous group. Because of this, the accounts have been prepared as if the Group had existed in its current form from the date (26 August 2016) shortly before ownership last changed. Therefore, the Group is presented as if it had existed from 26 August 2016. To help users understand the performance of the operating business, proforma details for the operating activities are shown in note 17.

Initial public offering ("IPO")

The Company's shares were admitted to trading on AIM, a market operated by the London Stock Exchange, on 21 December 2017. These Group financial statements are the Company's first subsequent to its admission to AIM and followed a Group reorganisation to facilitate the IPO.

Group reorganisation

The Group financial statements have been prepared under merger accounting principles because the transaction under which the Company became the holding company of Project Republica Topco Limited ("Topco"), the previous parent undertaking of the Sumo trading operations, was a group reorganisation with no change in the ultimate ownership of the Sumo trading operations. All the shareholdings in Project Republica Topco Limited were exchanged via a share-for-share transfer on 13 December 2017. The Company did not actively trade at that time.

The result of the application of the capital reorganisation is to present the financial statements as if the Company had always owned the Sumo trading operations. Topco was incorporated on 26 August 2016 and itself acquired the Sumo companies on 8 September 2016 and therefore the comparative information presented is for the 4 months trading post acquisition.

Forward looking statements

Certain statements in this results announcement are forward looking. The terms "expect", "anticipate", "should be", "will be" and similar expressions identify forward-looking statements. Although the Board of Directors believes that the expectations reflected in these forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties and events could differ materially from these expressed or implied by these forward-looking statements. 

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The Group's principal accounting policies, all of which have been applied consistently to all the periods presented, are set out below.

Basis of preparation

The Group financial statements have been prepared in accordance with International Financial Reporting Standards as endorsed by the European Union ('IFRS'), International Financial Reporting Standards Interpretation Committee ('IFRS IC') interpretations and those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The Group financial statements have been prepared on the going concern basis and on the historical cost convention modified for the revaluation of certain financial instruments.

The preparation of Group financial statements in conformity with IFRS requires the use of certain critical accounting estimates, which are outlined in the critical accounting estimates and judgements section of these accounting policies. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

Going concern

These Group financial statements have been prepared on the going concern basis.

The Directors have reviewed the forecasts for the years ending 31 December 2018 and 31 December 2019 and consider the forecasts to be prudent and have assessed the impact of them on the Group's cash flow, facilities and headroom within its banking covenants. Furthermore, the Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. Based on this work, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Basis of consolidation

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are deconsolidated from the date control ceases.

Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.

Revenue

Revenue is recognised at the fair value of the consideration received or receivable for goods and services provided in the normal course of business and is shown net of VAT and other sales related taxes. The fair value of consideration takes into account trade discounts, settlement discounts and volume rebates.

Where a contract is executed or where reasonable certainty exists that a contract will be executed for the provision of professional services, then revenue is recognised by reference to the stage of completion, if this can be reliably estimated. Revenue for such contracts is stated as a proportion of the contract revenue appropriate to the stage of completion, less amounts recognised in previous years.

Where the outcome cannot be estimated reliably and work is at the Group's risk then costs will be expensed. Royalties are recognised in the period in which they are earned as designated in the contract.

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)

EBITDA and Adjusted EBITDA

Earnings before Interest, Taxation, Depreciation and Amortisation ("EBITDA") and Adjusted EBITDA are non-GAAP measures used by management to assess the operating performance of the Group. Exceptional items are excluded from EBITDA to calculate Adjusted EBITDA.

The Directors primarily use the Adjusted EBITDA measure when making decisions about the Group's activities. As these are non-GAAP measures, EBITDA and Adjusted EBITDA measures used by other entities may not be calculated in the same way and hence may not be directly comparable.

Intangible assets

All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal or contractual rights regardless of whether those rights are separable, and are initially recognised at fair value.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment.

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses.

Computer software purchased separately, that does not form an integral part of related hardware, is capitalised at cost. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite and is presented within operating expenses. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use.

