K e y w o r d s S t u d i o s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 Annual Report and Accounts 2019 Building our platform for growth 2019 Highlights Our vision is to be the world’s leading technical and creative services platform for the video games industry and beyond. At Keywords Studios (Keywords), we are using our passion for games, technology and media to create a global services platform. In 2019, we delivered strong growth as we invested in a strengthened and more diversified services platform. Alternative performance measures* The Group reports certain Alternative performance measures (APMs) to present the financial performance of the business which are not GAAP measures as defined by International Financial Reporting Standards (IFRS). Management believes these measures provide valuable additional information for the users of the financial information to understand the underlying trading performance of the business. In particular, adjusted profit measures are used to provide the users of the accounts a clear understanding of the underlying profitability of the business over time. For full definitions and explanations of these measures and a reconciliation to the most directly referenceable IFRS line item, please see pages 135 to 143. Please note, to aid comparability, these explanations also present the current year APMs excluding the impact of IFRS 16, and also highlight where a number of APMs have been restated to reflect the current year presentation. Pages 1–6Highlights 1At a glance 2Investment summary 4Chairman’s statement 6Pages 8–44Q&A with Andrew Day 8Chief Executive’s review 10Market outlook 16Business model 18Our strategy 22Service line review 24Our people, our culture 28KPIs 34Financial and operating review 36Responsible Business report 40Board engagement with our stakeholders 43Principal risks and uncertainties 45Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 1 Revenue (€m) 2019 2018 2017 151.4 326.5 250.8 EBITDA* (€m) 2019 2018 2017 21.9 43.4 34.3 Profit before tax (€m) 2019 2018 2017 12.0 17.4 22.1 €326.5m 30.2% €43.4m 26.4% €17.4m 21.4% Margin 13.3% (2018: 13.7%) Margin 5.3% (2018: 8.8%) Organic Revenue growth* (€m) Adjusted EBITDA (pre IFRS 16)* (€m) Adjusted profit before tax* (€m) 2019 2018 314.7 272.5m 2019 2018 2017 26.3 49.5 43.7 2019 2018 2017 23.0 40.9 37.9 15.5% (2018: 10.1%) €49.5m 13.2% Margin 15.2% (2018: 17.4%) €40.9m 7.9% Margin 12.5% (2018: 15.1%) Basic earnings per share (c) Adjusted earnings per share* (c) 2019 2018 2017 15.23 12.37 23.16 2019 2018 2017 48.78 45.50 31.18 15.23c 34.2% 48.78c 7.2% Total dividend per share (p) 2019 0.58 2018 2017 1.61 1.46 0.58p 64% Pages 48–73Board of Directors 48Chairman’s introduction 50Corporate governance 51Audit Committee report 54Directors’ remuneration report 57Report of the Nomination Committee 70Directors’ report 71Statement of Directors’ responsibilities 73Pages 74–134Independent Auditor’s report to the members of Keywords Studios plc 74Consolidated statement of comprehensive income 79Consolidated statement of financial position 80Consolidated statement of changes in equity 81Consolidated statement of cash flows 82Company statement of financial position 83Company statement of changes in equity 84Company statement of cash flows 85Notes forming part of the consolidated and company financial statements 86Pages 135–144Alternative performance measures 135Company information 144GovernanceFinancial statementsSupplementary information 2 At a glance Continuing to build our global services platform 23 out of the top 25 games companies are serviced by Keywords Keywords Studios now has 59 studios, in over 40 cities, across 21 different countries worldwide. We provide a full set of integrated services, combining a presence that is local to our clients in key gaming clusters with good access to skilled talent pools across four continents. Throughout 2019, we have continued to invest behind growing demand. We have expanded our existing facilities and created new operating bases, while also adding capabilities and capacity through acquisitions. We added over 1,400 workstations in the period and welcomed 8 new businesses to the Group. All of this targeted investment has increased our scale, extended our global footprint, brought us closer to our clients and prospective talent, while adding to the vision of becoming the ‘go to’ external development partner to the video games industry. A full set of integrated services Keywords Studios is building world-leading capabilities in services that video game and similar interactive content creators need. We stand shoulder-to-shoulder with our customers working as their external development partner to provide dedicated outsourced or embedded services, providing access to our teams of experts where and when needed. Today we have breadth and depth in seven service lines. Revenue breakdown by service: Art Creation Game Development Audio Functional Testing Localization The creation of video game graphical art, including concept art, 2D and 3D art asset production and animation. Marketing services include game trailers, marketing art and materials, and full brand campaign strategies. Game development services including full game development, co-development, porting of games from one platform to another including remastering, tool development and consulting services on a work-for-hire basis. This also includes our proprietary software solutions for analytics, social media integration, procedural generation of art assets and player behaviour research consulting services. Multi-language voiceover recording, original language voice production, music management, sound effects and related services. Quality assurance, including discovery and documentation of game defects and testing to verify the game’s compliance with hardware manufacturers’ and distribution platforms’ specifications, as well as crowd based and focus group testing solutions. Translation of in-game text, audio scripts, cultural and local adaptation, accreditation, packaging and marketing materials in over 50 languages. Includes our proprietary technologies for content management, machine translation, and workflow management. Revenue 2019 €43.6m Revenue €66.3m Revenue €40.5m Revenue €68.9m Revenue €48.5m +28% Year on year growth +88% Year on year growth +18% Year on year growth +44% Year on year growth +10% Year on year growth Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 3 50+ languages across our services 59 studios in 21 countries 7,424 average number of employees in 2019 Brighton Liverpool Leamington Spa St. Petersburg London Vancouver Montreal Seattle Ottawa Dublin (HQ) Quebec City Paris Raleigh Saint Jerome Portland Los Angeles Orlando Madrid Barcelona Hamburg Mexico City Austin Rio de Janeiro São Paulo Berlin The Hague Krakow Katowice Milan Rome Beijing Tokyo Volgograd Zhengzhou Chengdu Dalian New Delhi Taipei Shanghai Manila Pune Singapore Yogyakarta Better balanced business higher up the value chain Business representation by each service: 11.1% 13.3% 6.9% 14.9% 20.3% 21.1% 12.4% Localization Testing Player Support Testing for out of context translations, truncations, overlaps, spelling, grammar, age rating issues, geopolitical and cultural sensitivities and console manufacturer compliance requirements in over 30 languages using native speakers. 365/24/7, multilingual support for gamers when games are in live operation, forum monitoring and moderation services and social media engagement on behalf of the game brand. Revenue 2019 €22.6m Revenue €36.1m +15% Year on year growth +1% Year on year growth Revenue (2019) €326.5m +30.2% Year on year growth GovernanceFinancial statementsSupplementary information 4 Investment summary Strengthened platform in a growth market Market leading position Strong growth record Keywords has a market leading position as the only global provider of fully integrated outsourced creative and technical services to the global video games industry. With an industry reputation for quality, reliability and flexibility, our scale and reputation mean we are well placed to take advantage of the trend for customers to move to more collaborative partnerships with fewer, larger suppliers. Our market leading position creates substantial barriers to entry which we have described in more detail on page 20. We continue to deliver strong organic revenue growth as we benefit from both the growth in the video games industry and the trend towards greater outsourcing of our services. In addition, we have successfully acquired and integrated 44 acquisitions since IPO. The 8 acquisitions we completed in 2019 bolstered our capabilities, particularly in Game Development and Marketing services. In addition to extending our existing service lines to bring us even closer to our customers, we have continued to expand our geographical reach, with new facilities in Mexico City and Leamington Spa and expanded facilities in Katowice. Access to a dynamic growth market Keywords operates in a dynamic growth market but has minimal direct exposure to the successes or failures of individual game titles. Our focus on content means we are platform agnostic and well positioned to take advantage of the opportunities presented by mobile gaming, cloud streaming, next generation consoles and AR / VR. The increasing sophistication of games, and the development of new platforms all add to the complexity of the video games market which is driving demand for larger, professional, outsourced specialists, such as Keywords, in a highly fragmented supplier market. Outsourcing such work is attractive to developers and publishers because it converts their fixed costs into variable costs, helps remove bottle-necks in capacity by providing access to talent as required and enables them to focus on their core competencies. Keywords is better placed than ever to continue to capture an increasing share of our robustly growing market, by deepening our relationships with customers who already trust us with their high value IP, having significantly extended our services and geographical reach during the year. We are a trusted partner to leading companies around the world, with a leading market position, providing services to 23 of the top 25 games companies and all 10 of the top 10 mobile games publishers by revenue, including: Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 5 978 customers, up from 846 in 2018 Opportunity to grow further Having made strong progress in extending the Group’s client base, market penetration, geographic footprint and service lines, we are now beginning to realise the significant potential for increased cross-pollination of our service lines and geographic locations, including taking advantage of our dual-shore capabilities which enable us to be close to our customers and provide services from lower cost studios, as we increasingly become a strategic partner to our customers. A strong business model Keywords’ flexible resourcing and charging model, with charges levied for time or output, combined with relatively low working capital and capital expenditure requirements, support our ability to grow the business whilst also achieving strong underlying cash conversion. Our business model also provides an opportunity to invest in the exciting video games market, without the risk of exposure to the successes or failures of individual game titles. Adjacent market potential Our expertise in providing outsourced solutions to the video games industry is already being sought after in adjacent markets such as film and television, and Keywords is well placed to deliver this. Video games represent the pinnacle of interactive content. Our mastery of this highly interactive content positions us well as other forms of content continually seek ways to be more interactive and therefore more engaging. GovernanceFinancial statementsSupplementary information 6 Chairman’s statement A year of strong delivery with a few growth pains Keywords has delivered another year of strong growth in 2019, at the temporary expense of lower margins, as it continued to deliver against the ambitious plan it set out at the time of its IPO in July 2013. Since that time, the video games market has grown significantly, with more users, games, platforms and expanded content, revealing further opportunities for our services which are agnostic to the success of a specific platform or game. As outsourcing has accelerated to support this expansion of content, so too has the breadth of services required by our customers, most recently taking us into co-development and marketing services. Indeed, looking back over the years, there has been an impressive track record of consistency of message and over-achievement assisted in no small measure by the extent to which we continually find opportunities to integrate ourselves into the multifarious facets of the video games industry. Our CEO, Andrew Day’s report shows how relentlessly the Group has been growing whilst also building the support infrastructure necessary to manage what is now becoming a very substantial business. 2019's accelerated growth brought with it a higher level of operational expenditure and, having identified a number of opportunities to improve the way we manage such rapid growth, we have put measures in place to deliver both revenue growth and improving margins following the near-term disruption from COVID-19. People Keywords has become a significant force in the industry, having grown from just over 200 people at IPO to over 7,400 full time equivalent employees (FTEs) at the year end. Managing, training, recruiting and motivating such a large group which is diverse in every dimension is a major undertaking and whilst our regular staff surveys highlight ways in which we need to improve, we are also getting a great deal right - our aspiration is to make all employees proud to be part of Keywords, embrace our culture and to be highly motivated to help continue the Group's success. Those people who have joined the Group through acquisition notice and appreciate the additional opportunities that Keywords offers. I would like to commend all Keywordians for their tireless contributions as they "go the extra mile" every day for our customers and help us to continue to deliver Keywords’ remarkable success story, particularly as many have rapidly changed their ways of working to support the global efforts to control the spread of COVID-19. Board As previously announced, David Broderick stood down from his role as Chief Financial Officer in October 2019 for personal reasons and, on behalf of the Board, I would like to reiterate our thanks for his contribution to Keywords over the last three years. Jon Hauck was appointed Chief Financial Officer in October 2019, having previously been Group Financial Controller and Treasurer at FTSE 100 business services group, Rentokil Initial Plc, where he gained highly relevant experience given Rentokil’s operations across 73 countries world-wide and its active M&A programme. Jon has already made a very positive impact. Responsible business The Board is very mindful of the recent focus on Environmental, Social and Governance (ESG) and we are committed to building a sustainable business for the long term that positively contributes to society and the environment; our focus on this will be backed up by incentives and financial assistance to ensure such social initiatives flourish. To fulfil this aim and as part of our commitment to being a responsible business, the Board has appointed Jon Hauck, Chief Financial Officer, to oversee this area. The Board was particularly proud to see, on visits to several of the Group’s studios in 2019, the number of social and environmental initiatives in place locally which benefit the local communities and wider charitable causes. COVID-19 overview, current trading and outlook The impact on the business from COVID-19 was limited to our Chinese operations in the first two months of the year but we have since experienced further disruption across the business. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 7 " We remain absolutely committed to the strategy embarked upon at the time of the IPO." Ross K Graham Chairman Our first priority during this period is the health and wellbeing of our people and, drawing on our experiences of territories that are further progressed in dealing with the crisis, in many cases we were able to implement safeguarding measures ahead of local authorities’ health and safety recommendations across the 21 countries in which we are located. This has enabled us to both keep our people safe and deliver business continuity across our service lines, and as part of this we have so far converted over 5,500 people to work from home arrangements. Operating within the global video games market and with seven service lines delivered from 59 studios across 21 countries, coupled with our ability to deliver the majority of our services through work from home arrangements, means we are able to offer clients a high degree of resilience to the varying cycles of the spread of the virus in different locations. However, the situation is changing rapidly, and it is difficult to foresee the impact on our clients and the further threats and opportunities that may await us. As such, the Board does not believe it is prudent to provide guidance on the potential full year outcome for FY20 at this time. The Group has a strong balance sheet with net debt (excluding IFRS 16 leases) as at 31 December 2019 of €17.9m, representing a net debt to Adjusted EBITD ratio of 0.4x. The business has good liquidity with cash and undrawn committed facilities under the €100m revolving credit facility (RCF) of €82m as at the end of December. In addition, as a precautionary measure we are in the final stages of exercising the accordion feature under the RCF which would provide a further €30m of committed facilities. Resilience testing has demonstrated the business is capable of operating in a work from home model for a prolonged period and remain comfortably compliant with bank covenant thresholds. Given the current environment, the Group has taken steps to preserve cash by a close focus on costs and eliminating discretionary expenditure, reducing working capital and delaying certain capital projects. Overall, the resilience of the video games industry to economic downturns and the continued strong demand for the Group’s services from its clients, combined with the Group’s flexible cost base, geographical diversification, broad range of services, financial strength and repeat revenues, which have consistently been at approximately 80% year on year, from long standing client relationships, provide the Group with the resilience to trade through this uncertain period and emerge in a strong position. A more detailed assessment of the potential impacts and opportunities resulting from COVID-19, and the mitigating actions we are taking, are provided in the CEO’s Review, with an assessment by service line provided in the Service Line Review, and in the Principal Risks and Uncertainties section. Dividend Despite the Group’s resilient financial position and the modest size of the dividend, the Board believes it would be inappropriate to recommend a final dividend in the current circumstances. Summary We remain absolutely committed to the strategy embarked upon at the time of the IPO and, beyond the near-term disruption from COVID-19, can see many years of good organic and acquisition led growth and strong cash flows ahead as we continue to pursue that strategy successfully. We are confident that we will continue to deliver excellent results to create further shareholder value over time, as we leverage our expanded platform in a growing, global video games market with an accelerating trend towards outsourcing (and few competitors of scale). We continue to keep our focus firmly on the video games industry, where we see substantial scope in the medium term to continue to grow even faster than the growing industry itself as we become the ‘go to’ global services platform for video games and beyond. In addition, other industries such as film and television (and on-line entertainment generally) and other adjacent markets are increasingly adopting interactive content and video games practices, such as simultaneous release of content, and we are uniquely placed to take advantage of these developments as they present themselves. We will continue to monitor the COVID-19 situation closely and do all we can to protect our people and support our customers, who are increasingly looking to us as part of the solution for their own contingency planning. We are well financed, with a global footprint, a unique position in a resilient market and a strong team to manage the business through this uncertain period and we expect to emerge in a robust position to continue to grow once we return to a more normalised environment. Ross K Graham Chairman 16 April 2020 GovernanceFinancial statementsSupplementary information 8 Q&A with Andrew Day We are building a platform of scale Q 2019 looks to have been a busy year – what are you most proud of? A We’ve made some excellent progress through 2019 and there is plenty for us to be proud of. I’ve been particularly pleased with the acceleration in organic growth despite the slowdown effects of the end of the current generation of consoles. This was driven by the good progress in Functional Testing and continued strong growth in Game Development which led to us exceeding the market’s revenue expectations. We’ve continued to expand, growing a global platform of scale to service the ever growing video game industry and its trend towards increased outsourcing. I remain confident that Keywords is the best placed provider to capitalise on this trend. I have also been pleased with the performance of our most important asset – our people. As an organisation, we are particularly proud and protective of our culture, where Keywordians are empowered, relaxed, professional and humble, Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 9 44 acquisitions since IPO 8 acquisitions completed in 2019 “ As an organisation, we are particularly proud and protective of our culture, where Keywordians are empowered, relaxed, professional and humble with a focus on doing the very best we can for our customers.” Andrew Day Group Chief Executive Officer with a focus on doing the very best we can for our customers and each project they entrust us with. By investing in the development of our people, we are ensuring we deliver the highest standard of work for our customers, furthering our strategy to be the ‘go to’ technical and creative services platform for the global video games industry. Q M&A activity appeared to slow down this year compared to previous years – are you at all concerned? A I am not concerned. We had a slower start to the year, but we completed 8 high quality acquisitions for a total potential consideration of €20m, further strengthening the breadth of value-added services we’re able to offer our customers. I’m happy with the progress we made in 2019, as we remain very disciplined in our approach to acquisitions, targeting specific areas to grow the platform and only acquiring businesses that we know will fit the Keywords model. Looking forward, we have a great pipeline of opportunities and I’m excited about what 2020 could hold for the Group. Q Should the TV+SYNCHRON acquisition be seen as a signpost that you will be doing more in the TV and film spaces? A Although we see some clear synergies in the TV and film market where demand for our expertise already exists, TV+SYNCHRON was an opportunistic acquisition which allows us to take advantage of some highly complementary opportunities in the European dubbing market. Whilst we will continue to consider opportunities in adjacent markets, the global video games market remains our core focus and there is still a lot to do in this area. Q Was there anything in the year you were particularly disappointed with? A Overall I am very happy with the way the business is continuing to come together. I think it’s easy to forget how early we are in our journey of building our business in an addressable market of well over $6bn. Our margin in 2019 was lower than many were expecting but much of that can be explained by the investment we are making in the strong organic growth we are delivering to ensure it is sustainable, controlled and the backbone is built to support the ongoing organic and acquisitive growth. In addition, we did have an issue with a fixed price contract, which is not something we would typically enter into. I am pleased to say that this contract is now concluded, and we have still maintained a strong relationship with the customer. to see in 2020? Q What can we expect A More of the same! We are building a platform of scale which gives us excellent opportunities for growth, and the investment in our infrastructure, systems and management will bring further benefits in 2020 and beyond as we leverage these costs over a growing revenue base. With the launch of a new generation of games consoles and further development of new streaming platforms, we are expecting 2020 to be an exciting one for the video games industry and for Keywords! GovernanceFinancial statementsSupplementary information 10 Chief Executive’s review A strong performance 2019 was a year of strong growth, with revenues up 30.2% to €326.5m, as we continued to build our platform as the ‘go to’ service provider to the video games industry which, in turn, enabled us to take advantage of the accelerating trend towards external development and outsourcing in the industry. 2019 was a relatively light year for video game releases as the industry reached the tail end of the existing console cycle, but we saw demand for our services continue to grow, with some service lines experiencing very strong growth as they benefitted from a marked shift towards outsourcing. The Group delivered 15.5% year-on-year Organic Revenue growth, which excludes the impact of currency movements and acquisitions (as defined on page 137 of the Alternative performance measures section), driven in particular by very strong organic performances in both Game Development and Functional Testing which grew by 36.4% and 37.0% respectively. These are now our two largest service lines, and their strong " Strong growth as we invested in building a more diversified services platform of scale." Andrew Day Group Chief Executive Officer Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 11 30.2% Reported revenue growth 15.5% Organic Revenue growth Platform We have used our passion for games, technology and media to build a services platform for the global games industry. Responding to client needs The games industry is continuously changing, and our customers rely increasingly on external development services to create new and engaging content. We need to match their global footprint with a depth and breadth of services and consistently high standards of service delivery, to ensure customers know what they are getting when they buy our services, regardless of location, timescale or service type. Maintaining high standards We ensure Keywords’ reputation for quality is upheld across the platform by gathering the know-how and tools before spreading them geographically, achieved through both acquisitive and organic growth. An example of this could be acquiring a new service before seeding it in an established existing location, using our team’s expert knowledge of the regional customer base. Another key aspect of the platform's success is Keywords’ ability to gather and retain the industry’s top talent. As Keywords increasingly becomes the place to work, renowned for its great culture, working on the best video games, with good facilities and benefits, so we attract the best talent and expertise. achievements are, in part, testament to the effective integration of prior year acquisitions to build strong, international service platforms of scale that are experiencing the increase in demand for their services that comes from becoming the ‘go to’ provider. Having first entered Game Development through the acquisition of GameSim in May 2017, we have now grown it to become a €66m revenue business employing an average of 792 production focused people across 10 studios. This additional scale enables us to take advantage of the accelerating demand for external development, including the growing demand for co-development and full game development services. The very strong organic growth achieved by Functional Testing in 2019 also demonstrated the acceleration of demand for our testing services, having reached the critical mass point of becoming the provider of choice, particularly in North America following the successful integration of VMC. To support the Group’s high level of growth, we have continued to invest in the Group’s operational capacity, supporting infrastructure and management, which we believe is important to enable the Group to capitalise on the clear opportunities it is seeing to capture share of the growing video games services market. These investments held margins back from their medium to longer term norm but will bring further benefits in future years as we leverage these costs over a growing revenue base. Complementing the Group’s strong organic growth, we continued to develop the Group through acquisitions, with 8 made during the year. These added scale to and diversified Keywords’ marketing services, Audio, and Game Development service lines and brought cutting edge machine translation and crowd sourcing technology to the Group’s Localization service offering. In October 2019, we agreed a new revolving credit facility for up to €140m which provides the Group with further flexibility and headroom to manage the short-term disruption of COVID-19 and invest in our business both organically and through acquisition. Delivering on our strategy Our strategy to build our platform as the ‘go to’ service provider to the video games industry is positioning the Group as the leader in a market characterised by highly fragmented, local, single-service providers, despite the growing needs of the major video games publishers and developers who act globally. These customers are increasingly turning to external development and support services as a way to manage the demands of generating more sophisticated content whilst limiting their fixed costs, and so they require the quality, flexibility, and security of a full service provider of scale. We made considerable progress in building our platform during the year, by investing in capacity expansion, making acquisitions that enhanced our service offering and generating synergies through collaboration across our expanding multi-service global platform, positioning us as an increasingly relevant and integral partner to our customers. GovernanceFinancial statementsSupplementary information 12 Chief Executive’s review continued Organic investment During the year, we invested in expanding our operational capacity and enhancing the Group’s infrastructure to scale up our business to support the Group’s ongoing growth. In addition to the over 1,400 work stations created during the year, we have invested in people, systems and marketing as we develop our IT, HR and finance functions and enhance our global branding. This investment included substantial expansion of the Group's facilities in Montreal, Katowice, Manila, Brighton, Mexico City, Tokyo, São Paulo and New Delhi. These expansions incurred start-up costs, where we were paying for space and staff as we fitted out the facilities and built and trained the production and support teams, before becoming operational. We have also continued to support the costs of the investment phase in our early stage technology businesses, Yokozuna Data, AppSecTest and GetSocial, as well as our fledgling services in music management, sound design, subtitling and dubbing for film and TV. We have continued to invest in the backbone of the business with increased capabilities in our support functions, including finance, HR, IT, facilities, administration, and general management (average number of people employed increasing to 646 from 505 in 2018) and we are increasingly developing ‘hubs of excellence’ in these support functions which support a number of studios or key regions, such as our Montreal hub which supports studios across North America. Around the Group, we continue to develop our own tools to enable and deliver our services and to enhance productivity, in addition to adopting and operating third party best of breed solutions. Once the environment has normalised following disruptions related to COVID-19, we expect to reap the benefits of many of these investments as work stations are efficiently utilised and our support functions yield improved recruitment, training, and retention of staff, enhanced management information, and more efficient workflow management. Acquisitions and integration We were pleased to have made 8 high quality acquisitions during the year, which further strengthened the breadth of value-added services we are able to offer our global video games customers. In January, we expanded our range of marketing services with the acquisition of Sunny Side Up, which brought production of high-quality marketing assets and provided access to the talent pool in Quebec City, to complement our similar operations in Brighton and London. Also in London, Ichi Worldwide joined the Group in December, adding strength and depth to our marketing services in campaign management, branding strategy and social media management, which are key to determining the success of a game. We diversified our Audio Services offering with the acquisitions of Vancouver based Descriptive Video Works, which brought accessibility services in North America; TV+SYNCHRON, which added a Berlin based dubbing and voice over studio in German language; and Syllabes, a games and film/TV audio recording studio, completing the full suite of services provided out of Keywords’ Montreal services hub. We also further strengthened our Game Development service line through the acquisition of GetSocial, based in The Hague, which provides an integrated platform for the management of all social media interactions within mobile games. In Japan, we added the game development team, Wizcorp, to our existing 270-person team in Tokyo. In our Localization service line, we welcomed Kantan to the business, which brought proprietary, cutting edge machine translation and crowd sourcing technology to the Group that will enable Keywords to work with its video game customers in marrying our unrivalled video games expertise with highly customisable machine translation engines and downstream workflow tools. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 2019 Acquisitions • Sunny Side Up • Ichi Worldwide I N O T A E R C T R A • GetSocial • Wizcorp T N E M P O L E V E D E M A G • Descriptive Video Works • TV+SYNCHRON • Syllabes I O D U A I N O T A Z L A C O L I 13 • Kantan Integration Even from the preliminary stages of due diligence we are constantly focused on integration. When looking to make acquisitions, integration is always front of mind. We have a tried and tested integration process which we implement for each new acquisition, starting with a detailed integration plan tailored to the company in question, which is designed by the people who will ultimately lead the integration process after the acquisition has completed. When we make an acquisition, we retain the brands for as long as it makes sense, adding "A Keywords Studio" to its logo to ensure it is seen as part of the Group. Acquired businesses immediately benefit from shared services through IT, security, HR, and finance – all of which have received significant investment this year, and a shared sales and marketing team allows businesses to focus on cross selling their services as part of a wider group, with local studios supported by regional hubs for key functions. In turn, the acquired studios quickly become ambassadors for the full range of services across Keywords. Following the acquisitions made during the year, we exited the year with pro forma revenue (as defined on page 136 of the Alternative performance measures section) of €333.6m. During the year, we have also made good progress with integrating prior period acquisitions, which are making good contributions to the Group. The Group's largest acquisition in 2018 (completed in August), Studio Gobo and Electric Square, has outperformed expectations while our largest acquisition in 2017 (completed in October of that year), VMC, was fully integrated in 2018, with the subsequent benefits of our additional scale demonstrated by the particularly strong growth in our Functional Testing service line during 2019. We were able to set out in more detail, in our Capital Markets Day in Montreal in November, how acquired businesses can thrive within the Keywords family, as they are able to leverage our scale, reputation, international reach, and broader expertise. In addition, they are able to focus on delivering high quality work for their customers whilst we provide the functional support that would otherwise be a constraint on their time as they grow their businesses. The benefit for these businesses of being part of the Keywords family is further evidenced by the reduction in ‘downtime’ and staff churn that many experience due to the opportunities to work on a broader base of interesting projects that the wider Group is able to offer. Our market opportunity Suppliers 50+ specialist 20% Market size and proportion of outsourcing* $3.0bn+ 10+ 40% $800m Non specialist call centre operators 50% $1.2bn 100+ 50% $1.0bn+ 10+ 70% $150m 50+ including large Multiple Language Vendors (MLVs) 85% $200m 50+ 90% $150m Game Development Functional Testing Player Support Art Creation** Localization Testing Localization Audio*** Percentage outsourced In-house 0 $0.5bn $1.0bn $1.5bn $2.0bn $2.5bn $3.0bn * Based on management’s estimates ** Art Services only, does not include Marketing Services *** Audio localization only GovernanceFinancial statementsSupplementary information 14 Chief Executive’s review continued People The average number of FTE employees across the Group in the period grew to 7,424 (2018: 5,238) with around 900 jobs being created organically and driven primarily by the very robust growth in our Functional Testing and Game Development businesses. We constantly strive to provide great working environments for all Keywordians around the world. One example of this can be seen in the central locations of our studios. Rather than over emphasise low cost locations and low cost facilities we feel the benefits of being able to attract the best talent in the most scalable manner outweigh any savings from potentially lower occupancy costs. Whilst there is always more to do in investing in our people, we continue to make improvements with training, benefit schemes, career progression and we monitor ourselves in line with our diversity and non-discrimination policies, to ensure we are providing equal opportunities in all of our locations. We are proud of our culture which brings common purpose to our colleagues around the world. Our empowered, relaxed, professional and humble team consistently does the very best we can for each project entrusted to us, working as an extension of our clients’ organisations. Our broad pool of highly experienced and games-passionate talent provides a tremendous resource that our customers can access in a flexible and cost-efficient manner across the globe and in convenient time zones. In turn, we offer colleagues the opportunity to work on an unrivalled range of the world’s leading games ahead of their release. We are typically working on over 250 titles at any one time, and we provide good career advancement and opportunities to move between our various studios and the countries in which we operate. This can be seen in our senior leadership team which comprises some home-grown talent and people who joined us with acquired entities, in addition to externally-hired employees. Our continued growth and reputation for consistently delivering good quality service on highly agile engagements to demanding deadlines is testament to the Keywords culture and the skills and the commitment of Keywords’ talented and games-passionate employees and collaborators. We are proud of our global talent pool, which means there is a contribution from Keywords in most of the world’s leading games, and we would like to thank everyone involved for their valuable contribution to the continued success of the Group. We are particularly proud of how Keywordians around the world have responded to the short-term challenges and the changes to ways of working to keep everybody safe in the context of COVID-19. We have though unfortunately had to make use of the various furlough arrangements provided by various governments during March and April 2020 while continuing our efforts to secure clients consents to move project teams to work from home arrangements. We have established a $500,000 hardship fund to support those on furlough who are experiencing particular financial constraints. COVID-19 Trading in 2020 started in line with our expectations, with only minimal impact from COVID-19 due principally to the short-term disruption in China that affected our five studios there. These operations have now returned to near full production, following the return to work after the government mandated shutdowns and our subsequent implementation of social distancing and rigorous hygiene regimes in the studios, as well as some work from home measures. However, since then, severe restrictions have been put in place elsewhere requiring most of our studios to be temporarily closed. Our first priority during this period has been the wellbeing of our people and we are following the health and safety recommendations of the local and national authorities in the 21 countries in which we have operations. As a business with robust operations and an inbuilt culture of flexibility and a “can do” attitude, all 59 studios have reacted extremely quickly supported by our global and regional HR and IT teams to move over 5,500 of our people to work from home arrangements. Whilst this resulted in some short-term disruption, we are pleased with how quickly our teams are settling into these new patterns of work. In consultation with our clients, we are continuing to make preparations to move more of our production staff to this model, particularly in testing where we are working closely with our clients with the aim of increasing the numbers of testers we can deploy in work from home arrangements. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 15 We are seeing an increase in the demand for certain services, as existing and new clients look to us for support during this challenging time and as they look to enhance the resilience of their production arrangements. We are making efforts to satisfy their requests subject to our own near-term resource constraints, as we prioritise the wellbeing of our people, albeit it does look likely that demand will outstrip our ability to fulfill it in the near-term. It is very difficult to predict how long the studio closures will be in place and whilst we do expect some disruption to the provision of our services due to the COVID-19 pandemic, we are doing all that we can to mitigate the short-term disruptions to production. We anticipate the underlying drivers of growth across the video games market to remain intact, and we hope to benefit from pent up demand from our clients once our operating environment normalizes. Medium term outlook Beyond the immediate disruption caused by COVID-19, we expect strong demand for our services to result from the launch of a new generation of games consoles, the further development of new streaming platforms, and content demands for virtual and augmented reality, in addition to the underlying drivers of growth across the video games market. Our investment in expanding and diversifying the business, improving our technology, strengthening our management team, and extending our functional support, has positioned us as the provider of choice. This investment will enable us to continue to deliver high levels of growth in the medium term, in a market that was already seeing an accelerating trend Scale We are developing a platform of scale, enabling us to become the ‘go to’ provider of services to the video games market. Our aim is to become the ‘go to’ provider This means being the first company our customers think of when they think about their external outsourced game development needs. For this to happen, we need both size and scale and to be known as the industry experts. Scale brings not only efficiencies but also creates significant barriers to entry for would-be competitors, all of which contributes to becoming the provider of choice which in turn accelerates growth. Another key element is the reputation we have earned across many parts of the industry for reliability, flexibility and trust. This is what will keep customers coming back and remove risk for others who are considering working with us. towards outsourcing and could see an even greater shift to outsourcing in response to the COVID-19 outbreak, as clients seek to enhance the resilience of their production arrangements for the long term. Whilst that investment held back margins in 2019 and the COVID-19 disruption will place further pressure on margins in 2020, we expect to see margins increase incrementally towards our historic norms as we leverage the investments over a growing revenue base in 2021. Our recently enlarged banking facility provides the Group with the balance sheet strength to meet its short-term liquidity needs and over medium term capitalise on our clear opportunity to take a leading share of the increasingly outsourced video games services market both organically and via acquisitions, as we further enhance shareholder value. We continue to maintain and build upon our strong pipeline of acquisitions with the intent of executing on selected opportunities as the market normalises again post COVID-19. We anticipate that the current crisis may give rise to further acquisition opportunities which, as the market leader, we will be well placed to execute. Thanks to the robustness of the Group’s model, the growth characteristics of our end markets and the strength of our market position, the Board is confident of being well positioned for growth and the long-term success of the business. Andrew Day Group Chief Executive Officer 16 April 2020 " 2019 was a year of strong growth as we continued to build our platform to become the ‘go to’ service provider to the video games industry which, in turn, enabled us to take advantage of the accelerating trend towards external development in the industry." GovernanceFinancial statementsSupplementary information 16 Market outlook Video games market shows no signs of slowing A large and growing industry Momentum in the video games market shows no signs of slowing, remaining a core element of the entertainment industry. Content revenues in the global games market grew by 7.2% to reach $148.8bn in 2019 and are forecast to increase to $189.6bn in 2022, a CAGR of 8.1%. (Source: NewZoo Global Games Market, for the period 2018-22). All indications are that game publishers will continue to make more games in the future, with ever more sophisticated content, published across more platforms and with an increasing need to continuously add content to the games post launch. An appealing market opportunity Much of the video games industry still remains vertically integrated. But as the market continues to grow and becomes ever more complex, games publishers and developers are increasingly seeking to avoid expanding their own teams for relatively short term projects. The video games publishing cycles are inherently lumpy, requiring significant resources to deliver complex projects on a tight timeline. This is resulting in a trend towards increasing outsourcing at a more strategic level which benefits Keywords as the market’s only major provider of scale. This includes a growing demand for co-development and full game development services, and we are investing to match that demand and continue to increase our market share. Segment breakdown of global game revenues toward 2022 2018 2019 2022 23% 30% 46% $138.7bn 24% 20% 30% 46% $148.8bn 31% 49% $189.6bn PC Console Mobile Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 17 $6bn+ addressable market for video games services Key trends in 2020 Next generation consoles 2020 is set to be a landmark year for console gaming with both PlayStation (PS5) and Xbox (Series X) having announced their next generation consoles, scheduled for launch in Q4 2020. With backward compatibility a feature of both systems, this console transition is expected to be the smoothest yet. Unlike in the last transition seven years ago, in which the market was surprised at how quickly platform holders and publishers shifted from content for the previous platforms to new content for the current generation, this time, a lot of games are running as a service and are expected to continue to be supported on the existing consoles. Games as a service Part of the smoothness of the generation transition will be thanks to the trend to the ‘games as a service’ model. We anticipate game publishers will want to continue to support existing content that is commercially successful while simultaneously producing new content that takes advantage of the power and features of the new consoles. Outsourcing the live operations for both platforms, including the introduction of new features, new characters, producing marketing materials, plus further localization and testing will bring opportunities for Keywords, and we anticipate this doubling up will create added demand for our services. Wider adoption of streaming and subscription platforms In addition to traditional consoles due for release in late 2020, the launch of Google Stadia and Apple Arcade in late 2019 and the anticipated launch of Microsoft’s xCloud in 2020 represent exciting steps to make gaming more readily available and accessible to a wide spectrum of gamers. Presently, gaming can be costly for the user, with the requirement for high end gaming PCs, expensive consoles and high end smartphones limiting the access to and uptake of some games. Streaming and subscription services have the potential to provide highly cost-effective distribution of content, making it available to more players, on more devices, in more countries, and in more languages. More than ever, video game technologies are also being used in other markets including e-learning, film and TV, simulation and e-retail, as content providers continue to seek ways to make their content more interactive and thereby more impactful and engaging. Interactive content of whatever type requires the sorts of skills and knowhow that Keywords has mastered in the most interactive of all content markets – video games. The video games service provider market remains highly fragmented, yet it is only when a service provider has sufficient scale that it is able to more efficiently utilise its resources, without significant downtime between projects and have the resourcing flexibility to meet the customers' needs on a timely basis. As the only service provider of scale, in this $6bn plus addressable market (see page 13), Keywords is uniquely placed to support our customers' needs. This is part of the attraction for acquisition targets, who want to be part of a larger group with access to a wider customer base and service offering. It also means we are increasingly benefitting from our scale relative to competitors, as we further consolidate our market, and can respond flexibly to increasingly large scale projects from our customers. “Keywords is uniquely placed to support our customers' needs.” GovernanceFinancial statementsSupplementary information 18 Business model Creating value and growth through operational efficiency The video games industry represents the pinnacle of interactive digital content. At Keywords, we are using our passion for games, technology and media to create a global, integrated services platform of scale for video games and beyond. Key strengths What we do Global presence Provides access to the best talent and enables us to deliver projects across studios in multiple time zones, allowing seamless 24-hour turnarounds whilst remaining close to our customers. Flexible resource model Particularly true of our testing business, this allows us to scale up or down to meet demand, mirroring the seasonality of games production. Knowledge and expertise Our talented people have deep games-specific knowledge and experience, enabling them to add value to our customers’ games at all stages in the development lifecycle. Reputation for quality At the heart of our culture is our commitment to quality, reliability and integrating with our customers’ processes, promoting long-term customer relationships. Financial strength Our strong financial performance and position gives our customers reassurance of resilience in their supply chain, and is part of our attraction to businesses we acquire. Acquisition track record We have a strong track record in identifying acquisitions with a good fit with Keywords in terms of culture, as well as expertise or geography and integrating them effectively to support their growth. Keywords’ presence in each stage of the games development cycle creates multiple opportunities for cross delivery and revenue growth. 1 2 Pre-production Concept art Level design Game design Early stage game development Co-development Programming Art production Cinematics/visual effects Audio production Original language voice production Engineering Development quality assurance Game demo trailers Music scoring Sound design Story writing Motion capture Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 19 Our business model is supported by our strategic pillars: Building our platform Selective acquisitions and integration Organic growth and cross selling Services offered by Keywords Services added by Keywords in 2018-2019 Services not currently offered by Keywords 3 4 5 6 Later stage game development Functional testing Text localization Audio localization Launch Certification testing Official game trailers Ongoing live operations support New content for games Customer support Game extensions Soundtrack publishing Community management Level expansions Marketing services Data analytics Localization testing Customer acquisition Payments processing Player research Game porting Music branding and strategy Merchandising Game analytics Social integration Customer retention Promotions management Issue patches Art Audio Testing Localization Marketing GovernanceFinancial statementsSupplementary information 20 Business model continued How we are different Acquisition track record Strong and disciplined track record in identifying acquisitions with a good cultural fit Established and effective integration processes Organic growth demonstrates success Scale Technology Large customers need large reliable suppliers Necessity of regular investment in technology and security makes it difficult for smaller suppliers to compete Importance of resilience and security through robust IT infrastructure Financial strength Strong performance reassures customers Attractive stability for businesses we acquire n Acquisitio trac k recor d l a i c n a n h t g n e r i t F s R e f p o u r t a q u tio ality n S cale Te c h n o l o g y Barriers to entry e l a b o l G c n e s e r p S c alable m odel Knowle d g e and expert i s e Global presence Access to the best talent worldwide Ability to deliver projects across studios in multiple time zones Close proximity to our customers Reputation for quality Commitment to quality embedded in our culture Reputation for delivery evidenced by long-term customer relationships Knowledge and expertise Talented and passionate people Deep games-specific knowledge and experience Value-adding expertise Scalable model Capable of scaling up or down to meet demands Mirror seasonality of games production Flexible resourcing to match client needs Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 21 470% Increase in Adjusted EPS since 2014* 108 Customers using 3 or more services (up from 30 in 2014) 7,424 Average number of employees (up from 978 in 2014) Creating value for our stakeholders By working as their external development partner, we enable leading content creators and publishers to leverage our expertise and capacity across the lifecycle of interactive content. In so doing we enable our customers who are operating in complex and fast-moving environments to remain lean and agile, and to focus on creating and monetising the most engaging experiences. We are trusted and relied upon by most of the world's leading video game companies to work alongside them during concept, development and live operations by leveraging the breadth and depth of our industry leading service lines every step of the way. Keywords’ presence in each stage of the games development cycle creates multiple opportunities for cross selling and revenue growth. Investors Consistent track record of delivering earnings and dividend growth. Opportunity to invest in the exciting video games market, without the risk of exposure to the successes or failures of individual game titles. Proven disciplined M&A track record to consolidate a fragmented global supplier base. Access to a structural revenue growth opportunity driven by industry growth and a trend towards outsourcing. Customers Our involvement across the video games cycle means that we can be a “one-stop-shop” for our global customers, meeting their requirements with a combination of on-demand and dedicated services facilitated through a wide geographic reach to talent and a flexible resource model. This allows our customers to outsource most aspects of game development, enabling our customers to reduce the number of permanent staff that would otherwise be required to cater for peak activity, thereby converting fixed to variable costs and minimising their overall operating costs. Employees Keywords provides employees with an excellent and sustainable variety of work, good career advancement opportunities and, increasingly, opportunities to work in many different locations. Our customers can access a world class talent base without incurring any of the usual fixed costs. * Before acquisition and integration expenses, share option charges, amortisation of intangibles, and foreign currency effects. GovernanceFinancial statementsSupplementary information 22 Our strategy To become the ‘go to’ technical and creative services provider for the video games industry and beyond The key pillars of our strategy are to grow organically and by acquisition to extend the Group's service capacity, capabilities and geographical reach in order to better serve our client base across all platforms, key geographies and languages, with a full range of services and solutions. Positioning the Group as the provider of scale in an otherwise highly fragmented service provision market, despite the global scale and nature of the major video games publishers and developers, will enable us to continue to take advantage of the trend towards greater externalising of development and support services as customers seek to manage the demands for increasingly frequent and sophisticated content in a cost effective manner. By investing in expanding capacity and across our multi-service global platform, we are increasingly becoming a strategically important partner to our customers who require a service provider of our scale and flexibility. As we develop positions of scale within our chosen markets, our focus moves to new areas where we see opportunities to expand through a mixture of organic and acquisitive growth. Strategic pillars Progress in 2019 Priorities in 2020 Measures of our success Building our platform • Continued to enhance our marketing services capabilities (first entered in 2018) with 2 acquisitions during the year; building on the first two we acquired in this space in 2018. Selective acquisitions and integration • Extended our geographical footprint by acquiring our first studio in Berlin, another key hub that further builds out our global platform. • Added 1,400+ work stations to support the strong levels of organic growth and become the ‘go to’ service provider in each service line. • Enhanced and grew our capabilities in new and existing regions with facilities opened in Montreal, Mexico City, Katowice, Manila, Tokyo and Leamington Spa. • Renamed our Game Development service line (previously Engineering) to more accurately reflect the range of services from full game development to software engineering consultancy. • Completed 8 acquisitions during the year which added to our existing scale and capabilities in audio, game development, marketing and localization services. • Kantan – acquired a leading machine translation business adding to our range of technology used across the Group. • Increased our presence in North America with selective acquisitions in Montreal and Vancouver. • These acquisitions are being integrated within the service lines as well as within the country and regional management structures and our global finance, accounting, HR and IT functions. • Made good progress with integrating prior period acquisitions, which are making good contributions to the Group. Organic growth and cross selling • Organic Revenue grew by 15.5% in 2019. • Organic growth in 2019 was a defining feature as we grew in all of our key regions and is reflective of our success in executing and integrating acquisitions. • Continued to expand our client relationships by making good progress with cross selling our services reflecting an increase in customers buying 3 or more services from 99 to 108. • In 2020, we will continue to build our platform so we are increasingly a strategically important partner to our customers. • Marketing services was first launched in 2018. There are further acquisition opportunities to widen the range of services we can offer and expand the geographies we can cover. • Our fast growing Game Development business has benefitted from investments in acquisitions and organic openings of new studios, and we hope to be able to make further acquisitions in the space as we build our Game Development business into the provider of choice. • As we extend our capacity, our investment in new workstations enables us to take advantage of higher levels of activity in a more cost-efficient manner. 2020 will also see continued investment as we develop our platform to service our clients' projects across our expanding multi-service global platform. • The Group’s acquisition programme continues to be an important strategic pillar and we anticipate that 2020 will again contain a number of acquisitions. • Our service lines are ever developing, and there are gaps in most of them. We will continue to make selective acquisitions that further enhance and extend each service's capabilities in 2020, particularly in Marketing services and Game Development. • Keywords will continue to develop and invest in technologies that support the services we provide to game developers and game publishers. • Following considerable success expanding in to the key global video games markets, geographical expansion remains a lower priority driver in 2020 as we continue our focus on enhancing our capabilities in regions where we already have a presence. • Organic growth remains our priority in 2020. Following the growth we saw in 2019 and our work on building out our platform, we will invest in this as a key priority. to customers. • Cross-selling within our services is vital and we have continued to see noticeable growth in the number of customers that are benefiting from the use of three or more of our services, a key reflection of our “relevance” Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 23 Some of the Sperasoft team taking part in their annual art day event. Strategic pillars Progress in 2019 Priorities in 2020 Measures of our success Building our platform • Continued to enhance our marketing services capabilities (first entered in 2018) with 2 acquisitions during the year; building on the first two we acquired in this space in 2018. Selective acquisitions and integration • Extended our geographical footprint by acquiring our first studio in Berlin, another key hub that further builds out our global platform. • Added 1,400+ work stations to support the strong levels of organic growth and become the ‘go to’ service provider in each service line. • Enhanced and grew our capabilities in new and existing regions with facilities opened in Montreal, Mexico City, Katowice, Manila, Tokyo and Leamington Spa. • Renamed our Game Development service line (previously Engineering) to more accurately reflect the range of services from full game development to software engineering consultancy. • Completed 8 acquisitions during the year which added to our existing scale and capabilities in audio, game development, marketing and localization services. • Kantan – acquired a leading machine translation business adding to our range of technology used across the Group. • Increased our presence in North America with selective acquisitions in Montreal and Vancouver. • These acquisitions are being integrated within the service lines as well as within the country and regional management structures and our global finance, accounting, HR and IT functions. • Made good progress with integrating prior period acquisitions, which are making good contributions to the Group. • In 2020, we will continue to build our platform so we are increasingly a strategically important partner to our customers. • Marketing services was first launched in 2018. There are further acquisition opportunities to widen the range of services we can offer and expand the geographies we can cover. • Our fast growing Game Development business has benefitted from investments in acquisitions and organic openings of new studios, and we hope to be able to make further acquisitions in the space as we build our Game Development business into the provider of choice. • As we extend our capacity, our investment in new workstations enables us to take advantage of higher levels of activity in a more cost-efficient manner. 2020 will also see continued investment as we develop our platform to service our clients' projects across our expanding multi-service global platform. • The Group’s acquisition programme continues to be an important strategic pillar and we anticipate that 2020 will again contain a number of acquisitions. • Our service lines are ever developing, and there are gaps in most of them. We will continue to make selective acquisitions that further enhance and extend each service's capabilities in 2020, particularly in Marketing services and Game Development. • Keywords will continue to develop and invest in technologies that support the services we provide to game developers and game publishers. • Following considerable success expanding in to the key global video games markets, geographical expansion remains a lower priority driver in 2020 as we continue our focus on enhancing our capabilities in regions where we already have a presence. 7 service lines, up from two in 2009, four in 2013 and six in 2016. 1 of our service lines, Functional Testing, has become the supplier of choice in North America. 4 continents in which we have operations. We now have 45% of our people in North America and South America, 23% in Europe and 32% in Asia. 4–10 acquisitions per year. Between €30m to €80m invested. 8 acquisitions in 2019. All are successfully being integrated into our platform. 44 acquisitions since IPO. Organic growth and cross selling • Organic Revenue grew by 15.5% in 2019. • Organic growth in 2019 was a defining feature as we grew in all of our key regions and is reflective of our success in executing and integrating acquisitions. • Continued to expand our client relationships by making good progress with cross selling our services reflecting an increase in customers buying 3 or more services from 99 to 108. • Organic growth remains our priority in 2020. Following the growth we saw in 2019 and our work on building out our platform, we will invest in this as a key priority. • Cross-selling within our services is vital and we have continued to see noticeable growth in the number of customers that are benefiting from the use of three or more of our services, a key reflection of our “relevance” to customers. 16% 108 increase in overall customer numbers in 2019 to 978, up from 846 in 2018. customers using three or more service lines. Up 9% from 2018. 1,400+ work stations added in 2019 to support our growth and growing need for scale. GovernanceFinancial statementsSupplementary information 24 Service line review All our service lines continued to grow in 2019, whilst we also continued to make good progress with cross-selling our services, with a 9.1% increase in the number of customers buying three or more services to 108 (2018: 99). The following table provides a summary of our revenues by service line, their growth rates on a reported basis and Organic Revenue** growth. We have also presented pro forma revenues by service line, which includes the annualised revenue of all acquisitions made in the year, to provide a better overview of the size and balance of the business at the end of the year, together with the average number of operational staff in each service line, excluding managerial and support staff. The service line commentary which follows reports on the statutory reported revenues unless otherwise stated. Revenue Art Creation Game Development Audio Functional Testing Localization Localization Testing Player Support % of 2019 Group revenue 2019 Revenue €m 2018* Revenue €m Change from 2018 % 2019 Organic Revenue** growth % 2019 Pro forma Revenue** €m 2019 Average number of operational staff by service line 13.3% 20.3% 12.4% 21.1% 14.9% 6.9% 11.1% 43.6 66.3 40.5 68.9 48.5 22.6 36.1 34.0 35.2 34.2 47.8 44.0 19.7 35.9 28.2% 88.4% 18.4% 44.1% 10.2% 14.7% 0.6% 30.2% 6.7% 36.4% 2.3% 37.0% 7.5% 11.2% (4.7%) 46.1 67.0 43.7 68.9 49.2 22.6 36.1 15.5% 333.6 1,194 792 220 2,316 381 532 1,343 Total 100.0% 326.5 250.8 * The prior year comparatives for Art Creation, Game Development and Functional Testing have been restated, primarily to reflect the reclassification of certain Sperasoft services, in order to provide a more meaningful comparison with the 2019 presentation. ** The Group reports certain Alternative performance measures (APMs) which management believes provide valuable additional information for the users of the financial information to understand the underlying trading performance of the business. For full definitions and explanations of these measures and a reconciliation to the most directly referenceable IFRS line item, please see pages 135 to 143. Art Creation (13.3% of Group revenues for the year) Our Art Creation service line creates graphical art assets for video games including concept art creation, 2D and 3D art asset production and animation. Also included under Art Creation is the marketing services business we are building through acquisitions, and the subsequent organic growth of Fire Without Smoke, The TrailerFarm, Sunny Side Up and most recently, Ichi Worldwide. 2019 performance Art Creation revenues grew by 28.2% to €43.6m in the year ended 31 December 2019 (2018: €34.0m) with the benefit of full year contributions from 2018 acquisitions Fire Without Smoke and The TrailerFarm, and contributions from 2019 acquisitions, Sunny Side Up, whilst Ichi was acquired at the very end of 2019. Organic Revenue, which excludes the impact of currency movements and acquisitions, grew by 6.7% for Art Creation. During the year, we employed an average of 1,194 production based people in Art Creation (2018: 1,038) whose services are primarily delivered by full-time permanent employees, particularly in our bigger operations in China and India, complemented by a small number of freelancers, particularly in our North American operations, which provides some additional flexibility in matching resources with demand. These freelance resources are not included in our employment numbers. COVID-19 update and mitigation measures In the current year, our five Chinese art studios were the first to be impacted by COVID-19 as government-mandated shutdowns were imposed following the Lunar New Year holiday. During that period, our businesses implemented work from home measures wherever that was possible. Since re-opening the studios, we have implemented social distancing measures, increasing the space available per person through shift working and rigorous hygiene regimes combined. Our China businesses have been back to close to near full production since the end of February and employees previously working from home have been returning to in-studio work. More recently, our art and marketing studios in North America, Europe and India have all implemented work from home operations. The market opportunity and medium term outlook Art Creation operates in a market we estimate to be valued at well over $1bn, with just c.50% of these services currently outsourced to a highly fragmented base of over 100 service providers. We have yet to quantify the opportunity for the Marketing services business but it is clearly very large and highly fragmented given the range of services provided both internally and externally which includes key art, trailer creation, advertising, PR, branding, campaign management, influencer marketing and management, marketing analytics, and community management. We expect to continue to add to our Marketing services activities with further acquisitions with the intention of reporting this business separately when it achieves scale through continued organic growth and acquisition. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 25 Game Development (20.3% of Group revenue for the year) Formerly called Engineering, our Game Development service line provides external development services to game developers and publishers including full game development, co-development, porting and general software engineering consultancy. 2019 performance Now our second largest service line, Game Development increased revenues by 88.4% to €66.3m (2018: €35.2m). This increase reflected full year contributions from our 2018 acquisitions, Snowed In, Studio Gobo and Electric Square, and the benefit of the acquisition of Wizcorp in April 2019. Organic Revenue, which excludes the impact of currency movements and acquisitions, increased very strongly for Game Development, up 36.4% compared to 2018. During the year we grew the number of people in our Game Development service line by over 80% to c. 900 at the end of the year, employing an average of 792 production focused people in 2019 (2018: 494). COVID-19 update and mitigation measures All of our Game Development studios are working from home in response to the pandemic. This is allowing us to continue to service our customer needs through the COVID-19 disruption and while demand remains high, we are likely to be constrained by a reduced ability to recruit. The market opportunity and medium term outlook Game Development is our largest addressable market, which we estimate to be valued at well in excess of $3bn, with just c.20% of game development services across the industry currently outsourced, meaning it has the lowest proportion of services outsourced of all of the Group’s service market segments. Service provision is also highly fragmented, with well over 50 service providers addressing this segment. We made our final delivery under an underperforming fixed price contract in December 2019. Without this drag factor, and with the benefit of the new studios in Leamington Spa, UK, in Singapore and in Austin, Texas (all of which we have opened in the last 4 months), we are well placed to meet the continued demand for our services, subject to any further COVID-19 related impacts. Audio (12.4% of Group revenue for the year) Our Audio service line provides multi language voice-over, original language voice recording, music, sound design, accessibility and related services. 2019 performance Audio revenues rose by 18.4% in the period to €40.5m (2018: €34.2m), with the benefit of full year contributions from the 2018 acquisitions of Cord, Laced, Blindlight and Maximal and contributions from Descriptive Video Works and TV+SYNCHRON in 2019, whilst Syllabes was acquired at the very end of 2019. Organic Revenue, which excludes the impact of currency movements and acquisitions, increased by 2.3% compared to 2018. Our audio services businesses are primarily aligned with the release of AAA video games. 2019 was a relatively light year for these games and this, coupled with the effect of the transition to new Xbox and PlayStation consoles in 2020, meant some developers and publishers reconsidered their release plans which held back our growth. During the year we grew the average number of service delivery staff in our Audio Services business by 18.9% to 220 (2018: 185). We were delighted that our relatively new audio production facility in London’s Covent Garden, Liquid Violet, and our Burbank, Los Angeles voice production facility were granted Netflix preferred vendor status in 2019 alongside that of Vancouver based Descriptive Video Works. COVID-19 update and mitigation measures We are experiencing some short-term disruption as a result of the temporary closure of most of our recording studio facilities in response to local government isolation measures. We are in the process of implementing remote recording capabilities to allow some limited voice-over recording from actors’ homes. Our current expectation is that this will reduce our recording capability in the short-term, but we would hope that higher levels of utilisation within those studios as we catch up with delayed productions, will enable us to offset some of the impact of the delays. The market opportunity and medium term outlook We estimate the market for video games’ audio localization services alone to be valued at c. $150m and to be approximately 90% outsourced. However, service provision in this segment remains highly fragmented, with over 50 service providers, so we expect to be able to continue to grow our market share as well as make acquisitions over time. We have not yet sized the market for the original language recording, music and sound effects/design segments. Assuming the environment becomes more normalised following near-term COVID-19 disruption, our Audio service line should benefit from a better second half of 2020 for AAA game releases, to coincide with the anticipated new console launches from Microsoft and Sony. GovernanceFinancial statementsSupplementary information 26 Service line review continued Functional Testing (21.1% of Group revenue for the year) In 2019, Functional Testing grew to become our largest service line and provides quality assurance including the discovery and documentation of game defects; testing to ensure games are compatible with the various hardware devices and configurations they are played on; and testing to verify that games comply with console manufacturers’ specifications. 2019 performance Functional Testing revenues increased by 44.1% to €68.9m (2018: €47.8m). Organic Revenue, which excludes the impact of currency movements and acquisitions, increased by 37.0%. This growth followed the consolidation we effected with the acquisition of VMC in late 2017, and the subsequent integration efforts and investments made in 2018 through to 2019, as our Functional Testing operations reached the scale necessary to become the 'go to' provider in North America. During the year, the average number of production staff in Functional Testing was 2,316 (2018: 1,170), many of which are flexibly resourced positions to enable us to scale up and down with the demands of the projects. COVID-19 update and mitigation measures Functional Testing has largely depended on being able to conduct its work from secure facilities, and as such, our testing operations are most at risk from the shutdowns imposed by local authorities. We have so far moved over 1,500 people to work from home arrangements and are continuing to consult on a client by client basis to move to a working from home model allowing us to maintain testing for these remaining clients through the crisis. This is resulting in some delays to certain projects and, where appropriate, staff have been moved on to government supported furlough arrangements until agreements can be reached with our clients. The market opportunity and medium term outlook The addressable market for Functional Testing is estimated by us to be valued at over $800m, with just c.40% of services currently outsourced. Whilst this is a less fragmented market, with approximately 10 or more service providers, we are a leading player in this segment for which the scale and flexibility of a larger player is important to customers. The market continues to grow as games companies become ever more focussed on the quality of the increasing volumes of content in their games. Beyond the potential near-term disruption described above, we expect Functional Testing to continue to grow strongly as it benefits from the trend to outsourcing in the industry and to see some operational leverage from the investments in growth made in 2019. Localization (14.9% of Group revenue for the year) Our Localization service line provides translation of in-game text, audio scripts, cultural and local adaptation, packaging and marketing materials. We have also recently added neural machine translation technology and a global crowd sourcing translation platform, through the acquisition of Kantan. 2019 performance Despite making up for the annualised effect of certain former customers entering insolvency processes in 2018, primarily due to the ‘Fortnite effect’, Localization revenues grew by 10.2% to €48.5m (2018: €44.0m). Organic Revenue, which excludes the impact of currency movements and acquisitions, has grown by 7.5% as this service line continues to benefit from the trend towards continuous content generation for games in live operation, albeit it was held back in 2019 in the lead up to the transition to new consoles, as in the case of Audio Services. Our Localization business makes effective use of a large pool of freelance translators built up and nurtured over many years while maintaining a permanent production base, with an average of 381 operational staff during the year (2018: 334) which includes new and expanded teams dedicated to certain customers. COVID-19 update and mitigation measures All project management and support staff are now working from home as are our in-house language leads, localisation engineers and client dedicated teams. With the majority of our Localization service already managed through a global network of freelancers working from home this service line was quick to migrate to a full work from home model and no material impact on delivery capabilities is currently expected. The market opportunity and medium term outlook We estimate that the market for localization for video games is valued at c.