The estimated useful lives, which were reviewed and amended in the year resulting in an accelerated amortisation charge, are as follows:

Impairment

For goodwill that has an indefinite useful life, the recoverable amount is estimated annually. For other assets, the recoverable amount is only estimated when there is an indication that an impairment may have occurred. The recoverable amount is the higher of fair value less costs to sell and value in use.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)

Taxation

Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or in equity, respectively.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except to the extent that it arises on:

· the initial recognition of goodwill;

· the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination;

· differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset in respect of tax losses is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Video Game Tax Credits

Video Game Tax Credits have only been recognised where management believe that a tax credit will be recoverable based on their experience of obtaining the relevant certification and the success of similar historical claims. Such credits are recognised as part of direct costs in order to reflect the substance of these credits to the Group and cash flows are presented within operating activities. The debit is recorded on the balance sheet as "VGTC recoverable" within current assets.

Exceptional costs

The Group presents as exceptional costs on the face of the income statement, those significant items of expense, which, because of their size, nature and infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the period. This facilitates comparison with prior periods and trends in financial performance more readily. Such costs include professional fees and other costs, directly related to the change in ownership during the period, including those advisor fees paid as a result of the IPO which have not been included within Share Premium.

Reverse acquisition reserve

The reverse acquisition reserve was created as a result of the share for share exchange under which Sumo Group plc became the parent undertaking prior to the IPO. Under merger accounting principles, the assets and liabilities of the subsidiaries were consolidated at book value in the Group financial statements and the consolidated reserves of the Group were adjusted to reflect the statutory share capital, share premium and other reserves of the Company as if it had always existed, with the difference presented as the reverse acquisition reserve.

Direct costs

Included within direct costs are all costs in connection with the development of games, including an allocation of studio management costs. Video Games Tax Credits are presented within direct costs as they are directly related to the level of expenditure incurred.

3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

Accounting estimates

Impairment of goodwill and other intangible assets

The carrying amount of goodwill is £20,791,000 (2016: £19,225,000) and the carrying amount of other intangible assets is £7,422,000 (2016: £34,245,000) as at 31 December 2017. The Directors are confident that the carrying amount of goodwill and other intangible assets is fairly stated, and have carried out an impairment review. The forecast cash generation for each Cash Generating Unit ("CGU") and the Weighted Average Cost of Capital ("WACC") represent significant assumptions and should the assumptions prove to be incorrect there would be a significant risk of a material adjustment within the next financial year.

The cash flows are based on a three-year forecast with growth between 9.7% and 36.1%. Subsequent years are based on a reduced growth rate of 2% into perpetuity.

The discount rate used was the Group's pre-tax WACC of 9.75%.

Given the significant headroom in the carrying value of goodwill compared to the calculation of the net present value of the future cash flows, and bearing in mind the market value of the Group, the Directors cannot foresee a reasonable downside scenario in which the goodwill would be impaired in the foreseeable future and hence detailed sensitivity disclosures have not been presented.

Accounting judgements

Judgements in applying accounting policies and key sources of estimation uncertainty

In the preparation of the Group financial statements, the Directors, in applying the accounting policies of the Group, make some judgements and estimates that affect the reported amounts in the financial statements. The following are the areas requiring the use of judgement and estimates that may significantly impact the financial statements.

Goodwill and Intangible assets arising on acquisition

The process of estimating the value of customer contracts and customer relationships on acquisition includes an element of forecasting and judgement. The Directors review customer contracts and relationships on an annual basis which also involves an element of judgement as to the length of the contract and relationship. These judgements concerning the length of customer contracts and relationships will largely be resolved during 2018 as the balances naturally unwind through the amortisation charge, given the relatively short length of the customer contracts. Details of the period end impairment review of Goodwill have been disclosed in note 10.

Revenue recognition on development contracts

The recognition of revenue on development contracts requires judgement and estimates on the overall contract margin and percentage of completion of the contract at each period end. These judgements are based on contract value, historical experience and forecasts of future outcomes. These include specific judgement in respect of contracts for which variations may be in the process of being negotiated, and so the contracts are accounted for on the basis of the best estimate of the revenue expected to be received on the contract, which are all expected to be resolved relatively shortly after the financial year end.