$200m, of which c.85% is currently outsourced but that service provision remains highly fragmented, with over 50 providers most of which are single language providers and don’t have the scale to deliver simultaneous multi-jurisdictional localization projects for our global video games customer base. We expect Localization to continue to build on its leading market position as it increasingly differentiates itself by combining proprietary software tools like XLoc, and recently acquired AI and Machine Learning technology from Kantan, with its market leading expertise in games localization built up over the past 20 years. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 27 Localization Testing (6.9% of Group revenue for the year) Our Localization Testing service line identifies out of context translations, truncations, overlaps, spelling, grammar, age- rating and cultural issues and tests for console manufacturer compliance requirements in over 30 languages using native speakers. 2019 performance Although held back by the transition to the new generation of consoles due out in late 2020 and evidenced by the light release of AAA games in 2019, Localization Testing revenue increased by 14.7% to €22.6m (2018: €19.7m). On an organic basis, which also excludes the impact of currency movements, Localization Testing was 11.2% higher compared to 2018. During the year in which we opened new Localization Testing operations in Katowice, the average number of production focused staff in Localization Testing was 532 (2018: 446), of which many are flexibly resourced positions to enable us to scale up and down with the demands of the projects. COVID-19 update and mitigation measures As in the case of Functional Testing, Localization Testing largely depends on staff being able to conduct their work from secure facilities, so is more exposed to shutdowns imposed by local authorities. We are consulting on a client by client basis to move to a working from home model allowing us to maintain testing through the crisis. This is resulting in some delays to certain projects and, where supported by government initiatives, some staff have been moved on to furlough arrangements until agreement can be reached with our clients. The market opportunity and medium term outlook We estimate the video games market for localization testing to be valued at c.$150m, which is approximately 70% outsourced. Whilst this is a less fragmented market, with roughly 10 service providers, we are the leading player in this segment for which scale, breadth of languages, and the agility of a larger player is critical to customers. Beyond the potential near-term disruption described above, we would expect Localization Testing to benefit from a stronger second half for AAA game releases as a result of the anticipated new console launches from Microsoft and Sony, and also from our expanded operations in Katowice, Poland and Ottawa, Canada. Player Support (11.1% of Group revenue for the year) Our Player Support service line provides multi-lingual, cost effective and flexible customer care services including managing communities of gamers across all forms of social media, within the games themselves and on the official game forums. 2019 performance As previously stated, Player Support has been consolidating the extremely strong growth of 2018 when it grew more than threefold, by investing in management talent and expanded facilities as its revenue increased marginally to €36.1m (2018: €35.9m). Organic revenues, which are on a constant currency basis, were down by 4.7% on the very strong comparative. During the year, the average number of service delivery people in Player Support was 1,343 (2018: 1,113). Manila has grown to be our single largest location for Player Support with our newer locations of Katowice and Mexico City showing promise. COVID-19 update and mitigation measures All of our Player Support teams around the world are now working from home as we have been able to agree to do so with our clients over the past few weeks. This service line is benefitting from increased video game playing since isolation measures have been in place, with a resulting increase in demand for its support. The market opportunity and medium term outlook Player Support operates in a large market, of which we estimate the value of video game support at c$1.2bn. Around 50% of this is currently outsourced and the market has been dominated by large, generalist customer support providers. We continue to aim to differentiate ourselves from these large customer support providers through our specialist video games expertise, extending our services to cover more ‘touch points’ of gamer engagement, and developing our technological tools, in order to make further progress in this market. GovernanceFinancial statementsSupplementary information 28 Our people, our culture Our people – at the core of what we do Our culture acts as the glue that binds all Keywordians around the world together – relaxed, professional and humble with a focus on doing the very best we can for our clients through each and every project they entrust us with. At Keywords, we encourage our people to engage with each other not only across our studios but across our regions and global network. Through knowledge sharing and open plan offices, we encourage our colleagues to be the very best at what they do. At the heart of our culture are our operating principles, the “Keywords Rule of 9”. Keywords Rule of 9 1. 2. 3. 4. 5. 6. 7. 8. Communication – We communicate openly and in a timely fashion. We do not hide things from colleagues or clients and we avoid office politics. Project Focus – We focus on projects, delivering the best we can for the benefit of each and every product we touch. Client Centricity – We act as an extension of the client’s organisation, moulding our processes and procedures to fit their requirements whilst sharing our knowledge of best practices. Empowerment – We empower our people to perform to the best of their ability by providing them with the resources and environment to do their jobs and the tools to track and measure their performance. Passion for Games – We are passionate about games and are proud of our role in helping to deploy them and we play an active role in the wider industry. Client Intimacy – We love our clients (all of them) and want the best for them at all times. Positivity – We have a “can do” attitude and rise to the challenge of solving our clients’ problems. Flexibility – We recognise the importance of flexibility and actively embrace it despite the obvious challenges. Flexibility is why we exist at all. Without it, clients would perform the tasks we do, themselves. 9. Learning & Growing – We learn at every opportunity and grow ourselves through experience, training and tackling new challenges. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 29 GovernanceFinancial statementsSupplementary information 30 Our people, our culture continued Our people At Keywords, an average of 7,424 full time equivalent employees make up our international, highly diverse and multicultural team and we are well balanced across our three regions; 3,322 in North and South America, 1,733 in Europe and 2,369 in Asia. The number and diversity of people and skills in our workforce allows us to be well placed to deploy these skills across the industry to meet all of our customers’ needs. We are constantly striving to provide great working environments for all our colleagues around the world. This can be seen in the central locations of our studios. Rather than seek out low cost locations and facilities, we feel the benefits of being able to attract the best talent in the most scalable manner outweigh any savings from lower costs of occupation. Our continued growth and reputation for consistently delivering good quality service, on highly agile engagements, to demanding deadlines, is testament to the Keywords culture, and the skills and commitment of our talented and games- passionate employees and collaborators. We are proud of the passion, commitment and professionalism of this invaluable resource of over 7,400 Keywordians which means there is a contribution from Keywords to most of the world's leading games – we would like to thank everyone involved for their valuable contribution to the continued success of the Group. Our people, with their drive and talent, make Keywords the global service provider that it is today, and it is essential for us that we continue to support our unique and diverse culture, which includes welcoming new faces and ensuring they feel just as supported and welcomed as their more established colleagues. Joining the Keywords family We are a highly acquisitive business and have some very strict criteria for our acquisition targets, by far the most important being cultural fit. Typically, if we think that there is a cultural misalignment then we won’t even open the dialogue with the company. Once we set our sights on an acquisition there is a process that we follow during the due diligence phase and after closing the acquisition to ensure the seamless integration of the new studio and most importantly the new colleagues to ensure that, from day one, they feel like part of the Keywords family, while, at the same time, appreciating the history and richness that the new company brings. A mark of our integration success is that over half our senior executive team joined us through acquired companies. Supporting our communities Together with our studios across 21 countries, we place the support of our local communities, including our employees, at the heart of what we do. Throughout 2019, Keywordians have raised funds of over €29,000 and supported various community and employee needs: • Studios took part in the Extra Life Gaming Marathon – raising awareness and funds for Children’s Miracle Network Hospitals in Canada. • In support of Montreal Children’s Hospital, we sponsored a booth at the Montreal 2019 Comic Con, featuring a gaming competition in exchange for a small donation to the hospital. up to €100,000 per year to match funds raised for community outreach and charitable initiatives so that we can continue to support our local communities. Electric Square raised money for a local charity (Pedal People) by taking part in the ‘Mud Monster’ cross-country race. Keywords employees in Manila organise a ‘blood drive’ as part of World Blood Donor Day 2019. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 31 €100,000 per year pledged to match funds raised €29,000 raised for charity in 2019 59 studios in 21 countries • Throughout the year, employees • Studios in Japan supported Second Harvest, an organisation dedicated to helping welfare agencies. We placed non-perishable food collection boxes across the studios to help support this cause through donations. In the UK, studios recently organised a Wellbeing Week for their teams. During the week, awareness around various aspects of health and welfare, including activities related to social, physical, emotional, financial, health and nutrition were promoted and conversations on these topics were encouraged. As part of this, external speakers delivered presentations, educational workshops were made available, and there were motivational talks too. In 2020, we want to do more to support good causes across the communities that we are a part of. With this in mind, Keywords has pledged up to €100,000 per year to match funds raised for community outreach and charitable initiatives so that we can continue to support our local communities. in Montreal donated games and books to the Welcome Hall Mission, allowing those less fortunate to enjoy these items. • Our Montreal studio purchased 1,000 poppies from the Royal Canadian Legion so that employees could proudly wear these poppies and show their support for veterans on Remembrance Day. • • In India, we partnered with Feeding India, a non-profit organisation that works to eradicate hunger, malnutrition and food wastage in the country. Together, we organised a memorable day for 250 children from the Eklavya Trust, an NGO that provides education and welfare for the under-privileged in Gurgaon, New Delhi. The children were served lunch and enjoyed gifts and goodie bags throughout. • Also in India, Keywordians took part in the Be a Super Hero – Save a Life! campaign with Datri, a non-profit organisation working towards saving lives by encouraging people to become stem cell donors. More than 250 employees attended the session and 50 enrolled for stem cell donation, becoming active partners of this life- saving initiative. Keywords Studios staff take part in the Montreal Pride Festival celebrations. Sustainable studios Sustainability is a core focus for Keywords; as it is for all of our studios across in all our territories. In 2019, we piloted a programme for one of our studios to become Carbon Balanced, with great success. Electric Square, a studio based in Brighton in the UK , achieved an official Carbon Balanced certification for 2019 after it offset its footprint through a local, Brighton based organisation, C-Level. Working with C-Level and its holistic approach, the studio supported projects that aim to bring businesses and forest people together on climate change. In working together with C-Level, Electric Square supported two projects to balance its carbon footprint: • Plan Vivo’s Communitree project in Nicaragua – one of the world’s leading community reforestation projects and; • The Hadza hunter gatherers in Tanzania – a project that won the UN’s Equator Award in 2019. Following this successful pilot, Keywordians at Electric Square now plan to work towards becoming ‘Certified B’, a certificate that celebrates a company for leading the way in building a sustainable and inclusive economy that works for everyone. B Corporations are classified as innovative, inspiring and changing the world. GovernanceFinancial statementsSupplementary information 32 Our people, our culture continued In parallel with Electric Square’s work, we are delighted to announce that Keywords Studios Spain completed its first year as a green energy only organisation last year; a huge milestone for our team in Europe. In Montreal, we formed a Green Committee for Keywordians to research the best practices for energy usage, cutlery options, and training and policy additions to make our studios more sustainable. As part of this, the Committee is looking at how best to recycle our surplus and redundant IT equipment in Canada and the United States. In India, Lakshya celebrated its 15th anniversary by holding a tree planting drive. Employees chose and paid for more than 500 plants, with a focus on saplings, which were in turn planted in the local area. All the proceeds from this “Go Green Initiative” were donated to a charity that feeds the disadvantaged in the region. Our studio in Florida, GameSim, is also focused on being more environmentally conscious. The studio provides its people with compostable and eco-friendly plates and utensils, as well as glass coffee mugs for easy re-use. They keep the lights turned off on one side of the office as a way to conserve energy as well as to offer varied lighting options for employees who prefer the dim light. When hardware becomes non-operational, they ensure it is recycled and when furniture is no longer needed, it is donated to Goodwill or The Salvation Army. Celebrating cultures In Japan, employees across several studios placed a strong emphasis on recycling and the environment. To encourage this, descriptive posters were hung on the walls and containers were provided throughout the studio to make it easier to separate garbage from biodegradable material. On top of this, air conditioning has not been used wastefully and the lights have been turned off at night. To save on paper waste, the studios reuse the backs of un-needed printed paper. Studios have also teamed up to launch an environmental quiz for all Keywordians, testing their knowledge and offering insights on how to improve practices. The first 100 employees to score well in the quiz earned a reusable shopping bag. Following these successful pilots and initiatives, we will look for other opportunities to help balance our emissions in 2020 and make Keywords a sustainable business. Encouraging excellence At Keywords, we encourage excellence in every aspect of what our Keywordians do. Every year, Lakshya Studios organises the Lakshya Art Challenge, a competition that encourages and develops game art talent within our business through 3D digital game and art and thus competition. For the first time, the entire Keywords Art service line was invited to take part, making the 2019 challenge bigger than ever before. Other studios that took part included Mindwalk and Red Hot CG. Congratulations must go to everyone that took part but especially to Wei Sheng, winner of the Character prize and Li Daiwei, this year’s winner of the Props Award. Working with our customers We are fortunate to be able to count 23 of the top 25 global games developers and all of the top 10 mobile games publishers by revenue as our customers. These companies expect the highest level of service and our diverse capabilities allow us to satisfy our customers’ needs every time. Increasingly, these customers prefer to outsource multiple services to one service provider, and this is where we are uniquely positioned to meet expectations. We offer our clients flexible, scalable solutions that match their overall requirements. Through our Embedded Services team, we partner with our clients to provide in-house solutions managed by Keywords. With content being produced across the 21 countries we operate in, Keywords is often tasked with the role of content moderation. Not all our regions want the same content and, as such, it is our people who tailor these different requirements across regions so that content is culturally appropriate for the end customer. 70+ international holidays observed, including National Day, Diwali, International Women's Day, Chinese New Year, Revolution Day, Independence Day, Day of National Unity and many more Honouring the backgrounds of our teams located across 21 countries and 4 continents 50+ studios supporting diversity and inclusion Supporting worthy causes Ten studios supporting social welfare programmes, assisting with homelessness, poverty, hunger and other difficult circumstances 9 studios supporting local schools and education needs 8 studios helping sick and injured kids Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 33 Supporting communities Keywordians volunteered countless hours in an effort to help our neighbours Uniting and inspiring, making communities stronger Ensuring player safety and wellbeing, our Player Support Agents and Community Managers have reported hundreds of online threats Raised funds for various community needs Some of the team at Electric Square in Brighton pictured playing retro Nintendo 64 games. GovernanceFinancial statementsSupplementary information 34 KPIs Financial KPIs We monitor our financial performance against a number of different benchmarks and these are set in agreement with the Board. Revenue growth Organic Revenue growth Gross margin Adjusted operating costs (pre IFRS 16) as a % of revenue 30.2% 15.5% 36.8% 21.7% 30.2% 15.5% 2019 2018 65.6% 2019 2018 10.1% 2019 2018 36.8% 38.2% 2019 2018 21.7% 20.7% Reasons for choice Quantifies the growth in revenue from our operations on a reported basis. How we calculate Increase year on year in reported revenue. Due to the number of acquisitions the Group makes and because it integrates them quickly, this provides the most meaningful measure of underlying revenue growth. The Board believes this to be a consistent measure of trading performance. The Board monitors overheads to ensure the operating costs of the Group are in line with the level of business being generated. Calculated by adjusting the prior year revenues comparison, by adding pre-acquisition revenues for the corresponding period of ownership, as presented in the current year results, and applying consistent foreign exchange rates in both years. Revenues from services supplied to customers less cost of sales, as a percentage of revenue. Administration expenses, before non-operating costs including share option costs, costs of acquisitions and integration, amortisation, depreciation, and including bank charges, as a percentage of revenues. Objectives The Group aims for continued revenue growth and development. The Group aims to achieve like for like growth materially ahead of market growth. The Group aims for gross margins in line with historic norms. The Group will continue to seek to control these costs closely and in line with the level of business being generated. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 35 Adjusted EBITDA margin (pre IFRS 16) Adjusted operating profit margin 15.2% 13.2% Adjusted cash conversion rate 79.0% Growth in adjusted EPS 7.2% 2019 2018 15.2% 13.2% 17.4% 2019 2018 15.5% 2019 2018 79.0% 81.9% 7.2% 2019 2018 45.9% Provides an indication of how we are performing both internally and relative to our peers. The Board believes this to be a consistent measure of trading performance, aligned with the interests of our shareholders. Measures operating cash generation and our capacity to pay dividends, service debt and fund acquisitions. Comprises Operating profit adjusted for amortisation of intangible assets, share option expense and costs of acquisition and integration, as a percentage of revenues. Adjusted free cash flow before tax as a percentage of the adjusted profit before tax. The calculation is described in more detail on pages 139, 142 and 143. Comprises of EBITDA (Operating profit, adjusted for amortisation of intangible assets, depreciation, while deducting the share of profit from associates and bank charges) adjusted for share option expense, costs of acquisition and integration and non-controlling interest, as a percentage of revenues. Reports the underlying profit growth generated on a per share basis, demonstrating the value being created for shareholders. Also links to the Group’s dividend policy and gives an indication of our ability to pay dividends from underlying profit. The Adjusted profit after tax comprises the Adjusted profit before tax, less the Tax expense as reported on the Consolidated statement of comprehensive income, further adjusted for the tax arising on the bridging items to Adjusted profit before tax. The Adjusted earnings per share comprises the Adjusted profit after tax over the non- diluted weighted average number of shares as reported in note 8. The Group aims to increase margins through operational efficiencies. The Group aims for margins in line with historic norms. Cash generation and working capital management will remain a key focus. The Group aims for continued growth in Adjusted earnings per share. Reasons for choice How we calculate Objectives GovernanceFinancial statementsSupplementary information 36 Financial and operating review Strong organic growth and investment in the platform Group performance 2019 has seen the Group deliver another year of significant increases in revenue driven by strong organic growth supplemented by targeted acquisitions which have further extended the Group’s service offering, market penetration and geographic reach. Revenue Revenue for 2019 increased by 30.2% to €326.5m (2018: €250.8m). This was driven by strong Organic Revenue growth of 15.5% with particularly good performances in Game Development and Functional Testing which delivered organic growth of 36.4% and 37.0% respectively and represented an acceleration of the strong growth experienced in the first half of the year. The organic growth was supplemented by the full year impact of the acquisitions made in 2018 and 8 targeted acquisitions in 2019 to further build our platform as the ‘go to’ service provider to the video games industry. Gross margin Gross profit for the year was €120.2m (2018: €95.8m) representing an increase of 25.5%. The gross profit margin declined by 1.4 percentage points to 36.8% (2018: 38.2%) reflecting the investments made to support the growth in the business, including the costs associated with the rapid recruitment and increase in staff training in the Functional Testing service line. This combined with the dilutive impact of an underperforming fixed price contract which was completed at the end of 2019 and is therefore not expected to impact as we move into 2020. We have also continued to invest in a number of early stage technology businesses which are not yet generating revenue and have therefore negatively impacted on margins in the year. Operating costs Adjusted operating costs exclude depreciation, amortisation, share option expenses and one-time costs related to acquisitions. For 2019, adjusted operating costs increased by 20.4% to €62.6m compared with €52.0m for 2018. On a pre IFRS 16 basis, adjusted operating costs were €70.7m, representing 21.7% of revenue, an increase of 1.0%pts compared to 2018 and above our Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 37 medium-term target of ~20%. This was driven by investments during the year to expand our facilities to accommodate the strong growth as well as in our operational capability with strengthened management, support functions and infrastructure to support the Group’s ongoing growth. EBITDA Adjusted EBITDA, which adjusts for the items noted above, increased 31.7% to €57.6m compared with €43.7m for 2018. Of the increase, €8.1m relates to the adoption of IFRS 16. Excluding the impact of IFRS 16, adjusted EBITDA increased 13.2% to €49.5m compared with €43.7m for 2018 resulting in a decline in Adjusted EBITDA margin (pre IFRS 16) of 2.2%pts to 15.2% (2018: 17.4%) reflecting the reduction in gross margin and the investments noted above. Net finance costs Net finance costs increased to €4.2m compared to €0.5m in 2018. €1.7m relates to net foreign exchange loss recorded within financing cost which is described in more detail below (2018: €0.8m gain) and €0.7m of the increase represents the additional interest recognised as a result of the adoption of IFRS 16. Underlying interest costs (excluding IFRS 16 interest, deferred consideration discount unwind and foreign exchange) increased by €0.4m to €0.9m (2018: €0.5m) reflecting an increase in net debt of €17.5m to €17.9m at the end of 2019 (2018: €0.4m). Alternative performance measures The group reports certain Alternative performance measures (APMs) to present the financial performance of the business which are not GAAP measures as defined by IFRS. Management believes these measures provide valuable additional information for the users of the financial information to understand the underlying trading performance of the business. In particular, adjusted profit measures are used to provide the users of the accounts a clear understanding of the underlying profitability of the business over time. A breakdown of the adjusting factors is provided in the table below: Share option expense Costs of acquisition and integration Amortisation of intangible assets Foreign exchange and other items Years ended 31 December 2019 €m 9.8 4.3 7.3 2.1 23.5 2018 €m 4.1 5.3 6.9 (0.5) 15.8 2m options were granted under the Share Option scheme and Long Term Incentive Plan in 2019. This, together with grants from previous years, has resulted in a non-cash share option expense of €9.8m in 2019 (2018: €4.1m). The increase is largely due to an increase in the fair value charge (see note 17 on pages 108 to 110) for the shares granted in May and September 2019 compared to previous years. The increase is largely due to an increase in the fair value charge (see note 17 on pages 108 to 110) for the shares granted in May and September 2019 compared to previous years. One-off costs associated with the acquisition and integration of businesses of €4.3m were incurred in the period (2018: €5.3m). This relates to both the integration costs of acquisitions made in the prior year and the acquisition and integration costs of the 8 acquisitions made in 2019. Amortisation of intangible assets amounting to €7.3m was broadly in line with 2018 (2018: €6.9m). Foreign exchange and other items amounted to a net charge of €2.1m (2018: net gain of €0.5m). Keywords does not hedge foreign currency profit and loss translation exposures. The effect on the Group’s results of movements in exchange rates and the foreign exchange gains and losses incurred during the year mainly relate to the effect of translating net current assets held in foreign currencies. This resulted in a net foreign exchange loss of €1.7m in 2019, recorded within financing cost (2018: €0.8m gain). A more detailed explanation of the measures used together with a reconciliation to the corresponding GAAP measures is provided in the APMs on pages 135 to 143. Profit before taxation Profit before tax for the year was €17.4m (2018: €22.1m). Adjusted Profit Before Tax, which adds back acquisition and integration expenses, share option charges, foreign currency exchange movements and amortisation of intangibles (as noted above) increased by 7.9% to €40.9m compared with €37.9m in 2018 representing a reduction in net margin of 2.6%pts to 12.5% (2018 15.1%). Taxation The tax charge in the period was €7.5m including a one off €0.5m tax charge relating to a legacy pre acquisition tax issue (2018: €7.2m). This represents a reduction in the Adjusted Effective Tax Rate to 22.4% of Adjusted Profit Before Tax (2018: 22.8%, as re-stated to reflect the tax impact of the bridging items to Adjusted profit before tax). GovernanceFinancial statementsSupplementary information 38 Financial and operating review continued Tax governance The Group takes a balanced approach to the management of its tax affairs and has a tax policy which is approved by the Board. Our overall strategy is to meet our tax obligations and ensure that long term shareholder returns are responsibly optimised by structuring our business and transactions in a tax efficient manner, taking into account reputational factors. Tax risks are regularly reviewed by the Board and the Audit Committee. The Group’s approach in relation to the management of tax issues is to ensure that: • We comply with all applicable laws, disclosure requirements and regulations in the territories in which we do business; • All tax positions adopted are adequately and fairly disclosed in tax filings; • We have an open and transparent working relationship with relevant tax authorities around the world; • Where disputes arise with tax authorities, we seek to reach a resolution as soon as possible in an open and constructive manner; • Where considered appropriate, the Group takes advice from professional firms; • Tax risks are appropriately managed in accordance with the tax policy; and • Our tax planning is aligned with the Group’s commercial and business activities and the tax treatment of business transactions is optimised. Basic earnings per share Basic earnings per share were down 34.2% to 15.23c (2018: 23.16c) reflecting the reduction in the statutory profit after tax and a 1.2% increase in the weighted number of shares in issue. The denominator used for these calculations includes the shares which will be issued for the outstanding deferred consideration for acquisitions (see note 16 on pages 106 to 108). Adjusted earnings per share which adjusts for certain items, including acquisition and integration expenses, share option charges, foreign currency exchange gains/losses and amortisation of intangibles was 48.78c an increase of 7.2% over the prior year (2018: 45.50c). Adjusted for the impact of IFRS 16, adjusted earnings per share was 49.44c representing an increase of 8.7%. Acquisitions During the year the Group acquired 8 businesses generating annualised revenues in the year of acquisition of €13.2m. Total potential consideration amounted to €19.6m of which €4.0m will be satisfied through the issue of shares. Cash spend on these acquisitions amounted to €13.1m (net of cash acquired). As at the end of 2019 there was €6m of deferred and contingent consideration payable in 2020 in respect of completed acquisitions. Going forward we will continue to execute our targeted and disciplined approach to M&A to build out our global services platform to enhance further our position as the ‘go to’ provider for development services to the video games industry. IFRS 16 - Leases The new leasing standard, IFRS 16, has been effective from 1 January 2019 and has been adopted from that date with no restatement of prior year comparatives required. This has resulted in a number of leases (largely property leases) that were previously accounted for as operating leases (expensed as incurred) now being capitalised as Right of Use (ROU) Assets within fixed assets and depreciated over the lease term with a corresponding lease liability and interest charge. The new standard has not had a material impact on either Adjusted profit before tax or the underlying net cash flows of the business, but it has changed the presentation of the profit and loss account, the cash flow statement and the balance sheet as follows: • On transition, fixed assets increased by €23.1m; • The operating lease charge of €8.1m has been replaced with depreciation on the ROU assets of €7.8m and an interest charge on the corresponding lease liability of €0.7m; • In 2019 this has increased EBITDA by €8.1m and resulted in a reduction in Adjusted profit before tax of €0.4m. Cash flow and net debt The Group generated Adjusted EBITDA of €49.5m in 2019, an increase of €5.8m from €43.7m in 2018. This was offset by an increase of €5.5m in the amounts due in respect of multi-media tax credits (MMTC) and Video Games Tax Relief (VGTR). MMTC’s that are earned in the year of production, and are collected a year in arrears. The increase is therefore a timing difference driven primarily by the growth in revenue in the Functional Testing business in Canada and the Game Development business in the UK, where the credits are earned. This was partially offset by an improvement in Working capital and other items of €3.2m. Investment in PPE amounted to €13.1m (2018: €9.4m) reflecting the growth in the business, the expansion of facilities in Montreal, Katowice, Manila, Brighton, Tokyo, São Paulo and New Delhi and continued investment in the IT systems and infrastructure to support the Group platform. Interest payments were €1.4m in the year (2018: €0.5m), which reflected the increase in net debt and the fees associated with the refinancing of the Group’s Revolving Credit Facility. Tax payments amounted to €13.3m and included €2.5m in respect of the settlement of a prior tax balance of which €2m was accrued at the end of 2018. This resulted in Free Cash Flow of €13.7m, a reduction of €6.9m on the prior year. Adjusted Cash conversion rate (which adjusts for capital expenditure that is supporting growth in future periods) was 79% (2018: 82%). Cash spent on acquisitions totalled €27.8m including €14.7m of deferred consideration in respect of prior year acquisitions. In addition, acquisition and integration costs amounted to €3.8m and dividend payments amounted to €1.2m resulting in an underlying increase in net debt of €18.3m (2018: €11.5m). This, together with foreign exchange and other items, resulted in a closing net debt of €17.9m (2018: €0.4m). Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 39 2019 €m 49.5 (5.9) (1.7) (13.1) (0.4) 28.4 (1.4) 27.0 (13.3) 13.7 (27.8) (3.8) (1.2) 0.8 (18.3) 0.8 (17.5) (0.4) (17.9) Change €m 5.8 (5.5) 3.2 (3.7) 1.2 1.0 (0.9) 0.1 (7.0) (6.9) (1.1) 0.7 (0.1) 0.6 (6.8) 0.8 (6.0) 2018 €m 43.7 (0.4) (4.9) (9.4) (1.6) 27.4 (0.5) 26.9 (6.3) 20.6 (26.7) (4.5) (1.1) 0.2 (11.5) – (11.5) 11.1 (0.4) Cashflow statement Adjusted EBITDA pre IFRS 16* MMTC and VGTR Working capital and other items Capex – property, plant and equipment (PPE) Capex – intangible assets Operating cash flows Interest paid Free cash flow before tax Tax Free cash flow M&A – acquisition spend M&A – acquisition and integration costs Dividends paid Shares issue for cash Underlying increase in net debt FX and other items Increase in net debt Opening net cash / (debt) Closing net cash / (debt) * Alternative performance measures (for full definitions and explanations, please see pages 135 to 143). Balance sheet and liquidity The Group funds itself primarily through cash generation and a syndicated revolving credit facility (RCF). In October 2019, the Group successfully agreed a new RCF provided by Barclays Bank plc, Citibank N.A., HSBC and Silicon Valley Bank, for an initial €100m, with an Accordion option to increase this up to €140m. The RCF matures in October 2022 with an option to extend it for up to a further 2 years. The Group has a resilient operating model and the ability to flex the cost base to meet the potential disruption introduced as a result COVID-19 pandemic, particularly in the Localization, Testing and Audio service lines which have a higher proportion of variable costs to the other service lines. Given the current environment, the Group has taken steps to preserve cash by increasing the focus on costs, eliminating discretionary expenditure and delaying certain capital projects. The Keywords Group had €59.5m drawn under the RCF at year- end 2019. The majority of Group borrowings are subject to two financial covenants that are calculated in accordance with the facility agreement: Dividend Despite the Group’s resilient financial position and the modest size of the dividend, the Board believes it would be inappropriate to recommend a final dividend in the current circumstances. • Leverage: Maximum Total Net Borrowings to Adjusted EBITDA ratio of 3 times; and • Interest cover: Minimum Adjusted Operating Profit to Net Finance Costs ratio of 4 times. The Group exited 2019 with a strong balance sheet, with net debt (excluding IFRS 16 leases) of €17.9m as at 31 December 2019 representing a net debt to Adjusted EBITDA ratio of 0.4x. The Group has good liquidity with cash and undrawn committed facilities of around €82m at the end of December 2019. In addition, as a precautionary measure we are in the final stages of agreeing the exercise of the accordion feature under the RCF which would provide a further €30m of committed facilities. Jon Hauck Chief Financial Officer 16 April 2020 GovernanceFinancial statementsSupplementary information 40 Responsible Business report Dear shareholders Keywords is committed to conducting our business responsibly, operating to the highest standards of honesty, integrity and ethical conduct. Driven by this, we take seriously our wider corporate responsibility, the role the business plays in society and our impact on the environment. Our Remuneration Committee is also considering the best ways to incorporate our Responsible Business approach into its remuneration structure as we develop these measurable commitments. We plan to set actions against these commitments, develop additional KPIs and set short/medium term targets. In 2019, we made a concerted effort to deliver on these responsibilities. As a first step, we have worked with an independent third party to carry out a materiality assessment on a range of ESG areas with our senior team. The process included a materiality workshop, as part of our strategy week, providing the Board and senior executives with the opportunity to identify and debate matters of material importance to them based on business impact. Some of the issues commonly identified included customer retention, successful integration, cyber security and data, culture, service delivery, employee engagement and employee retention. Other issues were debated such as health and safety, bribery and corruption and climate change, recognising their importance to our stakeholders. This approach has resulted in a first stage internal materiality matrix for Keywords to build on in 2020, as part of our plan to engage with our key stakeholders – shareholders, employees, customers, suppliers and community participants – gaining their views and learning what they expect from us. To fulfil this aim and as part of our commitment to being a responsible business, the Board has appointed Jon Hauck, Chief Financial Officer, to oversee this area. This will ensure that our business strategy, set out by our Board and senior management, will become aligned with the Responsible Business goals and expectations of our key stakeholders. I would like to thank all of our 7,400+ Keywordians, across all 21 countries for upholding the highest standards through the “Keywords Rule of 9” as we engage and grow with our work colleagues, our customers and our communities. I am delighted to see so many Keywordians giving of their time and energies in support of the numerous initiatives so many of us feel strongly about, be they focused on our work environments, our wellbeing, gaming industry, not for profit programmes, educational initiatives or community outreach. We recognise that we can always do more and thus will continually seek to improve on our commitments to our environmental and social agenda. Continuing to create the right culture is core to Keywords' future sustainability. At the heart of our culture are our operating principles, the “Keywords Rule of 9”. I encourage all Keywordians to embrace these principles as we do the very best we can for our customers and those with whom we interact. Andrew Day Group Chief Executive Officer 16 April 2020 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 41 Keywords’ approach to responsible business is framed by a continuous drive to conduct our business with the highest standards of honesty, integrity and ethical conduct. Health, safety and wellbeing Keywords is committed to providing a safe and healthy workplace for all of our employees. We fully comply with national legislation on Health and Safety requirements and provide information, education and training. For wellness, we provide access to Employee Assistance Programmes in our larger locations and other locations arrange programmes locally, ranging from yoga classes to healthy eating to stress management. We welcome employee input into programmes and share initiatives across the organisation as we seek to meet the changing needs of our people. Diversity and inclusion Human talent is our most valuable resource and as a business we thrive on diversity, celebrate uniqueness and work as teams whether we are physically together in one of our 50+ studios around the world or working together virtually. We continually monitor ourselves in line with our policies to ensure we provide a working environment that treats people with dignity and respect, is free from discrimination and promotes fairness and equal opportunities. We recognise that the video games industry traditionally attracts more male than female employees, and at the end of December 2019, the Group was composed of approximately 25% women and 75% men. This distribution is mainly due to the higher proportion of males in many parts of game development. Keywords’ Board of Directors includes one woman out of seven Directors, i.e. 14%. Ethics The Group is committed to the highest levels of integrity and accountability and the prevention of bribery and corruption. We have also engaged with an external compliance software vendor to help with the rollout, training and awareness of our anti-bribery and corruption policy, in addition to other policies and eLearning activities. In 2018, we adopted a whistleblowing policy that has been rolled out globally. This policy allows employees wherever they are to raise any concerns about possible financial or other irregularities confidentially. During 2019, 3 whistleblowing disclosures were reported, with all of these investigated and satisfactorily resolved. Human rights The Board has adopted a Modern Slavery Policy since 2017 and our annual Modern Slavery statement is published on the Company website. We operate to international standards and principles including the International Bill of Human Rights, the UN’s Guiding Principles on Business and Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the Children’s Rights and Business Principles. The Group continues to make reasonable endeavours to ensure all employees and agents within our supply chains are not subject to any form of forced, compulsory/bonded labour or human trafficking through our Modern Slavery Policy and the accompanying Supplier Code of Conduct. In 2020, we started the process to develop a materiality matrix and build on our plan to engage with our key stakeholders; the results of which will form the basis of our responsible business goals to be reported next year. By embedding these goals in our business strategy, we believe Keywords can build a more robust and sustainable model for all our stakeholders (shareholders, employees, customers, suppliers and community participants). People and development We value our people; we trust them and work to support their passion to provide the best service for each project and each customer. However, there is always more that can be done to invest in our people and we continue to focus on making improvements with training, benefit schemes and career planning. Across Keywords, we provide training and development programmes appropriate to the service line. Examples of this in the Art Creation service line include our Lakshya Academy in India that teaches classically trained artists to work on video games, while in Localization we are developing a Master’s programme in partnership with a university in Milan. Our Localization and Localization Testing service lines continue to spearhead the ‘level up’ development programme that provides a path from tester to project manager and above. Customers We are fortunate to be able to count most of the top global games developers as our clients. These companies expect the highest levels of service and confidentiality. At the heart of our culture is our commitment to quality, reliability and integrating with our customers' processes that combined promotes long-term relationships. GovernanceFinancial statementsSupplementary information 42 Responsible Business report continued Employee engagement Our annual engagement survey took place in November with around 4,200 of our employees responding, a 54% response rate. In addition to the insights into how our people feel about working at Keywords, we sought input on improvements and feedback on community matters that are important to employees. The survey highlighted three areas of strength (Keywords provide the tools and resources needed for employees to be productive, high sense of teamwork and pride within the teams, and Line Managers are engaged with their team and give regular feedback) and three areas for improvement in 2020 (more opportunities to give back to the community, career development and growth within Keywords, and increased recognition for performance). As changes are implemented and progress demonstrated, we would expect to improve our response rates. We have set up focus groups for 2020 which will look at both messages and next steps from the survey, as well as initiatives to increase engagement. Communities In 2020, we want to do more to support good causes across the communities that we are a part of. With this in mind, Keywords has set aside a central fund of €100,000. This can be applied to match funds raised for community outreach and charitable initiatives by our local teams around the world. In this one way, we hope to encourage even more support for our local communities. Some of the many proud examples of our community efforts in 2019 include activities in Canada, India, UK and Japan, with more detail set out on pages 30 and 31. Environment Keywords is committed to minimising its impact on the environment. As a business, we are responding to the demands of our people to build a sustainable model which today impacts the environment mainly through our studio configuration and business travel. We accept that in a global organisation our people need to travel but we will try to limit this through the use of collaborative tools such as video conferencing wherever possible and when we do fly our policy is for everybody to travel in economy/coach class. Most of our studios have local initiatives to recycle and limit the use of plastics. In 2019, we supported two programmes that focused on carbon balance and green energy (more detail set out on pages 31 and 32. In 2020, Keywords is committed to reviewing its global operations, with a focus on identifying, assessing and measuring our energy and greenhouse gas emissions. We are also committed to a group-wide wide environmental policy that will align our business strategy to measurable environmental goals. Non-financial information statement Reporting requirement Environmental matters Social and employee matters Respect for human rights Anti-bribery and corruption Business model Description of principal risks and impact of business activity Non-financial key performance indicators Policies and standards which govern our approach • Environmental statement • Business travel policy • Recruitment policy • Employee handbook • Diversity and equal opportunity • Grievance policy • Employee assistance programme • Health and safety policy • Data protection • Supplier Code of Conduct • Modern Slavery Policy • Anti-bribery and corruption policy • Whistleblowing Page reference Page 40 Responsible Business Page 22 Our strategy Page 28 Our people, our culture Page 40 Responsible Business Page 40 Responsible Business Page 40 Responsible Business Page 54 Audit Committee Page 18 Business model Page 40 Responsible Business Page 45 Principal risks and uncertainties Page 22 Our strategy Page 40 Responsible Business Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Board engagement with our stakeholders 43 We believe that proactively engaging with and acting on the needs of our key stakeholders is critical to a culture and strategy that achieves long-term sustainable success. Section 172(1) statement The Directors have acted in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, in line with Section 172 of the Companies Act 2006. This section of the Strategic Report describes how the Directors continue to have regard for: • • • • • the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and • the need to act fairly as between members of the company. The Directors are fully aware of these duties and responsibilities, and have set out below how they are fulfilling those duties in respect of each of their key stakeholders. In line with our Responsible Business report (more detail on pages 40 to 42), the Board identifies the Group’s key stakeholders as shareholders, employees, customers, suppliers and community participants, and it is committed to effective engagement with these stakeholders. Shareholders Our Annual General Meeting (AGM) is an important part of effective shareholder communication, with all shareholders having the opportunity to hear from the Company and ask questions. The Board welcomes the opportunity to engage with our shareholders, typically providing a brief update presentation at each AGM and with all Directors available to answer questions. It would, however, welcome greater participation from shareholders and, as some are unable to physically attend the AGM, the Company is looking at other ways to broaden the participation of all shareholders. The Company also intends to increase the audience of the Capital Markets Day by broadcasting these events to selected stakeholders in order to encourage greater engagement. Throughout the year the CEO and CFO meet with shareholders, with the Board receiving regular updates from both the CEO and CFO on these engagements. Additionally, both the Senior Independent Director and the Chairman have met and will continue to meet, with institutional shareholders to discuss updates on the Group including strategy, remuneration and other key issues that are vital to these stakeholders in the future. An example would be the emerging importance to some stakeholders of ESG. Employees The Board receives regular updates in relation to employees, in addition to the results from the Group’s global employee survey (further details on page 42). During 2019, the Board engaged with the Group’s employees through a number of Board visits to key locations. The Group holds a series of annual strategy days and, as the Board is in attendance, it is able to get both formal and informal instant feedback from the Senior Management team. Customers During the year, the Board receives updates from senior management on key customer issues via the business reviews. The CEO and selected members of the Board also meet existing and potential clients at the key video games events (e.g. E3, GDC, Gamescom, Tokyo Games Show) to seek their input and gauge their current and future requirements. The CEO independently also regularly meets with the top echelon of key customers to strengthen relationships. Suppliers The Board recognises the important role that our suppliers play in helping us deliver our services, as this group comprises individual contractors in addition to a range of support service suppliers. In respect of our broader base of suppliers, the Board has developed a Supplier Code of Conduct, complemented by the adoption of a Modern Slavery Policy since 2017. Community participants The Board recognises the need to increase our community engagement and to support the good causes that we are part of. With this in mind, Keywords has pledged up to €100,000 per year to match funds raised for community outreach and charitable initiatives so that we can continue to support our local communities (further details on pages 30 and 31). GovernanceFinancial statementsSupplementary information 44 Board engagement with our stakeholders continued Decision making We set out below the Group’s remuneration policy and two examples, CEO pay ratio and Executive Director shareholding guidelines, of how the Directors have had regard to the matters set out in section 172(1)(a)-(f) when discharging their duties under section 172 and the effect of that on certain decisions taken by them. Remuneration policy The Group’s Remuneration Committee, on behalf of the Board, is responsible for the determination and implementation of the Directors’ remuneration policy, applicable to Executive and Non-Executive Directors. The Remuneration Committee Chair and other members of the Remuneration Committee engaged with a number of our large shareholders and institutional shareholder bodies during 2018 and 2019 in relation to the review of the Directors’ remuneration policy. Engagement with shareholders directly or through selective ‘Remuneration Policy Issues’ seminars plus regular dialogue and input from our advisers, Mercer Kepler, continued during 2019 in respect of the implementation and operation of the policy. The Board believes regular dialogue with our shareholders is critical to ensure our remuneration policy aligns with their expectations wherever possible, and we found this engagement meaningful and useful in achieving that aim. It was clear from the dialogue with shareholders that there was a considerable desire for companies to simplify remuneration structures and for the total remuneration outcome to be transparent and aligned to shareholder experience. The Chair also regularly meets with our primary regulators to understand their expectations, and to discuss our remuneration framework and practices and demonstrate how they promote sound and effective risk management. CEO pay ratio Whilst not required under AIM disclosure regulations, both shareholder and other advisory bodies recommended that companies do disclose on an annual basis the CEO pay ratio in a form that is both transparent and understandable. In addition, it was considered important to ensure that the CEO pay ratio was in fact well within Keywords Studios accepted guidelines compared to all employees of the Group. A decision was taken by the Remuneration Committee and ratified by Keywords’ Board to include such disclosure in the 2019 Annual Report. More detail on the Keywords’ CEO pay ratio can be found on page 67. Executive Director shareholding guidelines Also not required under AIM disclosure regulations is a guideline for shareholdings by the Keywords’ Executive Directors. After consultation with shareholders and advisers, it was decided by the Remuneration Committee to introduce such a policy in 2020 and this was ratified by Keywords’ Board. This is detailed in the Remuneration Section of this report on page 60. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Principal risks and uncertainties 45 The principal risks to which the Group is exposed are set out below, together with details of their potential impact; the likelihood of occurrence (on a scale of 1 to 3, with 1 being the most likely); an indication of whether the trend in the risk exposure is increasing, decreasing or broadly unchanged; and the actions taken to mitigate the risk. The principal risks associated with the Group's strategy are divided into: • Those specific to the Keywords Group and its strategy; • Industry-related risks; and • General business risks for any international company. Group and strategy risks Likelihood Actions Trend 3 3 2 3 Acquisitions and Integration risks Failure to deliver services Cross contamination risk Client concentration risk Keywords has an active acquisition agenda to support its strategy of becoming the ‘go to’ global provider of services to the video games industry. Managing such acquisitions successfully and embedding the Keywords culture is a crucial ingredient of success. Failure to do so could result in the business not achieving the expected financial and operational benefits and adversely impact growth, profitability and cash flow. Since IPO, the Company has involved a broader number of senior managers in the acquisition and integration process, building on the considerable experience that exists at Board and senior management level, thus providing further bandwidth to identify, execute and integrate acquisitions effectively. Most of Keywords’ services are of a time-critical nature with delays or service delivery failures potentially impacting the development or launch plans for games. Timely delivery and the resourcing flexibility to enable delivery to tight deadlines has been an integral part of the Company’s modus operandi, and Keywords’ approach to project management is applied across the Group. As the Group succeeds in delivering multiple services to the same customers, so the risk of failure in one service line contaminating the relationship with the customer across the other service lines increases. Whilst the introduction of co-development adds to this risk in some respects, it also helps to mitigate it. Adhering to Keywords’ strong standards of delivery and efficient communication across service lines is key to managing this risk. The Company’s client base principally comprises global game companies whose revenues are in the billions and hundreds of millions of dollars. Our top five customers account for 28.1% (2018: 25.6%) of the Company’s revenues. These companies have exacting standards and demand a high quality of service. Any failure in this regard or breakdown in the relationships at the top level could cause considerable damage to the business. The potential impact is partially mitigated through the Company’s highly flexible resource base and its expansion continues to reduce its exposure to any single large client, with no single customer accounting for more than 6.2% of revenues. Links to Strategic Pillars: Trend: Building our platform Selective acquisitions Organic growth and cross selling No change Increase Decrease GovernanceFinancial statementsSupplementary information 46 Principal risks and uncertainties continued Group and strategy risks continued Likelihood Actions Trend 2 3 2 2 Keywords floated on AIM in July 2013 with an expressed set of objectives of growing the business organically and by acquisition. Should the Company lose the confidence of investors, this will affect its ability to raise money for or place shares to pay for acquisitions. The Company makes every effort to communicate regularly with investors via announcements and face-to- face contact. This effective communication of the continued opportunities for growth in the sector, how the Group continues to execute on its stated strategy and successfully integrate the businesses it acquires, should continue to maintain the confidence of its investors. In addition, having extended the size and term of our revolving credit facility, the Group has a good mix of equity and debt funding which gives it the flexibility and headroom to invest in the business. Keywords has grown rapidly and it is important that global financial controls are in place to ensure smooth, timely and accurate reporting of financial results to satisfy our external reporting obligations as well as the Board. Failure to accurately report or forecast financial results through error or fraud would damage the Group’s reputation. Therefore, the Group has invested and continues to invest in its financial reporting function to facilitate strong reporting and management control as it grows. In 2019, the Group appointed a new Head of Internal Audit to further drive improvements. Keywords' management structure has been fundamental to the Group’s success, enabled by embedding a Group culture that binds the teams together, with a common purpose and set of standards. We constantly work to develop and incentivise our people and to support their passion to perform the best service for each project and client, with regular staff surveys undertaken too. In addition, special emphasis is placed on workplace harmony and the prevention of any forms of discrimination, harassment, or malpractice in the workplace, recognising that any sense of dissatisfaction can be very disruptive. As a separate dimension, failure to attract, retain or develop high quality entrepreneurial management across the business could impact on the attainment of strategic objectives. The Group is focused on these areas with the implementation of globally managed service lines, management development and remuneration programmes, incorporating long and short-term incentives. But with an ever increasing workforce this becomes more demanding. A material failure to comply with applicable legal and ethical standards could result in penalties, costs, reputational harm and damage to relationships with suppliers and customers. The Group promotes a culture of “Doing the right thing” in all activities. Business conduct guidelines are in place and are supported by more detailed policies and procedures where needed. Financial performance – failure to meet expectations Inadequate financial and operational controls Failure to manage human resources / talent effectively Non-compliance with legal and ethical standards Links to Strategic Pillars: Trend: Building our platform Selective acquisitions Organic growth and cross selling No change Increase Decrease Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 47 Industry-related risks Likelihood Actions Trend 2 2 3 Breaches to Technology and information security Regulation on video games Tax credits risk General business risks The Company uses various third party and proprietary tools and technologies for process control and productivity purposes. Continued investment in these tools is important to ensure the Group’s effectiveness. New technologies for automated testing, machine translation and crowd sourcing could pose a threat to the Group in the long-term. The Company participates directly with customers in various pilot programmes for new technologies to keep abreast of the state of the art. This is further underpinned through the formation of Keywords Ventures which is focused on new, emerging technologies that may impact the Group in the future. The industry requires the highest standards of security within a company offering services such as Keywords. Cyber security breaches may lead to piracy, disruption of customers’ marketing plans, loss of competitive edge and could result in compensation claims. Keywords maintains physical and data security policies and procedures which are regularly audited by its larger customers. Changes in regulation on video games, such as those seen in the Chinese market which imposed curfews on minors, could result in the delay or cancellation of video games by our customers. In relation to the Chinese market, Keywords has limited revenue exposure to games destined solely for the Chinese market. In addition, any potential impact is partially mitigated through the Company’s diverse revenue base (no single client larger than 6.2% (2018: 5.7%)). The Company receives multimedia tax credits (MMTC) in Canada and video games tax relief (VGTR) in the UK relating to qualifying costs in those markets. These tax credit regimes are designed to promote growth and investment in the relevant regions. Any reduction or cancellation of these tax credits would increase the cost base of the business and make the business less competitive. The Group works closely with regulators and governments in relation to these tax credits and has been given no indication that these tax credits will be removed in the medium term. The Group also retains the ability to move to other operating centres if material changes were made. Likelihood Actions Trend 1 3 2 Sudden business interruption Global political risk and uncertainty Currency risk Keywords is a global business and needs to minimise business interruptions and be able to continue servicing customers. This threat could be internal such as a major failure in its IT systems but also external such as the Group experienced and managed during the 2011 Tokyo earthquake and tsunami or currently with COVID-19 (see below). The Group’s multiple, full-service, delivery hubs provide for a good level of contingency and, supported by business continuity plans, the effects of such disasters can be managed. Since the year end the Group’s operations have been significantly impacted by the COVID-19 pandemic. This has resulted in restrictions being put in place requiring most of the Group’s studios to be temporarily closed. The Group has been able to move over 5,500 employees to work from home arrangements and whilst this has resulted in some short term disruption it has allowed production to continue across most of the Group’s operations. In consultation with clients, the Group continues to make preparations to move more of the production staff to this model, particularly in the Testing business (Functional and Localization Testing) with the aim of establishing a new model of testing from home, where testing had previously been conducted from secure facilities. It is very difficult to predict how long the studio closures will be in place for, but demand for the Group’s services remain robust, the broader video games industry has historically shown resilience in times of economic downturn and the Group has the ability to flex its cost base in response to a reduction in trading activity. Further details on how the Group is responding to the challenge faced by COVID-19 is provided in the Chief Executive’s review section on pages 14 and 15 and in the Service line review of pages 24 to 27. We operate and own assets in a large number of geographic regions and countries, and, as a result, we are exposed to a wide range of political, economic, regulatory, social and tax environments. Policies or laws in the countries in which we do business may change in a manner that may be adverse for us, even those with stable political environments. However the diversification and spread of activities geographically mitigates the risk of disruption in any one location. Brexit The UK accounts for 15.9% of Group revenue, with 380 employees of the Group's 7,424 based in the UK. The Board has assessed the risk of Brexit on Keywords and concluded that for now, this does not constitute a significant risk. The Group transacts in multiple currencies, given our customers are located globally. Keywords is therefore exposed to short-term currency risks, in addition to longer-term risk that could develop between our functional currency (Euro) and our multiple billing currencies. The Group’s largest exposure is to the US Dollar followed by the Canadian Dollar and Sterling. The Group does not hedge its currency risk because Keyword’s main movements in exchange related gains or losses relate to the effect of translating net current assets held in foreign currencies. GovernanceFinancial statementsSupplementary information 48 Board of Directors Ross Graham (72) Independent Non-Executive Director and Chairman Andrew Day (56) Group Chief Executive Officer Jon Hauck (47) Chief Financial Officer David Reeves (73) Senior Independent Non-Executive Director A N R D N D D A N R D Length of service with the Group (as at 16 April 2020): Length of service with the Group (as at 16 April 2020): Length of service with the Group (as at 16 April 2020): Length of service with the Group (as at 16 April 2020): 7 years 11 years 6 months 7 years Relevant skills and experience: Jon has a wealth of finance, change management and M&A experience, having held the role of Group Financial Controller and Treasurer at Rentokil Initial plc since 2015. He joined Rentokil Initial in 2008 and prior to taking up his current position, held several roles including Programme Director in North America where he was responsible for leading a substantial integration programme. He subsequently became Chief Financial Officer of the North America operations. Prior to Rentokil Initial, he worked in PriceWaterhouseCoopers’ Assurance practice. Jon is a Fellow of the Institute of Chartered Accountants of England and Wales. Relevant skills and experience: Andrew has a background in technology, manufacturing and business services through corporate development and general management roles within both publicly quoted and private companies. Andrew started his career in 1983 at Rothmans International PLC in production management. From 1986 to 1993 he had responsibility for corporate development activities at Britannia Security Group PLC, TIP Europe PLC and Brent International PLC before holding the position of Divisional Managing Director at Brent International PLC for six years. Andrew was Chief Executive Officer of interactive retail software developer, Unipower Solutions and Head of Retail and CPG for EMEA, a NYSE-listed advanced analytics business, FICO, before joining Keywords as its Chief Executive Officer in April 2009. Relevant skills and experience: Ross has extensive Executive and Non-Executive experience in the technology sector. From being a partner in Arthur Young from 1981 to 1987, he joined Misys plc, a global software business as Finance Director upon its flotation, latterly becoming Corporate Development Director; throughout he played a key role in developing and implementing the very successful Misys acquisition strategy. Since retiring from Misys, Ross has held a number of Non- Executive directorships including those at Psion PLC from 2005 until 2012 (when it was successfully sold to Motorola Solutions Inc.), at Wolfson Microelectronics PLC from 2004 to 2013 (prior to its sale to Cirrus Logic Inc.), and several others. His experience in these companies has included being Senior Independent Director, Chairman of the Audit Committee and Chairman of the Remuneration Committee. Ross was appointed Director and Chairman of Keywords shortly prior to its flotation in July 2013. With his wealth of experience and chairing skills, Ross creates the necessary environment for dynamic Board discussion. He has helped elevate the governance processes without destroying the entrepreneurial essence of Keywords. Relevant skills and experience: David has over 30 years' global experience in management roles within multinational companies. He began his career with ICI in the UK and then moved to RJ Reynolds Nabisco where he worked from 1979 to 1991, becoming the worldwide Marketing Director in the USA in 1989. In 1991, David served as the General Manager and Vice President of Marketing in Tokyo for Mitsubishi Shoji JV Technology Company before moving into the computer game industry, opening and setting up the PlayStation Company in Germany, Switzerland and Austria. He was appointed Executive Vice President in 1999 and President and CEO of Sony Computer Entertainment (Europe) in 2003 where he remained until 2009. David now runs his own Management Consultancy practice as well as being on the Board of three major Charities in the UK. He brings to Keywords a global knowledge of growing multinational companies, experience of the video game industry, Corporate Governance and an understanding of working with companies to develop global strategies in Europe, Asia, North America and LATAM. He was appointed to the Board of Keywords Studios on 29 May 2013. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 49 Giorgio Guastalla (51) Non-Executive Director Georges Fornay (63) Independent Non-Executive Director Charlotta Ginman (54) Independent Non-Executive Director and Chairman of the Audit Committee A A N R D Length of service with the Group (as at 16 April 2020): Length of service with the Group (as at 16 April 2020): Length of service with the Group (as at 16 April 2020): 21 years 3 years 3 years Relevant skills and experience: A Fellow of the Institute of Chartered Accountants in England and Wales, Charlotta is Chair of the Audit Committee. She is a Non-Executive Director and Chair of the Audit Committee of Polar Capital Technology Trust PLC and Pacific Asset Trust PLC. She is also a Non-Executive Director of Unicorn AIM VCT PLC. Charlotta has held senior positions in the investment banking and technology / telecom sectors. She was appointed a Director of Keywords in September 2017. Relevant skills and experience: Giorgio Guastalla is co-founder of Keywords. Prior to establishing Keywords in Ireland in 1998, Giorgio held various positions in marketing and IT at Brent International PLC based in the US, Spain, the UK and France. In 2002 Giorgio founded Italicatessen Limited, a company operating in the food sector. Giorgio was CEO of Keywords until 2009 before concentrating on his other business interests and moving to a Non-Executive Director role at Keywords Studios. With over twenty years’ experience in the industry, Giorgio brings a wealth of understanding and knowledge to Keywords. Relevant skills and experience: Georges has over 30 years’ experience in the technology and video games sectors and currently sits on the Board of France’s second largest independent games publisher, Focus Home Interactive, which is listed on the Alternext. Georges worked in senior management at Sony Computer Entertainment from 1995 to 2011, including as CEO of the French and Swiss divisions and culminating as the Senior Vice President from 2004 to 2011. During this time he oversaw the launch of the PlayStation Portable and PlayStation 3. Prior to this, Georges spent nine years at Commodore, the last five years of which were as CEO of Commodore France PC Manufacturing and Distribution. Georges has also held significant industry-wide roles including four years as President of SELL, France’s Union of Entertainment Software Publishers, where he was responsible for representing and advocating the industry’s and its 31 members’ interests to the French Government. Georges was appointed a Director of Keywords in September 2017. Committee Membership A Audit Committee Nomination Committee N R D Remuneration Committee Disclosure Committee None GovernanceFinancial statementsSupplementary information 50 Chairman's introduction The Board is committed to the highest standards of corporate governance Dear shareholders As Chairman of the Board of Directors of Keywords Group plc (Keywords, or the Company/Group as the context requires), I am pleased to introduce the Group’s corporate governance report. The corporate governance statement provides an insight into how the Board operated during the year and the key issues considered. The Board is committed to the highest standards of corporate governance. Our approach to governance is set by the Board and our Executive Directors ensure that the approach is effectively implemented across the business. Effective and robust governance remains central to the ongoing success of the Group. It is my responsibility to ensure that the Group has both sound corporate governance and an effective Board. As Chairman of the Company, my responsibilities include leading the Board effectively, overseeing the Group’s corporate governance model, communicating with shareholders and ensuring that good information flows freely between the Executive and Non-Executive Directors in a timely manner. The Directors of the Company recognise the value of good corporate governance in every part of its business. The Company has adopted the Quoted Companies Alliance Corporate Governance Code (QCA Code), which we believe is the most appropriate for a company with the size and stage of development as Keywords. The Board provides annual updates on our compliance with the QCA Code. During the year, the following changes were made to the Group’s key corporate governance arrangements: • Appointment of Jon Hauck as CFO in October 2019; and • Appointment of Aisling Hanley as Head of Internal Audit in August 2019. The Board considers that the Group complies with the QCA Code in all applicable respects. An explanatory statement of how we have applied the QCA Code guidance, and disclosures of any areas of non-compliance, can be found on our website at: www.keywordsstudios.com. The Board understands that the application of the QCA Code supports the Group’s medium to long-term success whilst simultaneously managing risks and provides an underlying framework of commitment and transparent communications with stakeholders. The main Group-wide governance documents are our Core Values and the Code of Conduct, which set out the values and standards that we expect of our employees. These documents, together with our policies, govern how we conduct our business and set the standards that drive performance. Compliance training helps to enforce this. Board oversight, reviews and audits form part of the monitoring and supervision process. Risk processes are embedded and reviewed on an ongoing basis across the business. The important governance developments at Keywords over the last year are outlined below. My ambitions for the composition of the Board are to maintain, and where applicable, broaden the range of expertise, experience and diversity. The Board continues to ensure that effective succession plans are in place. Given the COVID-19 restrictions, it is no longer possible to hold the AGM in the way that the Board had planned and therefore regrettably we cannot allow shareholders to attend in person and the Company’s Articles of Association do not currently permit hybrid or virtual meetings. The meeting will instead be convened at the offices of Keywords Studios, 39 Earlham Street, London, WC2H 9LT, United Kingdom on 27 May 2020, with the minimum necessary quorum of two shareholders (Chairman and CEO) present in order to conduct the business of the meeting. The Board of Directors strongly encourages shareholders to vote by proxy in lieu of attending in person. A video link of a presentation by the CEO of the Company will be made available for shareholders to view on the day of the Annual General Meeting on the Company’s website at: www.keywordsstudios. com and the Board will look at opportunities to meet with shareholders later in the year where possible and only if and when it is deemed safe to do so. Ross K Graham Chairman 16 April 2020 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Corporate governance 51 Strategy A description of the Company’s strategy, business model and supporting strategic pillars, along with key strengths can be found in the strategic report on pages 18 to 23. Internal controls and risk management The Board recognises the need for an effective and well-defined risk management process and it oversees and regularly reviews the current risk management and internal control mechanisms. The Company’s principal risks, along with key challenges in the execution of the Company’s strategy and controls implemented to mitigate them, can be found in the strategic report on pages 45 to 47. The Audit Committee has been delegated responsibility for the oversight of the Company’s risk management and internal controls and procedures, as well as determining the adequacy and efficiency of internal control and risk management systems. The Board continuously monitors and upgrades its internal control procedures and risk management mechanisms and conducts regular reviews, when it assesses both for effectiveness. This process enables the Board to determine whether the risk exposure has changed during the year and these disclosures are included in the Annual Report. In setting and implementing the Company’s strategies, the Board, having identified the risks, seeks to limit the extent of the Company’s exposure to them having regard to both its risk tolerance and risk appetite. The Directors believe that the Group has internal control systems in place appropriate to the size and nature of the business. The key elements are: • Group Board Meetings, at a minimum of eight times per year, with reports from and discussions with senior Executives on performance and key risk areas in the business; • Monthly financial reporting, for the Group and for each service line, of actual performance compared to budget and the prior year; • Visits to key locations; • Annual budget setting; • Annual strategy conference with top management team; and • A defined organisational structure with appropriate delegation of authority. The Board is now further supported with the oversight of its internal control systems and risk management through the appointment of a Head of Internal Audit in August 2019. Further information on the Company’s approach to risk management and internal controls can be also found in the Audit Committee report on page 54. The Board The Board, as a whole, is responsible for the overall management of the Group and for its strategic direction, including approval of the Group’s