Video Game Tax Credits

The process of claiming Video Game Tax Credits requires estimates to be accrued at the period end. Whilst the Company undertakes a detailed exercise involving external professional support in calculating the accrual, these claims are subject to review and approval by HMRC prior to payment. It is also in the Directors' judgement that presenting Video Game Tax Credits as a deduction from direct costs best reflects the substance and nature of these Credits.

4. GROUP ANNUAL REPORT AND STATUTORY ACCOUNTS

The financial information set out in the preliminary announcement does not constitute the Group's statutory accounts for the year ended 31 December 2017 and the period ended 31 December 2016. The statutory accounts for 2017 will be delivered to the Registrar of Companies following the Annual General Meeting. The auditors, Grant Thornton LLP, have reported on these accounts, their report is unqualified, does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and does not constitute a statement under either Section 498(2) or (3) of the Companies Act 2006.

The Annual Report and full financial statements for the year ended 31 December 2017 will be available on the Company's website (www.sumogroupplc.com) in due course, at which time a notification will be sent to shareholders.

5. SEGMENTAL REPORTING

The trading operations of the Group are only in video games development, and are all continuing. This includes the activities of Sumo Digital Limited, Mistral Entertainment Limited, Sumo Video Games Private Limited, Cirrus Development Limited, Sumo Digital (Genus) Limited, Sumo Digital (Atlantis) Limited, Atomhawk Design Limited and Atomhawk Canada Limited. The central activities, comprising services and assets provided to Group companies, are considered incidental to the activities of the Group and have therefore not been shown as a separate operating segment but have been subsumed within video games development. All assets of the Group reside in the UK, with the exception of non-current assets with a net book value of £400,000 (2016: £242,000) which were located in India and Canada.

Major clients

In 2017 there were three major clients that individually accounted for at least 10 per cent of total revenues (2016: four clients). The revenues relating to these clients in 2017 were £9.7m, £4.7m and £3.2m (2016: £3.4m, £1.6m, £1.4m, and £1.0m).

Analysis of revenue

Revenue by category

6. DIRECT COSTS (NET)

7. EXPENSES BY NATURE

Exceptional items

Exceptional items include external costs in relation to:

· 2016 - the Perwyn acquisition and related group reorganisation (£599,000)

· 2017 - the IPO and reorganisation in 2017 which primarily relate to professional fees (£2,453,000)

· 2017 - the acquisition of Atomhawk Design Limited and Atomhawk Canada Limited (£203,000)

8. TAXATION

Factors that may affect future tax charges

Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 (on 26 October 2015) and Finance Bill 2016 (on 7 September 2016). These included reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020, and this has been reflected in these financial statements.

9. EARNINGS PER SHARE

Basic and diluted earnings per share are calculated by dividing the earnings attributable to equity shareholders by the weighted average number of ordinary shares in issue from the date of the IPO to 31 December 2017. The weighted average number of shares for both the current and preceding years has been stated as if the Group reorganisation had occurred at the beginning of the comparative period.

When calculating diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of 950,000 of potentially dilutive shares. These represent share options granted to employees.

The calculation of basic and diluted loss per share is based on the following data:

The calculation of basic and diluted adjusted earnings per share is based on the following data:

The denominators used to calculate both basic and adjusted earnings per share are the same as those shown above for both basic and diluted earnings per share.

10. GOODWILL AND OTHER INTANGIBLE ASSETS

These financial statements are the first to be prepared since Sumo Group's IPO in December 2017. They cover the period in which the Group transitioned from the previous ownership structure when it was majority owned by funds under the management of Perwyn for more than 11 months of 2017 to its new status as a listed company 10 days before the financial year end. The intangible assets on the balance sheet arise from the acquisition by Perwyn in September 2016, more than 15 months before the December 2017 accounting reference date. These intangible assets consisted of customer contracts, customer relationships and goodwill. The intangible assets held in respect of the former two categories were being amortised over useful economic lives of five years and ten years respectively, while goodwill was tested annually for impairment. The assets arose in respect of contracts and relationships as at September 2016 and do not reflect contracts signed or relationships developed since that date. As a public listed company Sumo Group has decided to change the approach to these historical intangible assets by reference to the length of each customer contract in place at September 2016 and an assessment of the appropriate time period for the customer relationship from that date. The time periods are between four and 37 months for customer contracts and 24 months for customer relationships. This is a change to an accounting estimate, not policy, and the effect is to amortise the historical intangible assets arising on the September 2016 change of ownership over a shorter period from 1 January 2017. The impact of this change in the useful lives of the assets is to accelerate the amortisation charge in the year ended 31 December 2017 by £22,099,000.

The cost of customer relationships was determined as at the date of the respective changes in ownership by reference to expected future contracts. The valuations used the discounted cash flow method. The discount rate applied at that time to the future cash flows was 9.75%.

The customer contracts represent contracted revenues. The valuation used the discounted cash flow method, based on estimated profit margins considered on a contract by contract basis. The discount rate applied at the time of the future cash flows was 9.75%.

10. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

Goodwill and other intangible assets have been tested for impairment. The method, key assumptions and results of the impairment review are detailed below:

Goodwill is attributed to the only CGU within the Group, video games development. Goodwill and other intangible assets have been tested for impairment by assessing the value in use of the cash generating unit. The value-in-use calculations were based on projected cash flows in perpetuity. Budgeted cash flows for 2017 to 2019 were used. These were based on a three-year forecast with growth rates of 9.7% to 36.1% applied for the following years. Subsequent years were based on a reduced rate of growth of 2.0% into perpetuity.

These growth rates are based on past experience and market conditions and discount rates are consistent with external information. The growth rates shown are the average applied to the cash flows of the individual cash generating units and do not form a basis for estimating the consolidated profits of the Group in the future.

The discount rate used to test the cash generating units was the Group's pre-tax WACC of 9.75%.

On the basis of this review, it has been concluded that there is no need to impair the carrying value of goodwill and other intangible assets.

All amortisation charges have been treated as an expense and charged to operating expenses in the income statement.

11. BORROWINGS

The above carrying values of the borrowings equate to the fair values. Borrowings are secured against the assets of the Group.

The above borrowings are denominated in sterling. The fair value of borrowings equals their carrying amount, as the impact of discounting is not significant.

12. SHARE CAPITAL

The Company was incorporated on 20 November 2017 as a private company limited by shares in England and Wales, with share capital of £390 divided into 39,000,000 ordinary shares of £0.00001 each.

The Company became the ultimate holding company of the Group with Project Republica Topco Limited ("Topco") becoming the Company's direct subsidiary on 13 December 2017 by the issue of 3,900 ordinary shares of £0.00001 each to the existing shareholders of Topco in return for the entire issued share capital of Topco. The shares were issued to each of the shareholders in proportion to the relative value of each of their shareholdings in Topco.

On 13 December 2017 the Company capitalised amounts of £1,065,216 standing on the share premium account and utilised the amount for distribution amongst the shareholders of the Company in proportion to the number of shares held by them respectively on the basis of 2,731 bonus shares for every 1 share held, such that an aggregate of 106,521,617,940 new ordinary shares of £0.00001 each were issued. Following this issue and allotment, all the issued Ordinary shares of £0.00001 each were then consolidated into 106,554,131 Ordinary shares of £0.010000609158926 each.

On 13 December 2017, the Company undertook a reduction of share capital in accordance with Section 643 of the Companies Act, in which the nominal value of the ordinary shares was reduced to £0.01 each, which had the effect of reducing the share premium to £nil, with the balance credited to retained earnings.

The insertion of the Company as a new holding company by way of a share-for-share exchange constitutes a Group reorganisation and the transaction is accounted for as a capital reorganisation.

Under merger accounting principles, the shares issued in this transaction were recorded in the consolidated balance sheet at the nominal value of the shares issued plus the fair value of any additional consideration, which was recorded as a reverse acquisition reserve in the Group financial statements. The assets and liabilities of the subsidiaries are consolidated at book value in the Group financial statements and the consolidated reserves of the Group are adjusted to reflect the statutory share capital, share premium and reverse acquisition reserve of the Company as if it had always existed.

On 21 December 2017 the Company issued 38,445,869 ordinary shares of £0.01 each, for consideration of £38,445,869 in an IPO, with the balance recorded as share premium. £1,940,000 of the IPO costs have been charged to the share premium account.

A reverse acquisition reserve of £60,623,000 was created during the year as a result of the share for share exchange under which Sumo Group plc became the parent undertaking prior to the IPO. Under merger accounting principles, the assets and liabilities of the subsidiaries were consolidated at book value in the Group financial statements and the consolidated reserves of the Group were adjusted to reflect the statutory share capital, share premium and other reserves of the Company as if it had always existed, with the difference presented as the reverse acquisition reserve.

The Foreign currency translation reserve of £27,000 as at 31 December 2017 (31 December 2016: £43,000) comprises foreign currency translation differences arising from the translation of financial statements of the Group's Indian operations into GBP.

13. BUSINESS COMBINATIONS

Acquisition of Atomhawk Design Limited

Under an agreement dated 29 June 2017, the Group acquired the share capital of Atomhawk Design Limited, a visual design company registered in the United Kingdom for consideration of £2.9m.

The book and fair values of the assets and liabilities acquired are set out below:

Consideration transferred

The acquisition of Atomhawk was settled in cash amounting to £2,900,000. There is no contingent consideration.

Acquisition related costs amounting to £203,000 are not included as part of consideration transferred and have been recognised as an expense in the income statement as part of operating expenses - exceptional.

Following the acquisition a former key shareholder of Atomhawk invested £1,300,000 into the Sumo Group.

Goodwill

Goodwill of £1,566,000 is primarily related to growth, technical knowledge, and market diversification.

Contribution to the Group results

Atomhawk generated a profit of £331,000 for the 6 months from acquisition. Revenue for the period was £1,276,000. If Atomhawk had been acquired at the beginning of the period then revenue would have increased by £916,000 and profit by £249,000.

14. NOTES TO THE CASH FLOW STATEMENT

15. PRIOR YEAR ADJUSTMENT

The Group has adjusted the accounting disclosure of Video Game Tax Credit. This has historically been shown in other operating income and is now shown within Direct costs (net) - see note 6.

The reason for the change is that Video Game Tax Credit is closely related to the production of the games and therefore should be reflected in the gross margin reported.

The impact this has had on the income statement is to increase gross margin by £1,956,000 in the comparative period. There is no impact on the net profit.

The VGTC amounts recoverable which were previously presented within "Corporation tax recoverable" on the balance sheet are now presented as "VGTC recoverable" within "Trade and other receivables", and the cash flows are now presented as operating cash flows (previously tax cash flows). This has had no impact on the net assets of the Group.

16. POST BALANCE SHEET EVENTS

On 1 January 2018, the Group, through its wholly-owned subsidiary Sumo Digital Limited took on the Newcastle studio of CCP Games under an asset purchase agreement for nominal consideration. All 34 staff working at the studio became employees of the Group and the lease for the property in which the studio was located was assigned to Sumo Digital Limited.

17. PRO FORMA INFORMATION

The comparative information presented in the income statement represents the period from 8 September 2016 to 31 December 2016, and the results and cash flows for the 12 month period from 1 January 2016 to 31 December 2016 have therefore been presented below to allow comparability across the two years. The 12-month figures for 2016 have been extracted, without exception, from the Admission Document submitted for the purposes of the Initial Public Offering on 21 December 2017. As indicated, these pro forma amounts are unaudited.

Income statement

Note 1: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure

17. PRO FORMA INFORMATION (continued)

Cash flow statement

Note 1: The presentation of cash flows relating to VGTC amounts has been restated - refer note 15

17. PRO FORMA INFORMATION (continued)

Earnings per share

The below presents the earnings per share figures using the post-IPO capital structure. The weighted average number of shares is restricted by the 6,082,069 shares held by the EBT, as these shares are not freely available on the open market.

The earnings have been taken from the pro forma income statement above, and adjusted earnings exclude depreciation and amortisation charges, exceptional items, and their associated tax effect.

The calculation of basic and diluted adjusted earnings per share is based on the following data:

The denominators used to calculate both basic and adjusted earnings per share are the same as those shown above for both basic and diluted earnings per share.

17. PRO FORMA INFORMATION (continued)

Revenue by category