strategy, its annual business plans and budgets, the interim and full year financial statements and reports, any dividend proposals, the accounting policies, major capital projects, any investments or disposals, its succession plans and the monitoring of financial performance against budget and the formulation of the Group’s risk appetite including the identification, assessment and monitoring of Keywords’ principal risks. Director biographies and committee memberships are set out on pages 48 and 49. The Board comprises Andrew Day CEO, Jon Hauck CFO, one non-independent Non-Executive Director, Giorgio Guastalla, and four independent Non-Executive Directors, Georges Fornay, Charlotta Ginman, Ross Graham and David Reeves. David Reeves is the Company’s Senior Independent Director (SID), and Ross Graham is the Company’s Chairman. Letters of appointment of all Directors are available for inspection at the Company’s registered office during normal business hours. The Executive Directors work full time for the Company. All the Non-Executive Directors are expected to dedicate at least 30 days per annum to the Company, rising to 40 days if they also chair a Committee, and the Chair is expected to dedicate 60 days per annum. The Company has adopted a policy whereby all members of the Board are subject to re-election at each AGM. The Board is satisfied that it has a suitable balance between independence, on the one hand, and knowledge of the Company, on the other, and that no individual or group may dominate the Board’s decisions. The Non-Executive Directors have both a breadth and depth of skills and experience to fulfil their roles. The Company believes that the current balance of skills in the Board as a whole reflects a very broad range of personal, commercial and professional experience, and notes the range of financial and managerial skills. All Directors are encouraged to use their independent judgement and to challenge all matters, whether strategic or operational, enabling the Board to discharge its duties and responsibilities effectively. GovernanceFinancial statementsSupplementary information 52 Corporate governance continued The Board continued The Board meets a minimum of eight times a year and a calendar of meetings and principal matters to be discussed are agreed at the beginning of each year. In order to be efficient, the Directors meet formally and informally both in person and by telephone. Board and Committee document authors are made aware of proposed monthly deadlines through the calendar of meetings assembled at the beginning of the year. Board papers are collated by the relevant personnel (Chair, Company Secretary, CFO, Committee Chair), compiled into a Board/Committee Pack, and circulated at least three working days before meetings, allowing time for full consideration and necessary clarifications before the meetings. The Board also utilises a fully-functioning Board Portal, which ensures the provision of timely and efficient distribution of Board and Committee papers as well as an effective means of communication for the Board. Management supply the Board with appropriate and timely information and the Directors are free to seek any further information they consider necessary. Senior Independent Director David Reeves acts as the Senior Independent Director (SID) of the Company, serving as a sounding board for the Chairman and acting as an intermediary for the other Directors. The SID is also available to shareholders and other Non-Executive Directors to address any concerns or issues they feel have not been adequately dealt with through the usual channels of communication. Audit Committee The Audit Committee is chaired by Charlotta Ginman, and its other members are Ross Graham, David Reeves and Georges Fornay. The Audit Committee is responsible for assisting the Board in fulfilling its financial and risk responsibilities. The Audit Committee oversees the financial reporting, risk management and internal control procedures of the Company. The Audit Committee also advises the Board on the appointment and removal of the external auditor and discusses the nature, scope and results of the audit with the auditors. The Audit Committee reviews the extent of non-audit services provided by the auditors and reviews with them their independence and objectivity. Further information on the Audit Committee can be found in the Audit Committee report on page 54. Remuneration Committee The Remuneration Committee is chaired by David Reeves, and its other members are Charlotta Ginman and Ross Graham. The Remuneration Committee is responsible for determining the remuneration of the Chairman, Executive Directors, the Company Secretary and senior Executives of Keywords. The Remuneration Committee is responsible for making recommendations to the Board of Directors’ and senior Executives’ remuneration. Non-Executive Directors’ remuneration and conditions are considered and agreed by the Board. Financial packages for Executive Directors are established by reference to those prevailing in the employment market for Executives of equivalent status both in terms of level of responsibility of the position and their achievement of recognised job qualifications and skills. The Committee will also have regard to the terms, which may be required to attract an equivalent experienced Executive to join the Board from another company. Further information on the Remuneration Committee can be found in the Remuneration Committee report on page 57 to 69. Nomination Committee The Nomination Committee is chaired by Ross Graham. Charlotta Ginman, David Reeves and Andrew Day are the other members. Further information on the Nomination Committee, including its role and responsibilities, can be found in the Report of the Nomination Committee on page 70. Disclosure Committee The Disclosure Committee is responsible for assisting in the design, implementation and evaluation of the Company’s disclosure controls and procedures. The Disclosure Committee is chaired by Andrew Day and its other members are Charlotta Ginman, David Reeves, Ross Graham and Jon Hauck. Terms of reference of all Keywords’ Committees are available to view on the Company’s website at: www.keywordsstudios.com The table below sets out attendance statistics for each Director at scheduled Board, and where relevant, Committee meetings held during the financial year. Director Ross Graham Andrew Day David Broderick* Jon Hauck** David Reeves Giorgio Guastalla Georges Fornay Charlotta Ginman * Resigned 14 October 2019. ** Appointed 14 October 2019. Board 11 meetings held Audit Committe 5 meetings held Remuneration Committee 8 meetings held Nomination Committee 2 meetings held Disclosure Committee 2 meetings held 11 11 8 3 11 11 11 11 5 – – – 5 – 5 5 8 – – – 8 – – 8 2 2 – – 2 – – 2 2 2 1 1 2 – – 2 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 53 The Non-Executive Directors meet without the presence of the Executive Directors during the year, and also maintain ongoing communications with Executives between formal Board meetings. Board and Committees performance evaluations Details of the Company’s Performance Evaluations for the year can be found in the Report of the Nomination Committee on page 70. Culture The Board recognises that its decisions regarding strategy and risk may impact the corporate culture of the Company as a whole and that this will impact the performance of the Company. The Board is also aware that the tone and culture set by the Board can have an impact on the Company as a whole and on the way that employees behave. The corporate governance arrangements that the Board has adopted are designed to ensure that the Company delivers long term value to its shareholders and that shareholders are able to express their views and expectations for the Company in a manner that encourages open dialogue with the Board. A large part of the Company’s activities are centred upon an open and respectful dialogue with employees, customers and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives. The Board places great importance on this aspect of corporate life and seeks to ensure that this flows through all that the Company does. The Directors consider that the Company has an open culture facilitating comprehensive dialogue and feedback, which enables positive and constructive challenge. Further information on the Company’s culture can be found in the strategic report pages 28 to 33. Meetings are open and constructive, with every Director participating fully. Senior management can also be invited to meetings, providing the Board with a thorough overview of the Company. In addition to their general Board responsibilities, Non-Executive Directors are encouraged to be involved in specific workshops or meetings, in line with their individual areas of expertise. The Board is kept abreast of developments on governance and AIM regulations. ONE Advisory Limited, Keywords’ Company Secretary, provides updates on governance issues, and the Company’s Nominated Adviser (Nomad) provides annual Board AIM Rules refresher training as well as the initial training as part of a new Director’s on-boarding. The Board shall review annually the appropriateness and opportunity for continuing professional development, whether formal or informal. Advisors The Board has regular contact with its advisors to ensure that it is aware of changes in corporate governance procedures and requirements and that the Group is, at all times, compliant with applicable rules and regulations. The Company has Director and Officers’ liability insurance cover in place throughout the year and it is intended for the policy to continue for the year ending 31 December 2020 and subsequent years. Additionally, the Company provides an indemnity in respect of all the Company’s Directors or other officers of the Company against all costs, charges, losses, expenses and liabilities incurred by them in the execution and discharge of their duties. The Company’s Nomad supports the Board’s development, specifically providing guidance on corporate governance and other regulatory matters, as required. Liam O’Donoghue of ONE Advisory Limited is Keywords’ Company Secretary. ONE Advisory Limited is responsible for ensuring that Board procedures are followed and that the Company complies with all applicable rules, regulations and obligations governing its operation, as well as helping the Chairman to maintain excellent standards of corporate governance. ONE Advisory Limited also provides Board support through assistance with shareholder meetings and Market Abuse Regulation (MAR) compliance. The Company has also enlisted the support of Mercer Kepler, who provides advice in relation to remuneration. Additional information can be found in the Remuneration report on pages 57 to 69. All Directors may receive independent professional advice at Keywords’ expense, if necessary, for the performance of their duties. GovernanceFinancial statementsSupplementary information 54 Audit Committee report Introduction from the Chair As Chair, I am pleased to present the Audit Committee report for the year ended 31 December 2019. This report details the work of the Committee over the past year, fulfilling our responsibilities to provide effective governance over the Group’s financial activities. Last year I outlined our intention to introduce an Internal Audit function to the business and I am pleased to report that a Head of Internal Audit was recruited during the year and an Internal Audit Charter has been approved by the Committee together with the Internal Audit plan for 2020. As part of the establishment of the Internal Audit function, management has conducted an exercise to confirm the key financial controls that are expected to be in place across the business which will form the core basis of the Internal Audit testing process going forward. Audit Committee Composition and attendance in 2019 The Committee members, apart from myself, continue to be Ross Graham, David Reeves and Georges Fornay. The Audit Committee, as a whole, has competence relevant to the video games industry, both Ross Graham and I are Chartered Accountants and I also chair the Audit Committee for other public companies. More information about the Committee members can be found on pages 48 and 49. The Committee met five times during the financial year with all members in attendance. Committee role and responsibilities The role of the Audit Committee is to assist the Board in its oversight and monitoring of the internal control environment and risk management of the Group and the Group’s financial reporting. The Audit Committee’s focus is to review and challenge these areas with both management and the external auditor, in particular the Audit Committee: • Monitors the integrity of the Group’s financial reporting including key accounting policies and judgement areas (eg revenue recognition, goodwill impairment reviews and acquisition accounting), the use of Alternative performance measures and the going concern review; • Reviews the internal control and risk management framework including key operating risks, financial systems roll out, treasury, taxation and cyber risk, data protection and disaster recovery plans; • Monitors the Internal Audit function including the approval of the Internal Audit Charter and the annual Internal Audit plan; • Establishes and oversees the engagement and review of performance of the external Auditor including monitoring its independence and reviewing audit and non-audit services; and • Reviews key policies such as whistleblowing, anti-tax evasion, anti-bribery / corruption and Modern Slavery Policies. Terms of reference The Committee has written Terms of Reference which clearly define the Committee’s responsibilities and duties. The Terms of Reference were reviewed by the Board during 2019 and are available to view on the website, www.keywordsstudios. com. In addition to the Terms of Reference, the Committee has developed an annual agenda which corresponds with the meeting schedule, to ensure all key responsibilities are completed and managed. Activities of the Audit Committee during the year Internal Audit The Committee has worked closely with management to establish an Internal Audit function with the recruitment of a Head of Internal Audit in the second half of 2019. The Head of Internal Audit reports into the Audit Committee Chair with a dotted reporting line into the Group CFO. The activities of the Internal Audit function are governed by an Internal Audit Charter that was signed off by the Audit Committee during the year. In December 2019, the Audit Committee approved the Internal Audit plan for 2020 which will focus on: • Roll-out of and adherence to Group policies; • Review of key processes in financial reporting and sales; • Review of the integration of a selection of acquisitions; and, • Review of key finance controls at significant studios. This plan aims to address some of the internal and financial risks and uncertainties identified on pages 45 to 47 such as: • Acquisition risk – how new entities are integrated into the Keywords business; • Adequacy of and compliance with financial and operating controls to ensure smooth timely and accurate reporting; and • Compliance with legal and ethical standards to promote the culture of “Doing the right thing”. Internal control and risk assurance framework As part of the establishment of the Internal Audit function, management has conducted an exercise to confirm the set of key financial controls expected to be in place and operational in all of the businesses across the Group. This will be used as the framework for the Internal Audit testing in the future. As part of this exercise, each Regional Finance Director conducted a self- assessment of the adherence to the key financial controls within their region. It was pleasing to see that this did not reveal any major control weaknesses but it did identify a number of areas where controls can be improved as well as opportunities to standardise and automate some of the finance processes across the business. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 55 The Audit Committee has continued to review and challenge the upgrades that have taken place during the year to the Company’s internal control and risk assurance framework to ensure that following its rapid expansion, the Company operates within a fit for purpose framework. The Committee is pleased to see continued progress made in the global automated financial systems roll-out, eventually allowing a fully integrated automated reporting system to operate seamlessly across the Group, replacing the current manual consolidation processes that are both labour intensive and potentially prone to human error. During 2019 the focus has been on North America, which is now all migrated to the new system, and recent acquisitions. The work on our cash pooling platform continues, providing us with better control of Group cash and the optimisation of cash management. Annual Report and financial statements The Board has asked the Committee to confirm that in its opinion the Annual Report as a whole can be taken as fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s financial position, performance, business model and strategy. In doing so the Committee has given consideration to: • The way the strategic reports (including the Chairman’s statement and reports of the CEO and CFO) present the Group – its business, financial and business model and the metrics management uses to measure performance; • Whether suitable accounting policies have been adopted and have challenged the robustness of significant management judgements and estimates reflected in the financial results; The industry requires the highest standards of security within a company offering services such as Keywords. During 2019 the Committee received regular cyber security updates from the IT function to review both the physical and data security policies and procedures. • The comprehensive control framework around the production of the Annual Report, including the verification processes in place to deal with the factual content; • The extensive levels of review that are undertaken in the production process, by both management and advisers; and During the year the Audit Committee has continued its regular review of the Company’s main risks on behalf of the Board, ensuring key risks are top of mind and relevant, and mitigation plans are in place where possible. For 2019 the risk assessment framework was cascaded to the senior leadership team. Going concern The Audit Committee reviewed the Going Concern assessment including the downside sensitivities to the Group’s cash flow projections to evaluate the Group’s ability to withstand a prolonged period of studio closures as a result of the COVID-19 pandemic, leading to a reduction in production capability. Key accounting issues During the year and as part of the year end procedures, the Committee considered the following key financial and internal control matters in relation to the Group’s financial statements and disclosures with input from both management and the external Auditor: • Revenue recognition • Functional reference currency • Business combinations • The valuation of Goodwill and Intangible Assets • Financial instruments • Alternative performance measures and KPIs • Segmental reporting • Application and impact of new standard IFRS 16 (Leases) • Taxation • Going concern For further detail on these, see notes 2 and 3 of the financial statements. • The Group’s internal control environment. The Group has adopted IFRS 16 Leases from 1 January 2019. Throughout the year the Committee received updates from both management and the external Auditor on the planning and processes being put in place and the subsequent impact of the new reporting standard. More detail regarding this standard can be found in notes 2, 3 and 24 of the financial statements. The Group uses certain APMs to present its results. These are non-GAAP measures but are designed to provide the users of the financial statements with a better understanding of the underlying trading performance of the business. An explanation of the APMs and a reconciliation to the nearest statutory equivalent measure is provided on pages 135 to 143. During the year management has reviewed the disclosure of APMs and has made a number of changes to make the reconciliations to the nearest GAAP measures more meaningful. As a result of the work performed, the Committee has concluded that the Annual Report for the year ended 31 December 2019, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, and it has reported on these findings to the Board. Whistleblowing During the year, the Audit Committee reviewed and re-approved the whistleblowing policy and accompanying process the Company has rolled out globally. The policy allows employees wherever they are to raise any concerns they may have about possible financial or other irregularities confidentially. During 2019, 3 whistleblowing disclosures were reported, none of which related to financial matters, with all of these investigated and satisfactorily resolved. The Group is committed to the highest levels of integrity and accountability and the prevention of bribery and corruption. GovernanceFinancial statementsSupplementary information 56 Audit Committee report continued External audit Audit services The Auditor is appointed by the shareholders to provide an opinion on financial statements prepared by the Directors. BDO, the Company’s current Auditor, was first appointed on 29 May 2013. The scope of the current annual audit was agreed in advance with the Committee with a focus on areas of audit risk and the appropriate level of audit materiality. The Committee also had discussions with the auditor on fees, internal controls, accounting policies and areas of critical accounting estimates and judgements. The auditor attends all meetings of the Audit Committee and reported to the Audit Committee on the results of the audit work and highlighted any issue which the audit work had discovered, or the Committee had previously identified as significant or material in the context of the financial statements. Independence and non-audit fees A non-audit services policy was established in 2018, in line with the FRC ethical standards. Any non-audit services are required to be pre-approved by the Audit Committee. During the year BDO provided non-audit services to the Company of €12,000 (2018: €23,000). During 2019, the policy regarding the recruitment of former external audit staff was reviewed and approved. In order to fulfil the Committee’s responsibility regarding independence of the Auditor, the Committee reviewed the senior staffing of the audit, the Auditor’s arrangements concerning any conflicts of interest, the extent of any non-audit services and the Auditor’s independence statement. The Committee was satisfied that the Auditor remains independent. There were no adverse matters brought to the Audit Committee’s attention in respect of the 2019 audit, which were material or significant or which should be brought to shareholders’ attention. Charlotta Ginman, FCA Chair of the Audit Committee 16 April 2020 Effectiveness The Audit Committee monitored and evaluated the effectiveness of the Auditor under the current terms of appointment based on an assessment of the Auditor’s performance, qualification, knowledge, expertise and resources. The Auditor’s effectiveness was also considered along with other factors such as audit planning and interpretations of accounting standards and separate discussions with Management (without the Auditor present) and with the Auditor (without Management present). The Chair of the Audit Committee also had discussions with the Audit partner outside the formal meetings throughout the year. The Committee was satisfied that the audit was effective and that BDO continues to demonstrate the skills and experience needed to fulfil its duties effectively. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Directors’ remuneration report 57 Dear Fellow shareholders As Chairman of the Remuneration Committee, it is my pleasure to present the Directors’ remuneration report for the period ended 31 December 2019. Keywords Studios plc has chosen to apply the Corporate Governance Code for Small and Mid-size Quoted Companies published by the Quoted Companies Alliance. The Company is currently AIM quoted and the Board recognises the importance of shareholder transparency and standards of governance. Therefore, this report contains all the information required to be disclosed as an AIM quoted Company and also contains some additional information that would be applicable were the Company listed on the London Stock Exchange main market, and includes: • The Directors’ Remuneration Policy; and • Our Annual Report on remuneration, detailing Director remuneration in 2019 and that set for 2020. We operate a simple Executive Director remuneration structure made up of base salary and pension, a bonus plan and a Long Term Incentive Plan (“LTIP”) which provides a clear link between pay and our key strategic priorities. We recognise that there is currently a general focus on companies where Executive pensions are not aligned with the rest of their workforce; the Committee would like to highlight that Keywords does not provide a significant pension above that of local legal requirements as detailed in our remuneration policy, and the pensions offered to Executive Directors is the same as that offered to the local workforce. In October 2019, Jon Hauck joined the Board as Group Chief Financial Officer. His remuneration structure is consistent with our Remuneration Policy whereby his salary has been set below market median, and his bonus potential is in line with that of the CEO, Andrew Day. Jon was also granted a one-off award of LTIP shares to compensate for those awards he forfeited on his departure from his prior employment. The Remuneration Committee intends to keep its approach to remuneration under regular review for continued appropriateness taking account of regulatory requirements and corporate governance best practices as applicable to the Company over time. To this end, it is relevant to note our decision to introduce a shareholding guideline from 2020 and to adopt the CEO pay ratio disclosure in this report. No other changes are intended in relation to the implementation of our Remuneration Policy in 2020. It is my hope that you find this a clear and comprehensive report and I look forward to hearing the views of our investors on the information presented here over the coming months. We will carefully monitor emerging practice in this area as well as guidance from investor representative groups. Dr David Reeves Chair of the Remuneration Committee 16 April 2020 GovernanceFinancial statementsSupplementary information 58 Directors’ remuneration report continued Executive Directors’ remuneration at a glance The following is a summary of the key components of Keywords’ Executive Director remuneration, including changes and implementation in the financial year. Element Salary Implementation in 2019 With effect from 1 March 2019: • Andrew Day, CEO: £240,000 Implementation in 2020 With effect from 1 March 2020: • Andrew Day, CEO: £244,800 (2% increase) • David Broderick, Former CFO: €168,695 • Jon Hauck, CFO: £204,000 (2% increase) (until 14 October 2019) • Jon Hauck, CFO: £200,000 Pension Executive Directors have access to pension schemes based on local legal requirements or where expected by local labour markets. Contributions (up to the salary cap of £50,000) meet the minimum requirements and amount to: Andrew Day’s pension to align with the majority of UK staff with a contribution of 3% of salary with no salary cap • Andrew Day, CEO: 3% of salary (capped at £50K salary) No change for Jon Hauck • David Broderick, Former CFO: 5% of salary • Jon Hauck, CFO: 5% of salary Annual bonus Maximum opportunity of 30% of salary based on: No change to opportunity or measures • Financial targets including turnover and profitability (weighted 80%) • Discretionary individual performance (weighted 20%) Payouts for 2019 were £nil for Andrew Day (as bonus was waived) and £5,631 for Jon Hauck. As a leaver during 2019, David Broderick was not eligible to earn a bonus for 2019 50,000 and 25,000 LTIPs granted to Andrew Day and David Broderick respectively. Jon Hauck was granted a regular 2019 award of 25,000 LTIPs on his appointment, and an additional 43,936 LTIPs in compensation for awards he forfeited on his departure from his previous employment 3-year performance period Vesting based on Total Shareholder Return performance against FTSE Small Cap Index Upon his departure, the 2019 LTIPs granted to David Broderick were forfeited LTIP Other The Remuneration Committee intends to make LTIP awards in line with previous years to the CEO and CFO respectively Introduced shareholding guidelines for Executive Directors at 100% of salary Section 1: Directors’ remuneration policy Policy and principles The Remuneration Committee determines the Company’s policy on the structure of the remuneration for Executive Directors and the Senior Management Team (“SMT”) and is responsible for governing the remuneration policy for the broader employee population. The objectives of this policy are to: • Reward Executive Directors and the SMT in a manner that ensures they are properly incentivised and motivated to perform in the best interests of shareholders. • Provide a level of remuneration required to attract and motivate high-calibre Executive Directors and SMT members. • Encourage value creation through consistent and transparent alignment of incentive arrangements with the agreed Company strategy over the long term. • Ensure the total remuneration packages awarded to Executive Directors and SMT members, comprising both performance- related and non-performance-related remuneration, are designed to motivate the individual, align interests with shareholders and comply with corporate governance best practices. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 59 The Board and the Remuneration Committee believe the foregoing objectives are best achieved by a remuneration structure whereby: • Basic pay is set at a below-median level albeit sufficient for the challenges and pressures of the role; • Annual bonuses are set at modest levels with a maximum of 30% of salary on the premise that an annual bonus does not influence the behaviour or commitment of a senior Executive (this does not apply to sales Executives); and • Long-term incentives are the means by which Executives can earn significant rewards if, but only if, shareholders likewise have obtained a good return. Remuneration components for Executive Directors and SMT (the ‘Executives’) Various remuneration components are combined to ensure an appropriate and balanced remuneration package which reflects the size and complexity of the Group, the Executive’s experience, responsibility and position, as well as market practice. For this, the Remuneration Committee takes into account the performance of the individual, comparisons with peer companies and, where considered appropriate, reports from external independent consultants. The remuneration package comprises the following elements: • Fixed remuneration (basic salary and, for some Executives, pension); • Performance-based remuneration (annual bonus and LTIP): Purpose and link to Strategy Operation Opportunity Performance measures Base salary To attract and retain talented Executives to deliver the Group’s strategy, by ensuring base salaries and the implied total package are competitive in relevant talent markets, while not overpaying. Pension and benefits To provide an appropriate structure and level of post-retirement benefit for Executives in a cost-efficient manner that reflects local market norms in the relevant jurisdiction. Base salaries are reviewed by the Committee annually, and benchmarked periodically against comparable roles at comparable companies of similar size and complexity. Salaries are set on a case-by- case basis to reflect the role, the experience and qualifications of the individual, and are targeted at below market median. n/a Base salary increases for the Executives take into account personal performance, Group performance, significant changes in responsibilities, the average increase awarded to the wider workforce, and competitive market practice. n/a At the discretion of the Remuneration Committee, the Executives may participate in a pension scheme facilitated by the Company. The Company also provides access to Group Benefit schemes where appropriate by Region which may include moderate contribution towards private health insurance, death in service cover and other Group based benefits. The Company provides access to pension schemes based on local legal requirements or where expected by local labour markets. Contributions meet the minimum requirements or are of a modest level. Basic additional benefits may also be provided where available and where considered the norm for managerial positions in similar businesses. GovernanceFinancial statementsSupplementary information 60 Directors’ remuneration report continued Remuneration components for Executive Directors and SMT (the ‘Executives’) continued Purpose and link to Strategy Operation Opportunity Performance measures Annual bonus To provide a modest award where individual and Company performance have been at or above expected levels. Executives are eligible to participate in an annual bonus scheme. Up to a maximum of 30% of salary (excluding sales plans where the maxima may vary). The Remuneration Committee reviews targets and the weighting of performance measures each year. The Company also offers commission arrangements for Executives in sales roles. LTIP awards are granted as a number of shares. LTIP To incentivise delivery against total shareholder return targets and align the interests of Executives and shareholders in growing the value of the Group over the long-term. LTIP grants are made annually in the form of conditional awards of shares or nil-cost share options which vest subject to performance conditions measured over three years. Once vested, awards may be exercised for a period of up to 7 years from grant. Malus provisions apply in certain circumstances. The portion of bonus earned in any one year depends on the Remuneration Committee’s assessment of each individual’s performance and the overall performance of the Company against predetermined turnover and profitability targets for the year. Performance targets are typically weighted 80% on the Company’s financial performance and 20% on personal performance (however, if the Company’s financial performance is considered to be unsatisfactory, the element based on personal performance is likely to be foregone or reduced). Vesting of the LTIP is subject to continued employment during the performance period and the achievement of performance conditions based on Total Shareholder Return (“TSR”). The Committee has the power of discretion to adjust the outcome in exceptional circumstances so that it is a fair reflection of the underlying performance of the Group. Further details, including the performance targets attached to the LTIP in respect of each year will be disclosed in the relevant implementation report on Remuneration (subject to these being considered not to be commercially sensitive). Executive Director shareholding guidelines With effect from February 2020, a new guideline was introduced which encourages Executive Directors to build and maintain over time a shareholding in the Company with a value equivalent to at least 100% of their base salary to be met through the retention of vested LTIP shares. Andrew Day has a significant shareholding and therefore has already met the guideline. Jon Hauck will be expected to build his shareholding in line with the guideline. Details of the Executive Directors’ current shareholdings are provided on page 68. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 61 Malus policy For any awards granted since 2016, malus may be applied to LTIP awards in cases of fraud, dishonesty or deceit, gross misconduct or material financial misstatement in the audited financial results of the Group. The Remuneration Committee may determine that an award is cancelled in its entirety or be reduced to the extent they see fit. Use of discretion The Remuneration Committee may apply its discretion when agreeing remuneration outcomes, to help ensure that the implementation of our remuneration policy is consistent with underlying Company performance and is equitable to all parties. Executive Director service contracts In accordance with general market practice, each of the Executive Directors has a rolling service contract. The following table shows the date of the service contract for each Executive Director in post at the end of the year: Executive Director Position Date of appointment Date of service agreement Notice period Andrew Day Jon Hauck CEO CFO 1 Apr 2009 14 Oct 2019 21 Jun 2013 30 Sep 2019 6 months 6 months Remuneration for the wider workforce The remuneration policy for other employees is based on principles consistent with those that are applied to Executive remuneration, with the common objective of driving financial performance and the achievement of strategic objectives and contributing to the long-term success of the Group. Remuneration supports our ability to attract, motivate and retain skilled and dedicated individuals whose contribution continues to be a key factor in the Group’s success. Annual salary reviews take into account Company performance, local pay and market conditions plus salary levels for similar roles in comparable companies. Some employees below Executive level are eligible to participate in annual bonus schemes; opportunities and performance measures may vary by organisational level, geographical region and an individual’s role. An annual survey is conducted to ensure gender equality as it relates to employee compensation. The Company performs equal pay and gender pay gap analyses across all its locations. In particular, the Board of Directors discussed the results of the latest analyses in December 2019 and are satisfied that there is equal pay, given location and role. ESOP (LTIPs and Stock Options) programmes are used for senior permanent members of staff, in which approximately 10% of the workforce (3.3% in the LTIP and 6.7% in Stock Options) participate. The focus of the LTIPs is to retain talent and create long-term shareholder value consistent with fulfilment of the Company’s long-term strategic goals. External appointments held by Executives Executives may not accept any external appointment without the consent of the Board. Consideration of shareholder views The Remuneration Committee will take into consideration all shareholder views during the year and at the AGM each year as well as guidance from shareholder representative bodies more broadly, in shaping the Company’s implementation of its Remuneration Policy as well as future changes to the Policy. Leaver treatment Fair treatment will be extended to departing Executives. The Group’s policy on termination payments is to consider the circumstances on a case-by-case basis, taking into account the relevant contractual terms in the Executive’s service contract and the circumstances of termination. Executives who resign or are dismissed for cause are, by default, not eligible for an annual bonus if they have left or are under notice at date of payment and forfeit all unvested LTIP shares. At the Remuneration Committee’s discretion good leavers (normally including such circumstances as retirement, death, disability and redundancy) may be allowed to exercise a proportion of unvested LTIPs post-termination when, or to the extent that, the underlying LTIPs meet the performance criteria for vesting. On a change of control, unvested LTIP awards may be exercised at the time of the event subject to achievement of any performance conditions. GovernanceFinancial statementsSupplementary information 62 Directors’ remuneration report continued Pay for performance scenario analysis The charts that follow provide an estimate of the potential future reward opportunities for the Executive Directors, and the potential split between the different elements of remuneration under three different performance scenarios: ‘Maximum’, ‘On target’ and ‘Minimum’. These charts illustrate how performance-orientated and long-term the Company’s remuneration arrangements are, with the majority of the remuneration opportunity being delivered only under a ‘Maximum’ scenario. We have also included a bar showing the value of the actual package in 2019. Potential reward opportunities are based on the Remuneration Policy, applied to 2020 base salaries and incentive opportunities. Note that the LTIP awards granted in a year will not normally vest until the third anniversary of the date of grant, and the projected value excludes the impact of share price movement. Potential future reward opportunities for CEO and CFO CEO Minimum On-Target Maximum Max. +50% Share Price Appreciation 2020 Scenarios CFO Minimum On-Target Maximum Max. +50% Share Price Appreciation 2020 Scenarios – 500 1,000 1,500 – 500 1,000 1,500 (£000) (£000) Salary Bonus LTIP Assumptions: ‘Actual 2019’: Fixed remuneration (2019 base salary, pension), bonus granted in 2019 and LTIP vesting in 2019. ‘Minimum’: Fixed remuneration only (2020 base salary, pension), being the only element of Executive Directors' remuneration not linked to performance. ‘On Target’: Fixed remuneration as above, plus target bonus (18% of base salary) and threshold LTIP vesting (10% of maximum) at the 3-month average share. price to 31 December 2019. ‘Maximum’: Fixed remuneration, plus maximum bonus (30% of salary) and full vesting of proposed 2020 LTIP awards at 3-month average share price to 31 December 2019. ‘Maximum+50%’: As per Maximum scenario but with an assumption of share price growth of 50% over the 3-year performance period for LTIP awards. Non-Executive Director fee policy Non-Executive Directors receive fees for attendance at board meetings and its sub-committees. The Company does not operate any pension scheme for Non-Executive Directors nor do they participate in any variable pay plan. Any reasonable business expenses (including tax thereon) may be reimbursed. Section 2: Implementation of the remuneration policy in 2019 The Remuneration Committee The members of the Remuneration Committee in 2019 were David Reeves (Committee Chairman), Charlotta Ginman and Ross Graham. The members are all Independent Non-Executive Directors. In the year ended 31 December 2019, the Remuneration Committee met on eight occasions. All three members of the Committee attended the committee meetings throughout the year together with, on occasion, the CEO, the CFO, the COO and the Global HR Director, all at the request of the Committee Chairman. The Company Chairman and the Chairman of the Remuneration Committee also met with key investors on several occasions in 2019 to obtain input and feedback on Executive and Company-wide remuneration. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 63 The remit of the Committee is to determine and agree with the Board the framework for the remuneration of the Company Chairman (Ross Graham is not involved in related discussions), Executive Directors, Company Secretary and other members of the Senior Management of the Group, and also oversee the remuneration policy for the wider workforce. No Director is involved in any discussion or decision about his or her own remuneration. Mercer Kepler supports the Remuneration Committee on remuneration related matters and is a member of the Remuneration Consultants’ Group and, as such, voluntarily operates under the Code of Conduct in relation to Executive remuneration consulting in the UK. Mercer Kepler does not have any other association with the Company and is considered independent by the Committee. Directors’ emoluments The remuneration for the Directors of the Company for the period year ended 31 December 2019 is detailed in the table below: 2019 Salary or fees £000 Bonus £000 Pension £000 Andrew Day Jon Hauck4 David Broderick5 Ross Graham David Reeves Giorgio Guastalla Georges Fornay Charlotta Ginman Total (£000) Total (€000)6 234 50 201 92 68 48 51 63 807 949 – 6 – – – – – – 6 7 LTIP £000 9621 - 3472 – – – – – Total £000 1,198 59 555 92 68 48 51 63 2 3 7 – – – – – 12 14 1,309 1,539 2,134 2,508 2018 Salary or fees £000 Bonus £000 Pension £000 204 – 135 70 58 45 49 58 619 728 19 – 12 – – – – – 31 36 1 – 7 – – – – – 8 9 LTIP £000 5963 – – – – – – – Total7 £000 820 – 154 70 58 45 49 58 596 701 1,254 1,474 1. Based on share price at vesting date of 10th May 2019 @£16.04. 2. Based on share price at vesting date of 3rd Oct 2019 @£11.57. 3 Based on share price at vesting date of 1st Jun 2018 @£17.04. 4. Jon Hauck’s salary and pension are calculated from his start date of 30th September 2019. 5. David Broderick’s salary and pension are calculated to his departure date of 30th November 2019. 6. FX Eur/Stg = 0.8508. 7. Individual remuneration has been rounded to the nearest £000 and the rounding differences have not been reflected in the total. Annual bonus outcome for 2019 During 2019, the Executive Directors participated in the annual bonus scheme, and were eligible to earn awards of up to 30% of salary, subject to the attainment of specific targets set for each individual. The portion of bonus earned in the year was dependent on Company performance (weighted 80%) against turnover and profitability targets for the year in line with our financial KPIs (see pages 34 and 35) and on the Remuneration Committee’s discretionary assessment of each individual’s performance (weighted 20%). The discretionary element takes into account the Director’s performance for the year against non-financial targets, such as mergers and acquisitions, key employee retention and delivery of major projects. The Remuneration Committee also retains a discretionary override to adjust the final bonus up or down to take into account all aspects of the Company’s performance. As a result, the CEO would have achieved an annual bonus of 11.3% of salary (but, with agreement of the Remuneration Committee this was subsequently waived by Andrew Day) and the CFO a bonus of 11.3% of salary, pro-rated for Jon Hauck to reflect his employment not covering the full financial year. As a leaver during 2019, David Broderick was not eligible to earn a bonus for 2019. The table below summarises the bonus earned by the Executive Directors for the year: Director Andrew Day Jon Hauck Outcome 0% of salary 11.3% of salary Bonus for 2019 £nil (waived) £5,631 (pro rata with length of tenure) GovernanceFinancial statementsSupplementary information 64 Directors’ remuneration report continued Long-term incentives vesting in 2019 In May 2016, Andrew Day was granted an award of 60,000 LTIPs and in October 2016 (his starting date) David Broderick was granted 30,000 LTIPs, the vesting of which was based on the Company’s TSR performance versus the Numis Smaller Companies (excluding Investment Trusts) Index over the 3-year period ending on 10 May 2019 and 3 October 2019 respectively. One-third of the award vests for achieving Index TSR+10%, two-thirds vests at Index TSR+20%, with full vesting for Index TSR+30% over three years. The Company’s TSR performance over this period significantly outperformed that of the Index (by c. 205-512%) resulting in full vesting of these awards in 2019. TSR over the 3-year performance period 2016–2019 LTIP (£) NSCI ex. Inv Trusts: 27% Keywords: 512% 2016–2019 LTIP (£) NSCI ex. Inv Trusts: 15% Keywords: 205% Full vesting (Index +30%) Full vesting (Index +30%) 0% 100% 200% 300% 400% 500% 600% 0% 50% 100% 150% 200% 250% TSR over the 3-year performance period (May 2016–2019) TSR over the 3-year performance period (Oct 2016–2019) Other long-term incentives outstanding during 2019 LTIP awards granted to the Executive Directors in May 2017 and May 2018 remained outstanding during 2019. The full vesting of the 2017 awards requires Keywords TSR to outperform the Numis Smaller Companies (excluding Investment Trusts) Index over the 3-year period by 45%. Based on performance up to 31 December 2019 when the share price was £14.98, these awards would fully vest. For the 2018 awards threshold vesting (10% of the award) will vest for TSR in line with the Index and full vesting will be earned for exceeding the Index TSR by 20% over the performance period. Based on performance up to 31 December 2019 when the share price was £14.98, these awards would not vest (see TSR Performance chart below). Long-term incentives granted during 2019 In 2019, the Executive Directors were awared LTIPs, the vesting of which is based on the Company’s TSR performance versus the FTSE Small Cap Index over a 3-year performance period. Threshold vesting (10% of the award) will vest for TSR in line with the Index and full vesting will be earned for exceeding the Index TSR by 20% over the performance period. The number of shares granted to the Executive Directors is summarised in the table below. Number of shares Value as % of salary Performance period Director Andrew Day David Broderick Jon Hauck (regular award) Jon Hauck (buy-out award) 50,000 25,000 25,000 43,936 331% 274% 142% 250% 3 May 2019 – 2 May 2022 3 May 2019 – 2 May 2022 Vest date 3 May 2022 3 May 20221 30 Sept 2019 – 29 Sept 2022 30 Sept 2022 30 Sept 2019 – 29 Sept 2022 30 Sept 2022 1 On his departure in October 2019, David Broderick forfeited the LTIP granted in 2019. Jon Hauck was granted a second tranche of 43,936 shares to compensate for those awards he forfeited on his departure from his prior employment. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 65 Based on performance up to 31 December 2019 when the share price was £14.98, these awards would not vest (see chart below). TSR performance up to 31 December 2019 2017–2020 LTIP (£) 2018–2021 LTIP (£) 2019–2022 LTIP (May) (£) 2019–2022 LTIP (Sept) (£) NSCI ex. Inv Trusts: 8.7% NSCI ex. Inv Trusts: 1.3% Keywords: (22.5%) FTSE Small Cap ex. Inv Trusts: 2.3% Keywords: 5.4% FTSE Small Cap ex. Inv Trusts: 3.9% Keywords: -15.6% Keywords: 85.7% -40% -20% 0% 20% 40% 60% 80% 100% TSR performance The charts below show (i) the Company’s TSR since listing versus the FTSE Small Cap and Numis Smaller Companies indices, and (ii) the shareholder value created each financial year based on share price growth and dividends paid. Value of £100 invested in July 2013 1200 1000 800 600 400 200 Keywords FTSE Small Cap Numis Small Cap 0 11 Jul 2013 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 GovernanceFinancial statementsSupplementary information 66 Directors’ remuneration report continued TSR performance continued Shareholder value created each year £m £600 £400 £200 £0 -£200 -£400 2014 2015 2016 2017 2018 2019 Shareholder value created each year is based on the change in share price plus dividends paid over each financial year multiplied by the shares outstanding at the start of each year. The table below illustrates the CEO’s single figure of total remuneration over the same period as the charts above. Single figure (£000) Annual bonus outcome (% of max) LTIP vesting (% of max) SOP vesting (% of max) FY13 52 N/A N/A N/A FY14 146 100% N/A N/A FY15 213 100% N/A 100% FY16 449 100% 100% 100% FY17 397 100% N/A* 100% FY18 820 30% 100% N/A FY19 1,198 0% 100% N/A * No LTIPs were issued in 2014 and therefore no vesting occurred in 2017. Change of Chief Financial Officer David Broderick resigned from the Company and ceased to be an Executive Director effective 14 October 2019. He was entitled to receive salary, pension and benefits for the period up to the termination date. He has forfeited all outstanding incentive awards, except the 2017 LTIP award (x2) due to vest May 2020, subject to performance measures being met, as the Committee approved the continued vesting of this LTIP award. Jon Hauck was appointed as Chief Financial Officer effective 14 October 2019. Jon’s salary (£200,000) has been set below the market median in line with the remuneration policy. He is entitled to a maximum bonus of 30% of salary and an uncapped pension contribution of 5% of salary. Upon hiring, he was granted an LTIP award of 68,936 shares (25,000 as part of the regular 2019 cycle and 43,936 shares as compensation for forfeited awards) vesting over 3 years based on TSR performance against the FTSE Small Cap Index. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 67 Chief Executive Officer pay ratio Although the new amendments to the Companies (Miscellaneous Reporting) Regulations 2018 do not apply to Keywords as an AIM-quoted company, we have chosen to adopt the disclosure on CEO pay ratio to align with best practice. The table below provides disclosure of the ratio between the CEO’s salary and total remuneration and that of the lower quartile, median and upper quartile of our 380 UK-based employees. Financial year Calculation methodology P25 (lower quartile) P50 (median) P75 (upper quartile) 2019 Companies (Miscellaneous Reporting) Regulations 2018 (Option A) Salary ratio Salary (£000) Total remuneration ratio Total remuneration (£000) 9:1 26.4 38:1 31.6 7:1 35 30:1 40.6 5:1 50 21:1 56.8 CEO 240 1,198 The lower, median and upper quartile employees were determined using calculation methodology A which involved calculating the actual full-time equivalent remuneration for all UK employees for the year ended 31 December 2019. From this analysis, three employees were then identified as representing the 25th, 50th and 75th percentile of the UK employee population. Keywords chose this method as it is the preferred approach of the Government and that of shareholders, and the Company had the systems in place to undertake this method. As the drafting of this report was earlier than the final determination of bonuses for the wider population, the bonus outcomes have been based on the financial forecasts in December 2019. As this is the first year of reporting the CEO pay ratio using the above methodology, there is no comparative data against which to compare the pay ratios above. The Committee will consider the median pay ratio of 30:1 in the context of the ratio reported in future years. The CEO pay ratio is based on comparing the CEO’s pay to that of Keywords’ UK-based workforce, a large proportion of whom are engineers, artists, and support staff. The Committee expects that the ratios will be largely driven by the CEO’s incentive pay outcomes, which will likely lead to greater variability in his pay than that observed at lower levels who, consistent with market practices, have a greater proportion of their pay linked to fixed components. The Committee takes into account these ratios when making decisions around the Executive Director pay packages, and Keywords takes seriously the need to ensure competitive pay packages across the organisation. Implementation of the remuneration policy in 2020 Salary With effect from 1 March 2020, salary increases of 2% have been awarded to the CEO and CFO, such that their 2020 salaries will be £244,800 and £204,000 respectively. Pension The Committee agreed that Andrew Day’s pension would be enhanced to be consistent with that of the majority of the UK workforce by removal of the salary cap (£50,000 at 3%). Jon Hauck’s pension remains unchanged from 2019 at 5% of salary. Annual bonus The Executive Directors will be eligible to earn an annual bonus of up to 30% of salary in line with previous years. The outcome will be determined with reference to targets set at the start of 2020 around financial performance (revenue and profit, weighted 80%) and personal performance (weighted 20%). LTIP The Remuneration Committee intends to make awards under the LTIP to the Executive Directors in line with previous years, with vesting based on the Company’s TSR performance versus the FTSE Small Cap Index over a 3-year period, consistent with the performance condition for awards granted in 2019. GovernanceFinancial statementsSupplementary information 68 Directors’ remuneration report continued Non-Executive Directors’ remuneration Non-Executive Director fees are based on the roles and responsibilities of the Directors (see table below). There are no fee increases for Non-Executive Directors in 2020. Ross Graham* David Reeves Giorgio Guastalla Charlotta Ginman Georges Fornay £90,000 £48,000 £48,000 £48,000 Role Board Chairman Senior Independent Director fee Non-Executive Director basic fee Additional fees: Chairman of the Audit Committee Chairman of the Remuneration Committee Member of: Audit Committee Remuneration Committee £5,000 £48,000 £12,000 £3,000 £12,000 £3,000 £63,000 £3,000 £51,000 Total £90,000 £68,000 £48,000 * Ross Graham receives no additional fees on top of his Board Chairman fee for his membership of the sub-committees. Directors’ interest in shares The interests of each person who was a Director of the Company (together with interests held by his or her connected persons) were: Andrew Day Giorgio Guastalla 1 Ross Graham David Reeves Georges Fornay Charlotta Ginman Jon Hauck 1 Giorgio Guastalla’s indirect shareholding arises out of his 90% holding in P.E.Q. Holdings Limited. At 31 Dec 19 At 31 Dec 18 3,296,573 3,296,573 3,150,662 3,600,662 58,440 32,400 5,142 1,733 – 58,440 32,400 5,142 1,733 – 6,544,950 6,994,950 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 69 The outstanding LTIP and Option awards held by each Executive Director of the Company are as follows. LTIP Andrew Day Jon Hauck David Broderick (former CFO) Number at 31 Dec 18 Number granted during the year Number vesting during the year Number lapsed / forfeited during the year 86,593 35,000 60,000 52,000 50,000 – – – 30,000 30,000 25,000 – 368,593 – – – – – 50,000 25,000 43,936 – – – 25,000 143,936 – – 60,000 – – – – – 30,000 – – – 90,000 Current vesting expectation** Number at 31 Dec 19 86,593 35,000 Vesting date 12 Jul 2016* 01 Jun 2018* 60,000 10 May 2019* 52,000 50,000 50,000 25,000 43,936 15 May 2020 100% 18 May 2021 3 May 2022 30 Sept 2022 30 Sept 2022 0% 25% 0% 0% – 3 Oct 2019* 30,000 15 May 2020 100% – – – – – – – – – – 25,000 25,000 50,000 – – 18 May 2021 3 May 2022 432,529 * Awards have vested. ** Vesting expectation (% of award) is based on the achievement of the TSR performance condition up to 31 December 2019. The awards in the table above vesting in 2020 were granted subject to the Company’s TSR performance versus the Numis Smaller Companies (excluding Investment Trusts) Index over a 3-year period with a 4-year exercise window and continuous employment; threshold vesting (10% of the award) will vest for TSR in line with the Index and full vesting will be earned for exceeding the Index TSR by 45% over the performance period. The awards in the table above vesting in 2021 and 2022 were granted subject to the TSR condition as described in the Section above “Long-term incentives outstanding during 2019” and “Long-term incentives granted during 2019” respectively, having the same criteria save that full vesting applies for exceeding the Numis Smaller Companies (excluding Investment Trusts) Index by 20% (previously 45%) in 2021 and the FTSE Small Cap Index in 2022. Share Option Scheme Andrew Day Number at 31 Dec 18 Number granted during the year Number exercised during the year Number lapsed / forfeited during the year 21,167 21,167 21,168 63,502 – – – – – – – – – – – – Number at 31 Dec 19 21,167 21,167 21,168 63,502 Vesting date 12 Jul 2015 12 Jul 2016 12 Jul 2017 Executive Directors no longer receive awards under the Share Option Scheme. Awards of options in the table above have all vested and shall lapse the day before the seventh anniversary of the Date of Grant (12 July 2013), assuming it is not exercised before then and no event occurs to cause it to lapse earlier under the Rules. Dr David Reeves Chair of the Remuneration Committee 16 April 2020 GovernanceFinancial statementsSupplementary information 70 Report of the Nomination Committee Roles and responsibilities The role of the Committee is to develop and maintain a formal, rigorous and transparent procedure for making recommendations on appointments and re-appointments to the Board. In addition, it is responsible for reviewing the succession plans for the Executive Directors and the Non-Executive Directors. This involves: • Reviewing the structure, size and composition of the Board and making recommendations to the Board with regard to any changes. • Assessing the effectiveness and performance of the Board and each of its Committees including consideration of the balance of skills, experience, independence and knowledge of the Company on the Board, its diversity, including gender, how the Board works together as a unit, and other factors relevant to its effectiveness. • Considering succession planning for Directors and members of the Executive Management Team. • Identifying and nominating new members to the Board. • Reviewing the results of the Board performance evaluation process that relate to the composition of the Board and the performance of individual Directors. • Reviewing annually the time input required from Non-Executive Directors. Diversity The Committee reviews the Board Diversity Policy regularly, with the last review in March 2020. The policy acknowledges that an effective Board will include and make good use of differences in the skills, regional and industry experience, background, race, gender and other distinctions between Directors and emphasises that in identifying suitable candidates for appointment to the Board, the Committee will consider candidates on merit against objective criteria, with due regard for the benefits of diversity on the Board. Governance processes The Committee meets at least twice a year and at such other times as the Committee Chair or any member of the Committee may request. In 2019, the Committee met twice. The Committee has formal terms of reference which can be viewed on the Company’s website, www.keywordsstudios.com. Main activities Succession The Board is committed to effectively managing leadership succession and proactively engages with the Senior Management Team to assess the Executive talent pool. The Committee and the Board receive regular contributions from individuals in the wider Executive Group at meetings of the Board and Committees throughout the year. These contributions are valuable for our decision making and have helped the Non-Executive Directors to develop a clear understanding of the strength of the management team. Succession planning is designed to consider the planned process of transition to new leadership over time and also the potential for unforeseen change over a shorter timeframe. The Board and the Committee keep in touch with the talent development process throughout the organisation, conscious of the strategic importance of promoting from within as far as possible to support the Company’s growth plans as set out in the strategic report. Senior management succession planning will continue to be a focus for 2020. Board and Committee Composition The Committee also reviewed the size, composition and skill set of the Board during the year and concluded that there was an appropriate mix of experience, skills and knowledge to provide strong and effective leadership. Role of the Company Secretary The Directors have access to the services of a Company Secretary through Liam O’Donoghue of ONE Advisory Limited, who provides advice on company secretarial and corporate governance matters. Annual evaluation of the Board and Committees’ performance This year’s annual internal Board and Committee evaluation exercise was designed and led by the Company Secretary, working closely with the Chairman of the Board in order to provide objectivity. The areas covered were: structure and skills, operating effectiveness, operating efficiency, quality of information and ongoing development. The findings from this evaluation, based on an in-depth questionnaire issued to each Director, identified a number of positive areas including site visits to the Company’s studio locations and the appointment of an Internal Audit Manager, signalling progress from the previous evaluation exercise. Although the Board and sub-committees are working well, areas highlighted for improvement include the need to spend more time discussing the quality and effectiveness of the senior management structure below the CEO, the effectiveness of the Company’s strategy from a day-to-day standpoint, and to continue to undertake more site visits to the Company’s studio locations. These matters will be addressed during the 2020 financial year. In addition, individual reviews of Non-Executive Director’s performances were carried out by the Chairman, and the performance of the Chairman was reviewed by the rest of the Directors. This concluded that overall the Chairman devotes adequate time of the Company’s business, stays abreast of developments affecting the Company, and shows a strong understanding of the business. Ross K Graham Chairman of the Nomination Committee 16 April 2020 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Directors’ report 71 The Directors present the Annual Report together with both the audited consolidated financial statements and the parent company (Keywords Studios plc) financial statements for the year ended 31 December 2019. Disclaimer The purpose of this Annual Report and financial statements are to provide information to the members of the Company. The Annual Report and financial statements have been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, its Directors and employees, agents or advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. The Annual Report and financial statements contain certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and financial statements and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report and financial statements should be construed as a profit forecast. Dividends The results for the year are set out on page 79. Dividends paid are set out on page 101. The Board is not proposing a final dividend following the payment of an interim dividend of 0.58p per share in October 2019. Directors and changes to the Board The Directors of the Company during the year were Ross Graham, Andrew Day, David Reeves, Giorgio Guastalla, Georges Fornay, Charlotta Ginman, Jon Hauck (appointed 14 October 2019), and David Broderick (resigned 14 October 2019). Details of members of the Board at 31 December 2019 are set out on pages 48 and 49. Going concern The Directors have performed an assessment, including a review of the Group's budget for the 2020 financial year and its longer term plans. In doing so the Directors have considered the uncertain nature of the current COVID-19 pandemic but have noted the strong continued demand for the Group’s services, the ability to operate most of its services in a work from home model whilst studios are temporarily closed, the historical resilience of the broader video games industry in times of economic downturn and the ability of the Group to flex its cost base in response to a reduction in trading activity. The Directors have also considered the Group’s strong liquidity position, with access to cash and committed undrawn facilities under the Revolving Credit Facility (RCF) of €82m at 31 December 2019 and the uncommitted accordion feature under the RCF agreement providing access to up to €40m of additional funds subject to lender agreement. The Directors have applied downside sensitivities to the Group’s cash flow projections to evaluate the Group’s ability to withstand a prolonged period of studio closures as a result of the COVID-19 pandemic, leading to a reduction in production capability. Under this severe case the Group would have sufficient liquidity and remain within its banking covenants. The Directors are satisfied that the Company and the Group have adequate resources to continue to operate and meet its liabilities as they fall due for the foreseeable future, a period considered to be at least 12 months from the date of signing these financial statements. For this reason they continue to adopt the going concern basis for preparing the financial statements. Financial risk management The Group’s approach to capital management is shown in note 25 of the financial statements. The Group’s exposure and approach to liquidity, credit, interest rate and foreign currency risk is shown in note 23 of the financial statements. Our approach to risk management generally and our principal risks can be found in the strategic report on pages 22 and 23. Political donations No political donations were made in the year. Directors and their interests A list of Directors, their interests in the ordinary share capital of the Company, their interests in its long-term performance share plan and details of their options over the ordinary share capital of the Company are given in the Directors’ Remuneration report on pages 57 to 69. No Director had a material interest in any significant contract, other than a service contract or contract for services, with the Company or any of its operating companies at any time during the year. GovernanceFinancial statementsSupplementary information 72 Directors’ report continued Significant shareholdings At 31 December 2019, the Company had been notified, in accordance with the Disclosure Guidance and Transparency Rules, of the following interests in its ordinary share capital*: Shares 6,020,414 4,030,666 3,500,736 3,296,573 3,255,696 3,220,657 2,283,856 % 9.2 6.2 5.4 5.1 5.0 4.9 3.5 Corporate responsibility Keywords seeks to be a socially responsible Group which has a positive impact on the communities in which it operates. By the nature of the business, we employ a diverse workforce, with many nationalities. No discrimination is tolerated and we endeavour to give all employees the opportunity to develop their capabilities. We provide an excellent working environment, the latest technology and appropriate training. Website publication The Directors are responsible for ensuring the Annual Report and financial statements are made available on a website. Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. By order of the Board Jon Hauck Chief Financial Officer 16 April 2020 Name Franklin Templeton Octopus Investments P.E.Q Holdings* Andrew Day Liontrust Asset Management T Rowe Price Global Investments TimesSquare Capital Management * As recorded on the Company’s share register. Future developments Important events since the financial year end related to the COVID-19 pandemic are described in note 30 of the financial statements, the Chief Executive's review section on pages 14 and 15 and in the Service line review on pages 24 to 27. Future developments are described in the strategy section of the strategic report on pages 22 and 23. People and organisation Keywords is, and always has been, dependent on the quality and commitment of its entire staff to provide and maintain the high levels of services expected by the Groups’ customers. Keywords average number of employees was 7,424 during 2019. This permanent headcount is supplemented with employees on short-term contracts as activity changes throughout the year. Employment policy Keywords has a range of employment policies covering such issues as diversity, employee wellbeing and equal opportunities. The Group continues to give full and fair consideration to applications for employment made by disabled persons, having regard to their particular skills and experience. Appropriate arrangements are made for the continued employment and training, career development and promotion of disabled persons employed by the Group including making reasonable adjustments where required. In the event of any colleague becoming disabled during their career at Keywords, every effort is made by the Group to ensure their continued employment and engagement with the business. Employee involvement The Group provides employees with information on matters of concern to them so that their views can be taken into account when making decisions that are likely to affect their interests. A summary of the methods we use to engage with our employees are provided in Our People, our culture section of the Annual Report on pages 28 to 33, Responsible Business report on pages 40 to 42 and Section 172(1) statement on page 43. Approximately 10% of the workforce participate in the Employee Share Option Plan (see page 61). We continue to review options to expand participation in employee share schemes. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Statement of Directors’ responsibilities 73 The Directors are responsible for preparing the Annual Report and financial statements. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these financial statements the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable and prudent; • State whether IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the Group and Company financial statements respectively; and • Prepare the financial statements on a going concern basis, unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors as at the date of this report, whose names and functions are listed in the Board of Directors on pages 48 and 49, confirm that: • So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and • The Director has taken all the steps that he or she ought to have taken as a Director in order to make himself / herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Website publication The Directors are responsible for ensuring the Annual Report and financial statements are made available on a website. Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. By order of the Board Liam O’Donoghue Company Secretary 16 April 2020 GovernanceFinancial statementsSupplementary information 74 Independent Auditor’s report to the members of Keywords Studios plc Opinion We have audited the financial statements of Keywords Studios plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2019 which comprise the Group and Parent Company Statements of Financial Position, the Group Statement of Comprehensive Income, the Group and Parent Company Statements of Cash Flows, the Group and Parent Company Statements of Changes in Equity, and the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • • • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2019 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRCs Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 1 Revenue Recognition – cut off Key Audit Matter Although the majority of the Groups revenue contracts are non complex in nature, there is a material accrued revenue balance as at 31 December 2019 of €7.0m (2018: €6.3m). We focused on this area due to the risk of management manipulation of the timing of revenue recognition and the cut off relating to accrued revenue at the year end. Related Disclosures Refer to note 2 of the accompanying consolidated financial statements for the accounting policies of the Group in relation to Revenue Recognition. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 75 Audit Response We have performed audit procedures to understand the application of the revenue recognition accounting policies and to assess whether for each material revenue stream, that revenue has been recognised correctly in accordance with the Group Revenue Recognition policy. We have completed a substantive based audit approach across all full scope locations and completed specific audit procedures on a sample basis on less significant components of the group. Our audit work included, but was not restricted to, reviewing a sample of transactions both throughout the year and around the year end, to assess that the stage of completion and therefore accrued revenue is reflective of the underlying project status. We have tested these transactions to supporting documentation such as sales orders and contracts from customers, project status evidence, and subsequent billing. When examining samples of transactions around the year end we have assessed whether the revenue has been recognised in the correct period. 2 Business Combinations Key Audit Matter The Group has entered into a significant number of acquisitions and business combinations throughout the year, which have had a material and extensive impact on the group’s financial performance and position. Following the purchase price allocations (in which identifiable assets and liabilities assumed were recognised at fair value), €176m (2018: €154m) of goodwill has been recognised cumulatively to date. The fair value of certain identifiable assets acquired and liabilities assumed in a business combination is different from their carrying amounts in the acquired statements of financial position which can give rise to fair value adjustments as part of the purchase price allocations of these business combinations. Accordingly, the cumulative acquisitions are material and significant judgement is required in relation to the purchase price allocations including the resulting goodwill. Management determined the fair value of the identifiable assets and liabilities and notably the value of the customer relationships. The valuation of these assets was primarily based upon the expected future cash flows related to these acquisitions. A number of these acquisitions have also included deferred consideration in the form of shares and cash payments at future dates, which add further complexity with regard to the acquisition-date fair value of such consideration as part of the consideration transferred in exchange for the acquisitions and business combinations. Related Disclosures Refer to note 2 of the accompanying consolidated financial statements for the accounting policy in relation to business combinations. In addition, detailed disclosures have been made in relation to each business combination in note 28 to the financial statements. Audit Response We have reviewed the underlying contracts and share purchase agreements relating to each acquisition to assess whether the basis for treatment of the acquisitions is in accordance with the accounting policy and International Financial Reporting Standard 3 – Business Combinations. We have assessed the carrying value of each material balance at the date of acquisition, and have reviewed management’s assessments of the fair value of the assets and liabilities acquired, and in particular, the methodology applied in the valuation of intangible assets and goodwill. Our procedures included; • We reviewed the methodology applied to identify the categories of intangible assets, • We evaluated whether the cash flow forecasts used in the valuation are consistent with information approved by the Board and have reviewed the historical accuracy of management’s forecasts in order to assess the reliance which can be placed upon managements forecasting, • We have challenged the key assumptions such as the growth factors and discount rates by comparing them to relevant market rates and historic acquisitions to evaluate whether management had been consistent in its approach to valuations, and • We assessed the adequacy of the acquisition disclosures in the Group’s financial statements. GovernanceFinancial statementsSupplementary information 76 Independent Auditor’s report to the members of Keywords Studios plc continued 2 Business Combinations continued In addition, we have examined the terms of all business combinations to assess whether the fair value of any deferred / contingent consideration is treated appropriately in accordance with the group accounting policy and IFRS 3. We also examined the key post combination employment contracts of former shareholders of the acquired entities, reviewing the substance of the transactions and considered whether they have been appropriately accounted for in line with the group accounting policy and the requirements of IFRS 3. 3 Valuation of goodwill and intangible assets Key Audit Matter As a result of both the current year and prior year acquisitions, the group has amassed significant intangible assets and goodwill balances. These balances are material to the financial statements, with goodwill carrying value of €176m (2018: €154m), and intangibles carrying value of €21.1m (2018: €25.9). The valuation of goodwill and other intangible assets is significant to our audit due to the fact that the impairment test calculations are based on several key assumptions which are estimated by management, and are by nature judgemental. Key assumptions include the expected future cash flows for the forecasting period, the discount rates and perpetual growth rate. The Directors have concluded that there is one cash generating unit (“CGU”) in the group, for the purposes of impairment assessment. Related Disclosures Refer to note 2 of the accompanying consolidated financial statements for the accounting policy in relation to business combinations, intangible assets and goodwill. In addition, detailed disclosures have been made in relation to each business combination in note 28 to the financial statements. Detailed disclosures are made in note 11 relating to goodwill, and note 12 in relation to intangible assets. Audit Response We have reviewed the Directors assessment of the carrying value of goodwill and intangible assets. We have challenged the Directors assumptions in relation to CGU identification, cash flow forecasting, discount rates applied, and future growth rates. Our procedures included; • We have evaluated that the CGU identified is the lowest level at which management monitors goodwill and intangible assets, • We have reviewed the accuracy of the cash flow forecasts used, and ensured that these represent those which are reviewed by the Board, • We have reviewed and assessed the accuracy of the historical forecasts prepared by the Group, • We have assessed the key estimates and inputs into the discounted cash flow models, including the growth rates assumed, and tested these where possible to supporting evidence such as post year end activities, • We have completed sensitivity analyses in relation to the cash flow models and have stress tested all key assumptions used, and • We have considered the appropriateness of the disclosures relating to the valuation of goodwill and intangible assets in the financial statements. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions in the financial statements, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take into account the nature of identified misstatements, and in particular the circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. We determined materiality for the financial statements as a whole to be €1.75m, which represents 10% of profit before taxation and represents less than 2% of equity. We consider profit before income tax to be the most significant determinant of the group’s financial performance used by shareholders and other users and therefore consider this as an appropriate basis for materiality. Our materiality is lower than the level we set for the year ended 31 December 2018 (€2.2m), due to the decreased profits of the group. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 77 Our application of materiality continued We agreed with the Audit Committee that we would report to the Committee all individual differences identified during the course of our audit in excess of €87,500, (2018: €110,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Materiality for the parent company financial statements as a whole was also considered. As the parent company's primary function is that of a holding company, a benchmark based on 5% of total assets was deemed appropriate. The resulting materiality figure for the parent company financial statements was €8.9m. As this amount was greater than the materiality applied to the group financial statements, the lower group financial statement materiality figure of €1.75m was applied in relation to the parent company financial statements also. An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Group and its environment, including the group wide controls, and assessing the risks of material misstatement identified at group level. The Group has operations in 21 countries, and 77 wholly owned subsidiary entities. Based on our assessment, we have completed full scope audit procedures in relation to the following entities; Keywords Studios plc, Keywords International Limited, Sperasoft Studios LLC, Cord Worldwide Limited, Studio Gobo Limited, Electric Square Limited, Keywords Studios QC-Games Inc (formerly Babel Games Services Inc), Keywords France, Keywords China and Keywords Studios Italia S.R.L (formerly Binari Sonori S.R.L & Sillabit S.R.L). In addition, specific audit procedures have been completed in relation to certain material balances and transaction streams in VMC Embedded Services, Keywords Canada Holdings Inc (formerly Volt Canada Inc), Keywords Studios QC-Tech Inc (formerly Alchemic Dream Inc), and Keywords Studios Japan. The above entities represent 74% of Group revenues. Analytical review procedures have been performed on the remaining non- significant components in the group. Whilst materiality for the financial statements as a whole was €1.75m, each component of the group was audited to a lower level of materiality. Audits of these components were performed at a materiality level calculated by reference to a proportion of group materiality appropriate to the relative scale of the business concerned. The Group auditor, BDO Dublin, has audited Keywords Studios plc, Keywords International Limited, Cord Worldwide Limited, Studio Gobo Limited, Electric Square Limited. Their involvement in the work performed by other component auditors varies by location and involves, at a minimum, direction of the audit procedures to be completed, and review of the reports received in relation to the results of the audit work undertaken by component audit teams. In the current year, the Senior Statutory auditor or senior members of the Group audit team have visited the following reporting locations on planned visits: Brighton, UK (Electric Square) and Canada to meet with local auditors and local Keywords Management. At the parent company level we have also tested the consolidation process and carried out additional procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to full scope or specific procedures. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. GovernanceFinancial statementsSupplementary information 78 Independent Auditor’s report to the members of Keywords Studios plc continued Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 73 the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk / auditorsresponsibilities. This description forms part of our auditor’s report. John O’Callaghan (Senior Statutory Auditor) For and on behalf of BDO, Statutory Auditor Dublin 2, Ireland 16 April 2020 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Consolidated statement of comprehensive income 79 Revenue from contracts with customers Cost of sales Gross profit Share option expense Costs of acquisition and integration Amortisation of intangible assets Total of items excluded from adjusted profit measures Other administration expenses Administrative expenses Operating profit Financing income Financing cost Share of post-tax profit / (loss) of equity accounted associate Profit before taxation Taxation Profit Other comprehensive income: Items that will not be reclassified subsequently to profit or loss Years ended 31 December Note 2019 €’000 2018 €’000 4 5 17 5 12 6 6 27 7 326,463 250,805 (206,234) (154,997) 120,229 (9,775) (4,348) (7,318) (21,441) (77,246) (98,687) 21,542 74 (4,245) – 17,371 (7,462) 9,909 95,808 (4,129) (5,296) (6,872) (16,297) (56,826) (73,123) 22,685 791 (1,316) (66) 22,094 (7,191) 14,903 Actuarial gain / (loss) on defined benefit plans 19 (167) 27 Items that may be reclassified subsequently to profit or loss Exchange gain / (loss) in net investment in foreign operations Exchange gain / (loss) on translation of foreign operations Total comprehensive income Profit / (loss) for the period attributable to: Owners of the parent Non-controlling interest Total comprehensive income attributable to: Owners of the parent Non-controlling interest Earnings per share Basic earnings per ordinary share Diluted earnings per ordinary share 1,267 5,960 16,969 10,022 (113) 9,909 17,082 (113) 16,969 € cent 15.23 14.73 1,270 771 16,971 14,903 – 14,903 16,971 – 16,971 € cent 23.16 22.24 8 8 The notes from page 86 onwards form an integral part of these consolidated financial statements. On behalf of the Board Andrew Day Director 16 April 2020 Jon Hauck Director GovernanceFinancial statementsSupplementary information 80 Consolidated statement of financial position Non-current assets Property, plant and equipment Right of use assets Goodwill Intangible assets Investment in associate Deferred tax assets Current assets Trade receivables Other receivables Cash and cash equivalents Total assets Equity Share capital Share capital – to be issued Share premium Merger reserve Foreign exchange reserve Shares held in Employee Benefit Trust (“EBT”) Share option reserve Retained earnings Non-controlling interest Total equity Current liabilities Trade payables Other payables Loans and borrowings Corporation tax liabilities Lease liabilities Non-current liabilities Other payables Employee defined benefit plans Loans and borrowings Deferred tax liabilities Lease liabilities Total equity and liabilities At 31 December 2019 €’000 2018 €’000 Note 13 24 11 12 27 26 14 15 16 16 16 16 16 18 20 24 18 19 20 26 24 22,163 21,469 175,639 21,130 – 5,060 245,461 43,243 35,413 41,827 120,483 365,944 780 5,310 102,979 50,451 5,764 (1,997) 16,449 43,187 222,923 35 222,958 8,027 38,712 80 2,732 7,741 57,292 285 2,049 59,671 9,523 14,166 85,694 365,944 15,002 – 154,202 25,884 160 2,967 198,215 37,019 23,459 39,871 100,349 298,564 763 15,648 102,225 35,996 (1,463) (1,997) 6,674 34,529 192,375 – 192,375 7,142 41,153 40,071 6,665 – 95,031 1,062 1,378 230 8,488 – 11,158 298,564 The notes from page 86 onwards form an integral part of these consolidated financial statements. The financial statements were approved and authorised for issue by the Board on 16 April 2020. On behalf of the Board Andrew Day Director 16 April 2020 Jon Hauck Director Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Consolidated statement of changes in equity 81 Share capital – to be issued €’000 Share capital €’000 Share premium €’000 Merger reserve €’000 Foreign exchange reserve €’000 Shares held in EBT €’000 Share option reserve €’000 Retained earnings €’000 Total attributable to owners of parent €’000 Non- controlling interest €’000 Total equity €’000 At 1 January 2018 737 11,620 102,054 28,878 (3,504) (1,997) 2,545 20,679 161,012 – – – – 3 – – – – – – – – – – – 171 – – – – – – – – 2,041 2,041 – – – – – – – – – 14,903 14,903 – – 161,012 14,903 – 27 2,068 – 2,068 – 14,930 16,971 – 16,971 – 4,129 4,129 – 4,129 174 (1,080) (1,080) – – 174 (1,080) – – – – – 23 4,028 – 7,118 – – – 11,169 – 11,169 Profit for the period Other comprehensive income Total comprehensive income for the period Contributions by and contributions to the owners: Share option expense Share options exercised Dividends (note 9) Acquisition related issuance of shares (note 16) Contributions by and contributions to the owners 26 4,028 171 7,118 – – 4,129 (1,080) 14,392 – 14,392 At 31 December 2018 763 15,648 102,225 35,996 (1,463) (1,997) 6,674 34,529 192,375 – 192,375 Profit for the period Other comprehensive income Total comprehensive income for the period Contributions by and contributions to the owners: Share option expense Share options exercised Dividends (note 9) Acquisition related issuance of shares (note 16) Net assets on acquisition of AppSecTest Contributions by and contributions to the owners – – – – 7 – – – – – – – – – – – 754 – – – – – – – 10 (10,338) – 14,455 – – – – – 7,227 7,227 – – – – – – – – – – – – – – 10,022 10,022 (113) 9,909 – – 9,775 – – – – (167) 7,060 – 7,060 9,855 17,082 (113) 16,969 – – 9,775 761 (1,197) (1,197) – – – 9,775 761 (1,197) – – 4,127 – 4,127 – 148 148 17 (10,338) 754 14,455 – – 9,775 (1,197) 13,466 148 13,614 At 31 December 2019 780 5,310 102,979 50,451 5,764 (1,997) 16,449 43,187 222,923 35 222,958 GovernanceFinancial statementsSupplementary information 82 Consolidated statement of cash flows Cash flows from operating activities Profit after tax Income and expenses not affecting operating cash flows Depreciation – property, plant and equipment Depreciation – right of use assets Amortisation of intangible assets Taxation Share option expense Fair value adjustments to contingent consideration Disposal of property, plant and equipment Unwinding of discounted liabilities – deferred consideration Unwinding of discounted liabilities – lease liabilities Share of post-tax (profit) / loss of equity accounted associate Interest receivable Fair value adjustments to employee defined benefit plans Interest expense Unrealised foreign exchange (gain) / loss Changes in operating assets and liabilities Decrease / (increase) in trade receivables Decrease / (increase) in MMTC and VGTR receivable Decrease / (increase) in other receivables (Decrease) / increase in accruals, trade and other payables Taxation paid Net cash generated by / (used in) operating activities Cash flows from investing activities Current year acquisition of subsidiaries net of cash acquired Prior year acquisition of subsidiaries net of cash acquired Settlement of deferred liabilities on acquisitions Investment in associate Acquisition of property, plant and equipment Investment in intangible assets Interest received Net cash generated by / (used in) investing activities Cash flows from financing activities Repayment of loans Payments of principal on lease liabilities Interest paid on principal of lease liabilities Loan to finance acquisitions Dividends paid Share options exercised Interest paid Net cash generated by / (used in) financing activities Increase / (decrease) in cash and cash equivalents Exchange gain / (loss) on cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of period Years ended 31 December 2019 €’000 2018* Restated €’000 Note 9,909 14,903 13 24 12 7 17 5 13 6 6 27 6 19 6 28 18 27 13 12 29 6 29 9 16 7,295 7,849 7,318 7,462 9,775 493 200 330 694 – (74) 504 934 (577) 42,203 (4,370) (5,913) (2,162) 6,402 (6,043) (13,288) 32,781 (13,051) – (14,711) – (13,145) (391) 74 (41,224) (7,973) (7,355) (694) 27,000 (1,197) 761 (1,436) 9,106 663 1,293 39,871 41,827 5,316 – 6,872 7,191 4,129 766 63 311 – 66 – 279 502 (992) 24,503 (7,680) (370) 2,850 (252) (5,452) (6,304) 27,650 (24,163) (726) (1,603) (226) (9,440) (1,599) – (37,757) (10,835) – – 31,850 (1,080) 174 (502) 19,607 9,500 (3) 30,374 39,871 * The prior year has been restated to re-classify the Acquisition and integration cash outlay to Net cash generated by / (used in) operating activities, as the Directors consider this to be more appropriate. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Company statement of financial position 83 Non-current assets Property, plant and equipment Investment in subsidiaries Other receivables Right of use assets Current assets Other receivables Cash and cash equivalents Total assets Equity Share capital Share capital – to be issued Share premium Merger reserve Shares held in EBT Share option reserve Retained earnings Total equity Current liabilities Trade payables Other payables Loans and borrowings Corporation tax liabilities Lease liability Non-current liabilities Other payables Loans and borrowings Lease liability Total equity and liabilities At 31 December 2019 €’000 2018 €’000 Note 13 21 15 24 15 16 16 16 16 18 20 24 18 20 24 357 30,670 208,352 619 389 30,670 175,509 – 239,998 206,568 16,096 599 16,695 256,693 780 5,310 102,979 56,132 (1,997) 16,449 (84) 1,737 438 2,175 208,743 763 15,648 102,225 41,677 (1,997) 6,674 (2,538) 179,569 162,452 139 11,298 – – 204 11,641 5,561 59,500 422 65,483 256,693 285 5,435 40,000 3 – 45,723 568 – – 568 208,743 In accordance with Companies Act 2006, the Company is availing of the exemption from presenting its individual Statement of Comprehensive Income to the Annual General Meeting and from filing it with Companies House. The amount of profit after tax dealt with in the parent undertaking is €3,651k (2018: loss of €1,147k). The notes on pages 86 onwards form an integral part of these financial statements. The financial statements were approved and authorised for issue by the Board on 16 April 2020. On behalf of the Board Andrew Day Director 16 April 2020 Jon Hauck Director GovernanceFinancial statementsSupplementary information 84 Company statement of changes in equity Share capital – to be issued €’000 Share capital €’000 Share premium €’000 Merger reserve – restructuring €’000 Merger reserve – acquisitions €’000 Shares held in EBT €’000 Share option reserve €’000 Retained earnings €’000 Total equity €’000 At 1 January 2018 737 11,739 102,054 5,313 29,248 (1,997) 2,545 (311) 149,328 Profit / (loss) for the period Total comprehensive income for the period Contributions by and contributions to the owners: Share option expense Share options exercised Dividends (note 9) Acquisition related issuance of shares (note 16) Contributions by and contributions to the owners – – – 3 – – – – – – 23 3,909 – – – 171 – – 26 3,909 171 – – – – – – – – – – – – 7,116 7,116 – – – – – – – – – (1,147) (1,147) (1,147) (1,147) 4,129 – – – – – 4,129 174 (1,080) (1,080) – 11,048 4,129 (1,080) 14,271 At 31 December 2018 763 15,648 102,225 5,313 36,364 (1,997) 6,674 (2,538) 162,452 Profit / (loss) for the period Total comprehensive income for the period Contributions by and contributions to the owners: Share option expense Share options exercised Dividends (note 9) Acquisition related issuance of shares (note 16) Contributions by and contributions to the owners – – – 7 – – – – – – 10 (10,338) – – – 754 – – 17 (10,338) 754 – – – – – – – – – – – – 14,455 14,455 – – – – – – – – – 3,651 3,651 3,651 3,651 9,775 – – – – – 9,775 761 (1,197) (1,197) – 4,127 9,775 (1,197) 13,466 At 31 December 2019 780 5,310 102,979 5,313 50,819 (1,997) 16,449 (84) 179,569 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Company statement of cash flows 85 Cash flows from operating activities Profit / (loss) after tax Income and expenses not affecting operating cash flows Share option expense Interest receivable Interest expense Depreciation – property, plant and equipment Depreciation – right of use assets Amounts written off financial assets Changes in operating assets and liabilities (Increase) / decrease in other receivables Increase / (decrease) in trade and other payables Taxation paid Net cash generated by / (used in) operating activities Cash flows from investing activities Acquisition of property, plant and equipment Interest received Net cash generated by / (used in) investing activities Cash flows from financing activities Repayment of loans Financing Group acquisitions Loan to finance acquisitions Payments of principal on lease liability Interest paid on principal of lease liability Dividends paid Shares options exercised Interest paid Net cash generated by / (used in) financing activities Increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of period Years ended 31 December Note 2019 €’000 2018 €’000 13 24 13 29 29 9 16 3,651 (1,147) 693 (1) 984 45 200 92 255 (12) 669 27 – 127 2,013 1,066 (17,200) 10,641 (6,559) – (895) (13) 1 (12) (7,500) (16,368) 27,000 (192) (16) 2,393 4,505 6,898 – 6,817 (415) 12 (403) (10,100) (32,401) 31,850 – – (1,197) (1,080) 761 (1,420) 1,068 161 438 599 174 (680) (12,237) (5,823) 6,261 438 GovernanceFinancial statementsSupplementary information 86 Notes forming part of the consolidated and company financial statements 1 Basis of Preparation Keywords Studios PLC (the “Company”) is a company incorporated in the UK. The consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group”) made up to 31 December 2019. The Group was formed on 8 July 2013 when Keywords Studios PLC (formerly Keywords Studios Limited) acquired the entire share capital of Keywords International Limited through the issue of 31,901,332 ordinary shares. The parent company financial statements present information about the Company as a separate entity and not the Group. The consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (“adopted IFRSs”). The financial statements have been prepared in thousands (’000) and the financial statements are presented in Euro (€) which is the functional currency of the Group. New Standards, Interpretations and Amendments effective 1 January 2019 The Group has adopted new accounting standards which have become effective 1 January 2019, as follows: Impact of IFRS 16 Leases IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ along with three Interpretations (IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC 15 ‘Operating Leases-Incentives’ and SIC 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’). The new Standard has been applied using the modified retrospective approach. Prior periods have not been restated. From 1 January 2019, the Group now recognises a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. the right of use asset), for all material lease arrangements over 12 months in duration. On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low value assets, the Group has applied the optional exemptions to not recognise right of use assets but to account for the lease expense on a straight-line basis over the remaining lease term. For those leases previously classified as finance leases, the right of use asset and lease liability are measured at the date of initial application at the same amounts as under IAS 17 immediately before the date of initial application. Instead of performing an impairment review on the right of use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16. The impact of the application of IFRS 16 is outlined in note 24. The following is a reconciliation of operating lease commitments at 31 December 2018 to the lease liabilities recognised at 1 January 2019: Total operating lease commitments disclosed at 31 December 2018 Recognition exemptions: Leases of low value assets Leases with remaining lease term of less than 12 months Lease payments for expected lease renewals extending payments beyond the minimum lease payment period Operating lease liabilities before discounting Discounted using incremental borrowing rate* Operating lease liabilities Finance lease obligations Total lease liabilities recognised under IFRS 16 at 1 January 2019 (note 24) €m 17 – (1) 8 7 24 (1) 23 – 23 * Weighted average incremental borrowing rate applied to lease liabilities on transition 3.1% Impact of IFRIC 23 IFRIC 23 Uncertainty over Income Tax Positions, which was issued in June 2017, clarifies how to recognise and measure current and deferred income tax assets and liabilities when there is uncertainty over income tax treatments. Other New Standards, Interpretations and Amendments effective 1 January 2019 Other accounting pronouncements which have become effective from 1 January 2019 have not had a material impact on the Group. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 87 2 Significant Accounting Policies Basis of Consolidation Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. De-facto control exists in situations where the Company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists, the Company considers all relevant facts and circumstances, including: • The size of the Company’s voting rights relative to both the size and dispersion of other parties who hold voting rights; • Substantive potential voting rights held by the Company and by other parties; • Other contractual arrangements; and • Historic patterns in voting attendance. The consolidated financial statements present the results of the Company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany transactions and balances between Group companies are eliminated in full. Business Combinations The consolidated financial statements incorporate the results of business combinations using the purchase method. In the Consolidated Statement of Financial Position, the acquired identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained. They are consolidated until the date on which control ceases. Any contingent consideration payable is recognised at fair value at the acquisition date and is split between current liabilities and long-term liabilities depending on when it is due. The fair value of contingent consideration at acquisition date is arrived at through discounting the expected payment (based on scenario modelling) to present value. In general, in order for contingent consideration to become payable, pre-defined profit and / or revenue targets must be exceeded. At each balance sheet date, the fair value of the contingent consideration is revalued, with the expected pay-out determined separately in respect of each individual acquisition and any change recognised in the Statements of Comprehensive Income. For deferred consideration which is to be provided for by the issue of a fixed number of shares at a future defined date, where there is no obligation on Keywords to offer a variable number of shares, the deferred consideration is classified as an equity arrangement and the value of the shares is fixed at the date of the acquisition. Equity accounted investments The Group’s investments in its associates are accounted for using the equity method from the date significant influence is deemed to arise until the date on which significant influence / joint control ceases to exist or when the interest becomes classified as an asset held for sale. Goodwill Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. The cost comprises the fair value of assets given, liabilities assumed and equity instruments issued, plus the amount of any non-controlling interests in the acquiree plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree. Contingent consideration is included in acquisition date fair value and, in the case of contingent consideration classified as a financial liability, re-measured subsequently through profit or loss. The direct costs of acquisition are recognised immediately as an expense. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Intangible Assets The Group’s Intangible Assets comprise Customer Relationships and Other Intangible Assets. GovernanceFinancial statementsSupplementary information 88 Notes forming part of the consolidated and company financial statements continued 2 Significant Accounting Policies continued Customer Relationships Intangible assets, separately identified from goodwill acquired as part of a business combination (mainly Customer Relationships), are initially stated at fair value. The fair value attributed is determined by discounting the expected future cash flows generated from the net margin of the business from the main customers taken on at acquisition. The assets are amortised on a straight-line basis (to administration expenses) over their useful economic lives (typically five years is deemed appropriate, however, this is re-examined for each acquisition). Other Intangible Assets Other intangible assets include Intellectual Property and Music Licences, both acquired and internally developed. Other intangible assets are recognised as assets where it is probable that the use of the asset will generate future economic benefits and where the costs of the asset can be determined reliably. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortization (see below) and impairment losses, if any. Subsequent expenditures on capitalised intangible assets are capitalised only when they increase the future economic benefits embodied in the specific assets to which they relate. All other expenditure is expensed as incurred. Other intangible assets with definite useful lives are amortised from the date they are available for use on a straight-line basis over their useful lives, being the estimated period over which the Group will use the assets. Residual amounts, useful lives and the amortization methods are reviewed at the end of every accounting period. Development costs are capitalised as an intangible asset if all of the following criteria are met: • • • • • • the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; the asset will generate probable future economic benefits and demonstrate the existence of a market or the usefulness of the intangible asset if it is to be used internally; the availability of adequate technical, financial and other resources to complete the development and to use or sell it; the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following initial recognition of the development expenditure as an intangible asset, the cost model is applied requiring the intangible asset to be carried at cost, less any accumulated amortization and accumulated impairment losses. The intangible asset is amortised on a straight-line basis over the period of its expected benefit, starting from the date of full commercial use of the product. During the period of development, the asset is tested for impairment annually. If specific events indicate that impairment of an item of intangible asset may have taken place, the item’s recoverability is assessed by comparing its carrying amount with its recoverable amount. The recoverable amount is the higher of the fair value net of disposal costs and the value in use. Impairment Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units (“CGUs”). Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from a business combination that gives rise to the goodwill. The Group has one CGU. This CGU represents the lowest level at which goodwill is monitored by the Group and the lowest level at which management captures information for internal management reporting purposes about the benefits of the goodwill. Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Cash and Cash Equivalents For the purpose of presentation in the Statements of financial position and on the Statements of cash flows, cash and cash equivalents include cash on hand and on call deposits with financial institutions. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 89 2 Significant Accounting Policies continued Foreign Currency The Consolidated Financial Statements are presented in Euro, which is the presentation currency of the Group and the functional currency of the Parent Company. Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss. On consolidation, the results of overseas operations are translated into Euro at rates approximating to this ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. Exchange differences recognised in profit or loss in Group entities’ separate financial statements on the translation of long-term items forming part of the Group’s net investment in the overseas operation concerned are classified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal. Revenue from Contracts with Customers Contracts are typically for services, performing agreed-upon tasks for a customer and can be time-and-materials or milestone based. Most contracts are short term in duration (generally less than one month), however milestone based contracts can be longer term and extend to several months (or in some cases over a year). Where there are multiple performance obligations outlined in a contract, each performance obligation is separately assessed, the transaction price is allocated to each obligation, and related revenues are recognised as services or assets are transferred to the customer. Performance obligations are typically satisfied over time, as the majority of contracts meet the criteria outlined in IFRS 15 paragraph 35 (a) and (c). Revenue is derived from seven main service groupings: • Art Creation Services – Art creation services relate to the production of graphical art assets for inclusion in the video game including concept art creation along with 2D and 3D art asset production and animation. Contracts can be either time-and- materials based or milestone based, with performance obligations satisfied over time. Contracts are generally short term in duration, however for longer term contracts the input method is used to measure progress. Time and materials based contract revenue is recognised as the related services are rendered. For milestone based contracts where progress can be measured reliably towards complete satisfaction of the performance obligation, revenue is recognised using the input method to measure progress. Where progress cannot be measured reliably, revenue is recognised on milestone acceptance. • Game Development – Game Development relates to software engineering services which are integrated with client processes to develop video games. Contracts can be either time-and-materials based or milestone based, with performance obligations satisfied over time. Contracts are generally longer term in duration. Time and materials based contract revenue is recognised as the related services are rendered. For milestone based contracts where progress can be measured reliably towards complete satisfaction of the performance obligation, revenue is recognised using the input method to measure progress. Where progress cannot be measured reliably, revenue is recognised on milestone acceptance. • Audio / Voice-over Services – Audio Services relate to the audio production process for computer games and includes script translation, actor selection and talent management through pre-production, audio direction, recording, and post-production, including native language quality assurance of the recordings. Audio contracts may also involve music licencing or selling music soundtracks. Audio service contracts are typically milestone based, with performance obligations satisfied over time. Audio services contracts are generally short term in duration, however for longer term contracts where progress towards complete satisfaction of the performance obligation can be measured reliably, revenue is recognised using the input method to measure progress. Where progress cannot be measured reliably, audio services revenue is recognised on milestone acceptance. Music licencing and music soundtracks performance obligations are assessed separately, and related revenue is recognised on licence inception and on delivery of the soundtracks, respectively. • Functional Testing – Functional Testing relates to quality assurance services provided to game producers to ensure games function as required. Contracts are typically time-and-materials based and performance obligations are satisfied over time. Contracts are generally short term in duration, however for longer term contracts the input method is used to measure progress. Revenue is recognised as the related services are rendered. GovernanceFinancial statementsSupplementary information 90 Notes forming part of the consolidated and company financial statements continued 2 Significant Accounting Policies continued Revenue from Contracts with Customers continued • Localisation Services – Localisation services relate to translation and cultural adaptation of in-game text and audio scripts across multiple game platforms and genres. Contracts are typically time-and-materials based and performance obligations are satisfied over time. Contracts are generally short term in duration, however for longer contracts the input method is used to measure progress. Localisation contracts may also involve licencing translation software as a service. Such revenue is assessed separately. Revenue is recognised as the related services are rendered. • Localisation Testing – Localisation Testing involves testing the linguistic correctness and cultural acceptability of computer games. Contracts are typically time-and-materials based and performance obligations are satisfied over time. Contracts are generally short term in duration, however for longer term contracts the input method is used to measure progress. Revenue is recognised as the related services are rendered. • Player Support – Player support relates to the live operations support services such as community management, player support and associated services provided to producers of games to ensure that consumers have a positive user experience. Contracts are typically time-and-materials based and performance obligations are satisfied over time. Contracts are generally long term with the input method used to measure progress. Revenue is recognised as the related services are rendered. Due to the nature of the services provided and the competitive nature of the market, contracts generally allocate specific transaction prices to separate performance obligations. Individual services or individual milestones generally involve extensive commercial negotiation to arrive at the specific agreed-upon tasks, and the related pricing outlined in the contract. Such negotiations extend further for milestone based contracts to also include the criteria involved in the periodic and regular process of milestone acceptance by the customer. Such criteria may involve qualitative, as well as quantitative measures and judgements. In measuring progress towards complete satisfaction of performance obligations, the input method is considered to be the most appropriate method to depict the underlying nature of the contracts with customers, the interactive way the service is delivered and projects are managed with the customer. For time-and-materials contracts, other than tracking and valuing time expended, significant judgement is not normally involved. For milestone based contracts, progress is generally measured based on the proportion of contract costs incurred at the balance sheet date, (e.g. worked days) relative to the total estimated costs of the contract, involving estimates of the cost to completion etc. Added to this significant judgement can be involved in measuring progress towards customer acceptance of the milestone. Significant judgement may also be involved where circumstances arise that may change the original estimates of revenues, costs or extent of progress towards complete satisfaction of the performance obligations. In such circumstances estimates are revised. These revisions may result in increases or decreases in revenue or costs and are reflected in income in the period in which the circumstances that give rise to the revision became known. When the outcome of a contract cannot be measured reliably, contract revenue is recognised only to the extent that milestone have been accepted by the customer. Contract costs are recognised as incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately. Revenue recognised represents the consideration received or receivable, net of sales taxes, rebates discounts and after eliminating intercompany sales. Revenue is recognised only where it is probable that consideration will be received. Where consideration is received and the related revenue has not been recognised, the consideration received is recognised as a contract liability (Deferred Revenue), until either revenue is recognised or the consideration is refunded. Multimedia Tax Credits / Video Game Tax Relief The multimedia tax credits (“MMTC”) received in Canada and video games tax relief (“VGTR”) in the UK, are a credit related to staff costs. Tax credits are recognised in the year they are earned as a deduction against direct costs but typically paid in the following financial year once the claims have been submitted and agreed. The nature of the grants is such that they are not dependent on taxable profits. Tax credits have only been recognised where management believes that a tax credit will be recoverable based on their experience and the success of similar historical claims. Share-based Payments The Company issues equity settled share-based payments to certain employees and Directors under a share options plan and a Long Term Incentive Plan (“LTIP”). Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 91 2 Significant Accounting Policies continued Share-based Payments continued The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. Grants do not have non-market-based vesting conditions. At each reporting date, the Company revises its estimate of the number of equity instruments expected to vest and the impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. The Company has no legal or constructive obligation to repurchase or settle the options in cash. Where share-based payments are issued to employees of subsidiary companies, the annual cost of the option is expensed in the holding company and recharged to the subsidiary company through an inter-company charge. Share Option Plan These are measured at fair value on the grant date using a Black-Scholes option pricing model which calculates the fair value of an option by using the vesting period, the expected volatility of the share price, the current share price, the exercise price and the risk- free interest rate. The fair value of the option is amortised over the vesting period, with one-third of the options vesting after two years, one-third after three years, and the balance vest after four years. The only vesting condition is continuous service. There is no requirement to revalue the option at any subsequent date. LTIP The exercise of LTIP awards are subject to the Company's share price (stock symbol: KWS) performance versus the designated Share Index in terms of shareholder return, over a three-year period. For the awards granted up to 2015, one-third of the share options vested if the Company exceeded the Total Shareholder Returns (TSR) of the Numis Small Cap Index (excluding Investment Trusts) by 10%, two-thirds if the TSR exceeded the Index by 20% and full vesting if the TSR exceeded the Index by 30%. This was amended for the 2016 and 2017 awards to 100% vesting if the shareholder return exceeds the Index by 45%, and a pro-rated return between 10% if the TSR matches the Index, to 100% if the TSR exceeds the Index by 45%. The scheme was further amended in 2018 to 100% vesting if the TSR exceeds the Index by 20%, and a pro-rated return between 10% and 100% if the TSR exceeds by between 0% and 20%. In 2019, the benchmark Index was amended for future grants to be the FTSE Small Cap Index, with the same performance conditions as 2018. These are measured at fair value, taking into account market vesting conditions but not non-market vesting conditions, at the date of grant, measured by using the Monte Carlo binomial model. Dividend Distribution Final dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders. Interim dividends are recognised when paid. Income Taxes and Deferred Taxation Provision for income taxes is calculated in accordance with the tax legislations and applicable tax rates in force at the reporting date in the countries in which the Group companies have been incorporated. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on: • The initial recognition of goodwill; • The initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and • Investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities / (assets) are settled / (recovered). Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • The same taxable Group company; or • Different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. GovernanceFinancial statementsSupplementary information 92 Notes forming part of the consolidated and company financial statements continued 2 Significant Accounting Policies continued Property, Plant and Equipment Property, plant and equipment comprise computers, leasehold improvements, and office furniture and equipment, and are stated at cost less accumulated depreciation. Carrying amounts are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Property, plant and equipment acquired through business combinations are valued at fair value on the date of acquisition. Depreciation is calculated to write off the cost of fixed assets on a straight-line basis over the expected useful lives of the assets concerned. The principal annual rates used for this purpose are: Computers and software Office furniture and equipment Leasehold improvements 3 years 10 years over the length of the lease Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the Consolidated statement of comprehensive income. Financial Assets The Group’s most significant financial assets comprise trade and other receivables and cash and cash equivalents in the Consolidated statement of financial position, whereas the Company’s most significant financial assets comprise inter-group receivables. Trade Receivables Trade receivables, which principally represent amounts due from customers, are recognised at amortised cost as they meet the IFRS 9 classification test of being held to collect, and the cash flow characteristics represent solely payments of principal and interest. The Group’s impairment methodology is in line with the requirements of IFRS 9. The simplified approach to providing for expected credit losses has been applied to trade receivables, which requires the use of a lifetime expected loss provision. Intercompany Receivables Intercompany receivables are recognised at amortised cost as they meet the IFRS 9 classification test of being held to collect, and the cash flow characteristics represent solely payments of principal and interest. The Group applies the general approach to applying the expected credit losses to its related party loans. Under the General Approach, at each reporting date, the Group determines whether there has been a Significant Increase in Credit Risk (SICR) since initial recognition and whether any balances are credit impaired. This determines the amount, if any, of expected credit losses to be recognised. Cash and Cash Equivalents Cash and cash equivalents are held to meet the working capital requirements of the Group. They include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Where cash is on deposit with maturity dates greater than three months, it is disclosed as short-term investments. Contract Assets Contract assets arising from Revenue from Contracts with Customers are recognised in accordance with our Revenue Recognition policy, as discussed separately in this note. The Group applies the simplified approach to assessing expected credit losses in relation to contract assets, as the maturities of such assets are less than 12 months. Based upon the recoverability of contract assets at year end, no significant expected credit loss provision has been applied. Share Capital Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s ordinary shares are classified as equity instruments. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 93 2 Significant Accounting Policies continued Financial Liabilities Contingent consideration is initially recognised at fair value and subsequently re-measured through the profit and loss. Trade payables, bank borrowings and other monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method. Leased Assets As described in note 1, the Group has applied IFRS 16 using the modified retrospective approach and therefore comparative information has not been restated. This means comparative information is still reported under IAS 17 and IFRIC 4. The Company has applied the Group policies as set out below. Accounting policy applicable from 1 January 2019 For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. At lease commencement date, the Group recognises a right of use asset and a lease liability on the balance sheet. The right of use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received). The Group depreciates the right of use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The Group also assesses the right of use asset for impairment when such indicators exist. At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee, and payments arising from purchase and extension options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes to in substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right of use asset, or profit and loss if the right of use asset is already reduced to zero. The Group has elected to account for short-term leases and leases of low value assets using the practical expedients. Instead of recognising a right of use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term. The Group has applied judgement to determine the lease term for contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the lease liabilities and right of use assets recognised. Accounting policy applicable before 1 January 2019 Where substantially all of the risks and rewards of ownership are not transferred to the Group (“operating lease”), the total rental payables are charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of the lease. Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a “finance lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the Consolidated Statement of Comprehensive Income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Employee Benefit Trust Ordinary shares purchased by the Employee Benefit Trust on behalf of the parent company under the Terms of the Share Option Plan are deducted from equity on the face of the Consolidated Statement of Financial Position. No gain or loss is recognised in relation to the purchase, sale, issue or cancellation of the parent company’s ordinary shares. GovernanceFinancial statementsSupplementary information 94 Notes forming part of the consolidated and company financial statements continued 3 Critical Accounting Estimates and Judgements The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. Judgements The judgements, apart from those involving estimations, that management have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statement, are outlined below. • Functional Currency: The Directors have considered the requirements of IAS 21 in determining the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions to determine the Group’s functional currency. Detailed consideration has been given to both the Primary and Secondary Indicators in forming this conclusion. The Primary Indicators relate to revenues, regulation, competitive forces and costs, while the Secondary Indicators are primarily concerned with financing the business and the currency in which receipts from operating activities are usually retained. With a mix of currencies dominating the indicators, there is no clear single currency that influences the Group, however the EUR remains marginally the most dominant when all factors are considered. Therefore the Directors consider the EUR as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. • Business Combinations: When acquiring a business, the Group is required to identify and recognise intangible assets, the determination of which requires a significant degree of judgement. Acquisitions may also result in intangible benefits being brought into the Group, some of which qualify for recognition as intangible assets while other such benefits do not meet the recognition requirements of IFRS and therefore form part of goodwill. Customer relationships are recognised as separate assets where revenues are recurring in nature and material revenues have been generated with the customer for a continuous period of 3 years. For the Game Development service line, the key asset acquired is typically “know-how”, an asset that is not readily measurable and thus intrinsically linked to goodwill. Relationships are typically short term contract based rather than relationship based. Therefore neither customer contracts or customer relationships are typically recognised on the acquisition of an Game Development business. • Expected Credit Loss Provision on Company Receivables From Subsidiaries: As outlined in note 22, the Company has significant receivables from subsidiaries primarily related to investments in acquisitions. The Directors have assessed that they view a significant increase in credit risk to exist if there is evidence that a loan is 30 days past due its recoverable date, or if there is external or internal indicators that the subsidiary will not be in a position to repay its loan balances as it falls due. Similarly, the Group will conclude that a loan is in default if the scheduled repayments of either principal or interest are not being met. The Directors have assessed that loans due from subsidiaries of €205.1m (2018: €175.5m) (within Stage 1 of the IFRS 9 impairment assessment model), are within their repayment terms, and no significant increase in credit risk is noted. Furthermore having assessed the ongoing expected recovery strategy of these loans, the Directors have concluded that no material provision for expected credit losses is required. Separately the Company has balances of €15.2m (2018: €1.6m) which are technically repayable upon demand. These loans are within Stage 3 of the IFRS 9 impairment assessment model. The Directors have reviewed in detail the recovery strategy in relation to these loans and have concluded that the majority of these loans will be recoverable and therefore there is no material expected credit loss provision required. A small number of such loans are technically in a credit-impaired status. An expected credit loss of €212k (2018: €183k) has been recognised in relation to these balances. Following on the rapid expansion of the Group, the Directors have commenced a re-structuring program with a view to optimising the Group structure, facilitate tax efficient repatriation of cash and re-payment of loans throughout the Group. The Directors have taken into account both the re-structuring program and the cash generating capacity of the Group, in concluding that all such loans are recoverable and the expected credit loss provisions are adequate. • IFRS 16 Leases: The Group has determined that the Group’s incremental borrowing rate is the appropriate rate to use to discount lease liabilities. The Group has applied judgement to determine the lease term for contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the lease liabilities and right of use assets recognised. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 95 3 Critical Accounting Estimates and Judgements continued Estimates and assumptions The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. A number of areas requiring the use of estimates and critical judgements impact the Group’s earnings and financial position. These include revenue recognition, the computation of income taxes, the value of goodwill and intangible assets arising on acquisitions, the valuation of multimedia tax credits / video game tax relief, leasing and the valuation of defined retirement benefits. The Directors consider that no reasonably possible changes to any of the assumptions used in the estimates would in the view of the Directors give rise to significant risk of a material adjustment to the carrying value of the associated balances in the subsequent financial year 4 Revenue from Contracts with Customers and Segmental Analysis Revenue from Contracts with Customers Revenue recognised in the reporting period arises from contracts with customers, and is predominantly recognised over time. There were no significant amounts of revenue recognised in the reporting period that were included in a contract liability balance at the beginning of the reporting period, or from performance obligations satisfied in the previous reporting period. Revenue by line of business Art creation* Game Development (previously Engineering)* Audio Functional testing* Localisation Localisation testing Player support 2019 €’000 43,601 66,290 40,419 68,930 48,497 22,638 36,088 2018 €’000 33,952 35,163 34,190 47,862 43,983 19,751 35,904 * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. Analysis by geographical regions is made according to the Group’s operational jurisdictions. For many contracts, operations are completed in multiple sites. Revenue is associated with the jurisdiction from which the final invoice to the client is raised. This does not reflect the region of the Group’s customers; whose locations are worldwide. GovernanceFinancial statementsSupplementary information 96 Notes forming part of the consolidated and company financial statements continued 4 Revenue From Contracts With Customers and Segmental Analysis continued Revenue From Contracts with Customers continued Geographical analysis of revenues Ireland United States Canada United Kingdom Switzerland Japan Italy France India Germany Singapore Spain Poland Brazil China Mexico 2019 €’000 118,095 52,265 48,112 41,768 19,045 15,501 9,395 7,606 6,355 1,920 1,637 1,588 1,285 802 691 398 2018 €’000 47,203 52,321 69,536 21,205 20,067 7,724 8,673 8,489 6,323 741 1,130 1,968 347 1,016 3,126 936 326,463 250,805 No single customer accounted for more than 10% (2018: None) of the Group’s revenue during the year. Revenue Expected to be Recognised For Game Development, games are developed to an agreed specification and time schedule, and often have delivery schedules and / or milestones that extend well into the future. The following are Game Development revenues expected to be recognised for contracts with a schedule of work that extends beyond one year, representing the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period: At 31 December 2019 At 31 December 2018 Total undelivered €’000 24,645 10,417 Scheduled completion within 1 year €’000 Scheduled completion 1-2 years €’000 23,593 9,112 1,052 1,305 For all service lines excluding Game Development, contracts do not extend to more than one year, therefore we do not disclose information concerning unsatisfied performance obligations, as allowed under the practical expedient exemption under IFRS 15. This practical expedient is also availed of for Game Development contracts of less than one year in duration. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 97 4 Revenue From Contracts With Customers and Segmental Analysis continued Segmental Analysis Management considers that the Group’s activity as a single source supplier of Services to the gaming industry constitutes one operating and reporting segment, as defined under IFRS 8. Management review the performance of the Group by reference to Group-wide profit measures and the revenues derived from seven main service groupings. There is no allocation of operating expenses, profit measures, assets and liabilities to individual product groupings. Accordingly, the disclosures above are provided on a Group-wide basis. Activities are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the executive management team made up of the Chief Executive Officer and the Chief Financial Officer. Geographical analysis of non-current assets from continuing businesses United States United Kingdom Canada Italy Switzerland Ireland China France Spain Germany Japan Philippines India Mexico Poland Brazil Russia Singapore Netherlands Taiwan 2019 €’000 84,139 52,233 29,772 12,222 10,644 9,296 8,776 6,725 5,924 5,250 3,905 2,798 2,526 2,164 1,563 1,247 925 225 64 3 2018 €’000 84,685 48,929 11,760 11,650 11,117 3,542 7,850 6,318 1,535 1,097 796 595 2,321 885 267 888 797 52 – 4 240,401 195,088 Geographical analysis of non-current assets from continuing businesses 240,401 195,088 Investment in associate Deferred tax assets Non-current assets – 5,060 245,461 160 2,967 198,215 GovernanceFinancial statementsSupplementary information 98 Notes forming part of the consolidated and company financial statements continued 5 Cost of Sales and Operating Profit Cost of sales Operating expenses Multimedia tax credits / video game tax relief Other direct costs Operating profit is stated after charging: Depreciation – property, plant and equipment Depreciation – right of use assets Amortisation of intangible assets Costs of acquisition and integration Short term leases (2018: total lease expense) Costs of acquisition and integration Post-acquisition integrations costs re: 2019 acquisitions (note 28) Post-acquisition integrations costs re: 2018 acquisitions Fair value adjustments to contingent consideration (note 18) Deferred consideration related to continuing employment Acquisition related and other borrowing costs Acquisition team and related costs Other re-organisation and restructuring costs Auditor's remuneration Audit services: Parent company and Group audit Subsidiary companies audit Non-audit services: Audit related assurance services Taxation compliance 2019 €’000 213,011 (16,063) 9,286 2018 €’000 163,112 (12,220) 4,105 206,234 154,997 2019 €’000 7,295 7,849 7,318 4,348 1,616 2019 €’000 535 406 493 567 262 550 1,535 4,348 2019 €’000 285 202 12 – 499 2018 €’000 5,316 – 6,872 5,296 8,708 2018 €’000 – 758 766 590 693 614 1,875 5,296 2018 €’000 329 137 16 7 489 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 99 2019 €’000 2018 €’000 74 – 74 (629) (934) (694) (330) (1,658) (4,245) (4,171) – 791 791 (503) (502) – (311) – (1,316) (525) 2019 €’000 2018 €’000 (3) 8,523 (1,058) 7,462 2019 €’000 17,371 4,519 491 (929) (369) 4,354 (133) (1,524) (1,176) 1,064 1,473 (308) 7,462 – 9,592 (2,401) 7,191 2018 €’000 22,094 5,345 – (352) (368) 2,205 (588) (1,035) (131) 730 1,529 (144) 7,191 6 Financing Income and Cost Financing income Interest receivable Foreign exchange gain Financing cost Bank charges Interest expense Unwinding of discounted liabilities – lease liabilities Unwinding of discounted liabilities – deferred consideration Foreign exchange loss Net financing income / (cost) 7 Taxation Current income tax Income tax on profits of parent company Income tax on profits of subsidiaries Deferred tax (note 26) The tax charge for the year can be reconciled to accounting profit as follows: Profit before tax Tax charge based on the Effective Tax Rate* Tax settlement regarding a pre-acquisition issue Corporate tax prior year (over) / under provision Deferred tax prior year (over) / under provision and impact of change in tax rates Items disallowed for tax purposes Exempt and non taxable income Tax incentives Current year tax losses utilised Current year tax losses where deferred tax has not been provided State and other direct taxes Other differences – net Total tax charge * Effective tax rate – being the statutory tax rate relative to the profit before tax in each jurisdiction 26.0% 24.2% GovernanceFinancial statementsSupplementary information 100 Notes forming part of the consolidated and company financial statements continued 7 Taxation continued The Group’s subsidiaries are located in different jurisdictions and are taxed on their residual profit in those jurisdictions. The effective tax rate will vary year on year due to the effect of changes in tax rates and changes in the proportion of profits in each jurisdiction. Tax effects relating to each component of other comprehensive income Exchange gain / (loss) in net investments foreign operations Tax (expense) / benefit Net of tax amount Actuarial gain / (loss) on defined benefit plans Tax (expense) / benefit Net of tax amount Exchange gain / (loss) on translation of foreign operations Tax (expense) / benefit Net of tax amount 8 Earnings per Share Basic Diluted Profit for the period from continuing operations Denominator (weighted average number of equity shares) Basic* Diluting impact of Share Options Diluted* * Includes (weighted average) shares to be issued 2019 €’000 1,267 – 1,267 (167) 5 (162) 5,960 – 5,960 2019 € cent 15.23 14.73 €’000 9,909 2018 €’000 1,270 – 1,270 27 6 33 771 – 771 2018 € cent 23.16 22.24 €’000 14,903 Number Number 65,081,403 64,335,162 2,187,083 2,679,932 67,268,486 67,015,094 510,350 1,321,707 Contingently issuable Ordinary Shares are excluded from the computation of diluted earnings per Ordinary Share where the conditions governing exercisability have not been satisfied: LTIPs Share options Details of the number of share options outstanding at the year-end are set out in note 17. 2019 Number 2,067,536 1,128,000 2018 Number 951,800 544,900 3,195,536 1,496,700 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 101 9 Dividends Dividends paid Final Interim Dividends paid to shareholders 2018 Final Interim Dividends paid to shareholders 2019 In respect of Approval date € cent per share Pence STG per share 2017 2018 2018 2019 Apr-18 Sep-18 Apr-19 Sep-19 1.11 0.60 1.71 1.21 0.65 1.86 0.98 0.53 1.51 1.08 0.58 1.66 Total dividend €’000 696 384 1,080 773 424 1,197 Payment date Jun-18 Oct-18 Jun-19 Oct-19 The Group does not recognise deferred tax on unremitted retained earnings, as in general, retained earnings are continually re- invested by the Group and dividends are only remitted where there are minimal tax consequences. At 31 December 2019, Retained earnings available for distribution (being retained earnings plus share option reserve) in the Company were €16.4m (2018: €4.1m). The Directors do not foresee any impediment in continuing to implement the dividend policy of the Group. Following on distributions made in 2016 and 2017 that were not fully in compliance with the Companies Act 2006, the Directors have implemented legal advice to ensure ongoing compliance and rectify the oversights in earlier periods, which was envisaged in the Annual Report and Accounts 2018. Following the approval by shareholders of a specific resolution at the 2019 AGM, the Company entered into deeds of release, to put all relevant parties in the position where they were always intended to be, had the relevant dividends been made in accordance with the Act. Interim accounts for the Company have also been filed at Companies House to support the payment of an interim dividend in 2019. 10 Staff Costs Total staff costs (including Directors) comprise the following: Group Salaries and related costs Share option expense Company Salaries and related costs Share option expense 2019 €’000 201,158 9,775 210,933 2019 €’000 1,916 9,775 11,691 2018 €’000 146,785 4,129 150,914 2018 €’000 1,525 4,011 5,536 GovernanceFinancial statementsSupplementary information 102 Notes forming part of the consolidated and company financial statements continued 10 Staff Costs continued The average number of employees comprises the following: Group Average number of employees Operations General and administration Company Average number of employees Operations General and administration Key management compensation is as follows: Salaries and related costs Social welfare costs Pension costs Share option expense 2019 2018 6,778 646 7,424 4,733 505 5,238 2019 2018 – 26 26 2019 €’000 1,384 140 35 943 2,502 – 13 13 2018 €’000 907 99 27 501 1,534 The key management compensation includes compensation to eight Directors of Keywords Studios PLC during the year (2018: seven). The key management compensation presented for 2019 also includes additional executives of the Group, of which only one was included in 2018. 11 Goodwill At 1 January 2018 Recognition on acquisition of subsidiaries (note 28) Exchange rate movement At 31 December 2018 Recognition on acquisition of subsidiaries (note 28) Exchange rate movement At 31 December 2019 2019 €’000 108,062 43,144 2,996 154,202 16,950 4,487 175,639 The Group assesses the carrying value of goodwill each year on the basis of budget projections for the coming year extrapolated using a one to five year growth rate and a terminal value calculated using a long term growth rate projection. The discount rate used of 12.5% (2018: 12.5%) is based on the Board’s assessment of the WACC of the Group. The WACC assessment is supported by an annual independently calculated report, using the Capital Asset Pricing Model. However, the Board have excluded the impact of short term market volatility on these calculations in determining the Group WACC. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 103 11 Goodwill continued Key Assumptions 1 to 5 year growth rate assumption Long term growth rate assumption Value in use (€m) Carrying value – goodwill (€m) Actual Sensitivity analysis 2019 10% 2% 469 176 2018 10% 2% 445 154 2019 15% 2% 560 2018 15% 2% 532 2019 5% 2% 398 2018 5% 2% 378 The value in use calculations were consistently calculated year over year, with no significant changes in the assumptions made. The result of the value in use calculations was that no impairment is required in this period. 12 Intangible Assets Cost At 1 January 2018 Recognition on acquisition of subsidiaries Additions Exchange rate movement At 31 December 2018 Recognition on acquisition of subsidiaries Additions Exchange rate movement At 31 December 2019 Amortisation At 1 January 2018 Amortisation charge Exchange rate movement At 31 December 2018 Amortisation charge Exchange rate movement At 31 December 2019 Net book value At 31 December 2018 At 31 December 2019 Customer relationships €’000 Intellectual property / Development costs €’000 Music licences €’000 Total €’000 29,282 6,564 – 867 36,713 – – 907 37,620 5,734 6,758 179 12,671 7,001 346 20,018 24,042 17,602 – – 1,521 – 1,521 1,615 391 – 3,527 – – – – – – – 1,521 3,527 – 362 78 (4) 436 – – 18 454 – 114 1 115 317 21 453 321 1 29,282 6,926 1,599 863 38,670 1,615 391 925 41,601 5,734 6,872 180 12,786 7,318 367 20,471 25,884 21,130 Customer relationships, intellectual property / development costs and music licences are amortised on a straight-line basis over five years. Customer relationships and music licence amortisation commences on acquisition, whereas intellectual property / development costs amortisation commences when the product is launched. GovernanceFinancial statementsSupplementary information 104 Notes forming part of the consolidated and company financial statements continued 13 Property, Plant and Equipment Group Cost At 1 January 2018 Currency revaluation Additions Acquisitions through business combinations at fair value Disposals At 31 December 2018 Currency revaluation Additions Acquisitions through business combinations at fair value Disposals At 31 December 2019 Accumulated depreciation At 1 January 2018 Currency revaluation Depreciation charge Disposals At 31 December 2018 Currency revaluation Depreciation charge Disposals At 31 December 2019 Net book value At 31 December 2018 At 31 December 2019 Computers and software €’000 Office furniture and equipment €’000 Leasehold improvements €’000 12,474 (114) 6,248 362 (645) 18,325 1,042 6,815 300 (1,639) 24,843 7,252 (51) 3,805 (645) 10,361 639 5,226 (1,501) 14,725 7,964 10,118 4,316 (15) 1,082 272 (248) 5,407 275 1,657 232 (824) 6,747 2,222 11 643 (185) 2,691 160 703 (803) 2,751 2,716 3,996 3,424 27 2,110 332 (89) 5,804 497 4,673 231 (44) 11,161 629 74 868 (89) 1,482 267 1,366 (3) 3,112 4,322 8,049 Total €’000 20,214 (102) 9,440 966 (982) 29,536 1,814 13,145 763 (2,507) 42,751 10,103 34 5,316 (919) 14,534 1,066 7,295 (2,307) 20,588 15,002 22,163 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 105 13 Property, Plant and Equipment continued Company Cost At 1 January 2018 Additions At 31 December 2018 Additions At 31 December 2019 Accumulated depreciation At 1 January 2018 Depreciation charge At 31 December 2018 Depreciation charge At 31 December 2019 Net book value At 31 December 2018 At 31 December 2019 14 Trade Receivables Group Computers and software €’000 Office furniture and equipment €’000 Leasehold improvements €’000 Total €’000 2 2 4 1 5 1 1 2 1 3 2 2 – 145 145 – 145 – 8 8 15 23 137 122 – 268 268 12 280 – 18 18 29 47 250 233 2 415 417 13 430 1 27 28 45 73 389 357 Trade receivables Provision for bad debts (note 23) Financial asset held at amortised cost Trade receivables arise from revenues derived from contracts with customers. 15 Other Receivables Group – Short Term Accrued income from contracts with customers Prepayments and rent deposits Other receivables Multimedia tax credits / video games tax relief Tax and social security 2019 €’000 44,526 (1,283) 43,243 2018 €’000 38,736 (1,717) 37,019 2019 €’000 7,010 4,089 3,151 17,626 3,537 35,413 2018 €’000 6,317 2,490 2,459 10,820 1,373 23,459 GovernanceFinancial statementsSupplementary information 106 Notes forming part of the consolidated and company financial statements continued 15 Other Receivables continued Company – Short Term Intercompany receivables (financial assets held at amortised cost) Prepayments Other receivables Company – Long Term Intercompany receivables (financial assets held at amortised cost) 2019 €’000 15,220 702 174 16,096 2018 €’000 1,600 109 28 1,737 2019 €’000 208,352 208,352 2018 €’000 175,509 175,509 Accrued income from contracts with customers, represent mainly contract assets in process and related items. The movement in the year is comprised of transfers in and out as items are accrued and subsequently invoiced to customers, with no significant amounts written off or impaired in the period. 16 Shareholders’ Equity Share Capital At 1 January 2018 Acquisition related issuance of shares: Cord and Laced Synthesis Synthesis in lieu of deferred cash Fire Without Smoke Mindwalk Blindlight Snowed In Studio Gobo and Electric Square The Trailerfarm Around the Word Acquisition related issuance of shares Issue of shares on exercise of share options At 31 December 2018 Number of ordinary £0.01 shares Number of ordinary £0.01 shares – to be issued Share capital €’000 Share premium €’000 Merger reserve €’000 Share capital – to be issued €’000 Issue date Per share € 61,708,205 2,172,000 737 102,054 28,878 11,620 09–Apr 24–Apr 24–Apr 30–May 14–Jun 11–Jun 20–Jul 20–Aug 18–Sep 01–Oct 17.48 – 73,744 2.91 1,188,263 (1,188,263) 19.39 20.12 51,562 – – 77,006 3.67 513,189 (513,189) 20.57 19.55 19.74 21.33 12.07 – – – – 64,521 37,983 254,529 11,070 66,262 (66,262) 1,819,276 (1,248,861) 0.67 260,805 – – 15 1 – 6 – – – – 1 23 3 – – – – – – – – – – – – 1,289 3,440 (3,455) 999 – – 1,550 1,880 (1,886) – – – – 1,327 743 5,024 236 799 (800) 7,118 4,028 171 – – 63,788,286 923,139 763 102,225 35,996 15,648 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 107 16 Shareholders’ Equity continued Share Capital continued Number of ordinary £0.01 shares Number of ordinary £0.01 shares – to be issued Share capital €’000 Share premium €’000 Merger reserve €’000 Share capital – to be issued €’000 Issue date Per share € 04–Jan 16–Jan 16–Jan 04–Jun 06–Jun 11–Jun 26–Jun 12–Aug 20–Aug 24–Sep 01–Oct 26–Nov 12–Dec 12.46 – 60,179 16.48 243,442 (243,442) 14.13 20.12 7,801 – 77,006 (77,006) 9.12 160,297 (160,842) 17.93 20.57 19.55 – 35,560 64,521 (64,521) 37,983 (37,983) 19.74 254,949 (254,529) 21.31 13.12 15.94 15.86 11,070 (11,070) – – – 68,608 70,246 41,382 857,069 (573,418) 1.34 567,160 – – 3 – 1 2 – 1 – 3 – – – – 10 7 – – – – – – – – – – – – – – – 750 4,010 (4,013) 110 1,548 1,461 – 1,326 743 5,021 236 – – – – (1,549) (1,468) 638 (1,327) (743) (5,024) (236) 900 1,120 614 14,455 (10,338) 754 – – 65,212,515 349,721 780 102,979 50,451 5,310 Acquisition related issuance of shares: Sunny Side Up Sperasoft Sperasoft re: bonus to employees Fire Without Smoke Red Hot Descriptive Video Works Blindlight Snowed in Studio Gobo and Electric Square The Trailerfarm TV+SYNCHRON Ichi Kantan Acquisition related issuance of shares Issue of shares on exercise of share options At 31 December 2019 There is no limit to the number of shares which the Company can issue, nor are there are any restrictions on dividends or distributions on such shares. Shares to be issued are valued at the share price at the date of acquisition, and are recorded as shares to be issued, in accordance with IAS 32.16. Shares held in the Employee Benefit Trust (“EBT”) Ordinary shares held in the EBT 2019 2018 Number 335,425 €’000 1,997 Number 335,425 €’000 1,997 GovernanceFinancial statementsSupplementary information 108 Notes forming part of the consolidated and company financial statements continued 16 Shareholders’ Equity continued Reserves The following describes the nature and purpose of each reserve within owners’ equity: Reserve Description and purpose Retained earnings Cumulative net gains and losses recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange reserve Share premium Gains or losses arising on retranslation of the net assets of the overseas operations into Euro. The share premium account is the amount received for shares issued in excess of their nominal value, net of share issuance costs. Share option reserve The share option reserve is the credit arising on share-based payment charges in relation to the Company’s share option schemes. Share capital – to be issued For deferred consideration which is to be provided for by the issue of a fixed number of shares at a future defined date, where there is no obligation on Keywords to offer a variable number of shares, the deferred consideration is classified as an Equity Arrangement and the value of the shares is fixed at the date of the acquisition. Merger reserve The merger reserve was initially created following the Group reconstruction, when Keywords Studios PLC acquired the Keywords International Limited Group of companies. When the Group uses Keywords Studios PLC shares as consideration for the acquisition of an entity, the value of the shares in excess of the nominal value (net of share issuance costs) is also recorded within this reserve, in line with S612 of the Companies Act 2006. 17 Share Options In July 2013, at the time of the IPO, the Company put in place a Share Option Scheme and a Long Term Incentive Plan (“LTIP”). The charge in relation to these arrangements is as follows: Share option scheme expense LTIP option expense 2019 €’000 1,520 8,255 9,775 2018 €’000 646 3,483 4,129 Of the total share option expense, €754k relates to Directors of the Company (2018: €501k). Share Option Scheme Share options are granted to Executive Directors and to permanent employees. The exercise price of the granted options is equal to the market price of the shares at the time of the award of the options. The Company has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Outstanding at the beginning of the period Granted Lapsed Exercised Outstanding at the end of the period Exercisable at the end of the period Weighted average share price at date of exercise 2019 2018 Average exercise price in £ per share 7.11 15.88 14.74 2.66 9.96 1.89 15.98 Number of options 1,832,701 729,000 (175,807) (237,792) 2,148,102 809,440 Average exercise price in £ per share 2.79 17.10 13.24 1.93 7.11 1.47 17.68 Number of options 1,375,201 591,000 (65,246) (68,254) 1,832,701 706,524 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 109 17 Share Options continued Share Option Scheme continued Summary by year Year of Option Exercise price Outstanding at the beginning of the period Granted Lapsed Exercised 2013 £1.20 2015 £1.58 2016 £2.54 2017 £7.76 2018 2019 Total £17.10 £15.88 275,484 605,033 139,184 268,500 544,500 – 1,832,701 – – – – – – 729,000 729,000 (1,422) (7,005) (21,880) (75,000) (70,500) (175,807) (96,925) (59,130) (40,950) (40,787) – – (237,792) Outstanding at the end of the period 178,559 544,481 91,229 205,833 469,500 658,500 2,148,102 Exercisable at 31 December 2019 178,559 544,481 Exercisable 2020 Exercisable 2021 Exercisable 2022 Exercisable 2023 – – – – – – – – 41,567 49,662 44,833 – 80,500 156,500 – – 809,440 286,662 – – – 80,500 156,500 219,500 456,500 – – 156,500 219,500 376,000 – 219,500 219,500 The inputs into the Black-Scholes model, used to value the options are as follows: Year of Option Weighted average share price (£) Weighted average exercise price (£) Fair value at measurement date (€) 2013 £1.23 £1.20 €0.81 2015 £1.64 £1.58 €0.56 2016 £2.54 £2.54 €0.40 2017 £7.74 £7.76 €1.13 2018 £17.21 £17.10 €3.79 2019 Total £16.09 £15.88 €4.96 Average expected life 4 Years 4 Years 4 Years 4 Years 4 Years 4 Years Expected volatility Risk free rates Average expected dividend yield Weighted average remaining life of options in months 36.12% 28.03% 27.17% 24.79% 35.87% 45.43% 0.50% 1.00% 0.90% 0.75% 0.58% 0.55% 0.16% 0.21% 0.89% 0.10% 0.81% 0.10% – – 5 17 29 41 26 Expected volatility was determined by reference to KWS volatility. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Long Term Incentive Plan LTIP share awards are subject to KWS performance verses the designated share index over a three-year period. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Outstanding at the beginning of the period Granted Lapsed Exercised Outstanding at the end of the period Exercisable at the end of the period Weighted average share price at date of exercise 2019 2018 Average exercise price in £ per share 0.01 0.01 0.01 0.01 0.01 0.01 16.17 Number of options 2,677,467 1,298,136 (200,367) (329,368) 3,445,868 732,299 Average exercise price in £ per share 0.01 0.01 0.01 0.01 0.01 0.01 17.50 Number of options 1,976,416 996,000 (102,398) (192,551) 2,677,467 436,667 GovernanceFinancial statementsSupplementary information 110 Notes forming part of the consolidated and company financial statements continued 17 Share Options continued Long Term Incentive Plan continued Summary by year Year of option Exercise price Outstanding at the beginning of the period Granted Lapsed Exercised 2013 £0.01 2015 £0.01 2016 £0.01 2017 £0.01 2018 £0.01 2019 £0.01 Total £0.01 222,238 214,429 625,000 664,000 951,800 – 2,677,467 – – – – – – – – 1,298,136 1,298,136 (20,000) (94,800) (85,567) (200,367) (17,965) (13,470) (297,933) – – – (329,368) Outstanding at the end of the period 204,273 200,959 327,067 644,000 857,000 1,212,569 3,445,868 Exercisable at 31 December 2019 204,273 200,959 327,067 – Exercisable 2020 Exercisable 2021 Exercisable 2022 Year of option Weighted average share price (£) Weighted average exercise price (£) Fair value at measurement date (€) – – – 2013 £1.60 £0.01 €0.62 – – – 2015 £1.63 £0.01 €1.38 – – – 644,000 – – 2016 £2.56 £0.01 €1.74 2017 £7.75 £0.01 €4.96 – – 857,000 – – – 732,299 644,000 857,000 – 1,212,569 1,212,569 2018 2019 Total £17.24 £16.05 £0.01 £0.01 €11.83 €13.98 Average expected life 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years Expected volatility Risk free rates Weighted average remaining life of options in months 36.12% 28.21% 27.11% 24.79% 35.87% 45.26% 0.50% 0.88% 0.54% 0.16% 0.89% 0.79% – – – 5 17 29 17 LTIP’s vest on the third anniversary of the grant, if the market performance criteria are met. LTIPs must be exercised before the seventh anniversary of the grant. The options were valued using a Monte Carlo binomial model using the following inputs: • Expected volatility was determined by reference to KWS volatility. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. • As any dividends earned are to be re-invested into the business the impact of dividends has been ignored in the calculation of the LTIP share option charge. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 111 2019 €’000 2018 €’000 22,809 3,833 6,104 5,966 – 16,671 2,338 3,890 18,249 5 38,712 41,153 216 69 285 2019 €’000 10,091 818 118 271 – 5 1,057 1,062 2018 €’000 4,572 784 66 13 – 11,298 5,435 5,561 – – 5,561 568 – – 568 18 Other Payables Group Current liabilities Accrued expenses Payroll taxes Other payables (ii) Deferred and contingent consideration (i) Related party payable Non-current liabilities Other payables Deferred and contingent consideration (i) Company Current liabilities Intercompany payables Accrued expenses Payroll taxes Other payables Deferred and contingent consideration (i) Non-current liabilities Intercompany payables Other payables Deferred and contingent consideration (i) GovernanceFinancial statementsSupplementary information 112 Notes forming part of the consolidated and company financial statements continued 18 Other Payables continued Group (i) The movement in deferred and contingent consideration during the financial year was as follows: Opening balance Consideration settled by cash Consideration settled by shares Unwinding of discount (note 6) Additional liabilities from current year acquisitions (note 28) Fair value adjustments (note 5) Translation adjustment Company Opening balance Consideration settled by shares Unwinding of discount 2019 €’000 19,306 (14,711) – 330 237 493 380 2018 €’000 3,642 (1,603) (1,000) 311 17,068 766 122 6,035 19,306 2019 €’000 – – – – 2018 €’000 971 (1,000) 29 – In general, in order for contingent consideration to become payable, pre-defined profit and / or revenue targets must be exceeded. The valuation of contingent consideration is derived using data from sources that are not widely available to the public and involves a degree of judgement (Level 3 input in the fair value hierarchy). On an undiscounted basis, the Group may be liable for deferred and contingent consideration ranging from €nil to a maximum of €6.163m. A 10% movement in expected performance results, has no impact on the fair value of the contingent consideration, and hence there are no reasonably probable changes to the assumptions and inputs (including the discount rate), that would lead to a material change to the fair value of the total amount payable. (ii) Other payables includes deferred income from contracts with customers of €2,609k (2018: €312k), which mainly comprise items invoiced prior to services being delivered. The movement in the year is comprised of transfers in and out as items are deferred and subsequently recognised as revenue. 19 Employee Defined Benefit Plans In line with statutory requirements in France, Italy and India, we are required to maintain employee defined benefit termination payment schemes. In France, employees are entitled to a lump-sum on retirement or early termination, based on salary and length of service (‘Indemnité de Fin de Carrière’ or IFC), entitling the Group’s French employees to benefits of up to 2 month’s salary per year of service. In Italy, on leaving employment, each employee is entitled to 1/13.5 of their final salary for each year of service (‘Trattamento di Fine Rapporto’ or TFR). In India, in compliance with statutory requirements, employees with over 5 years service are entitled a termination benefit of 15/26 of monthly salary for each year of service (‘Gratuity’ benefits). The Group commissions an actuarial valuation of the related liabilities in each jurisdiction annually. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 113 19 Employee Defined Benefit Plans continued The liabilities at year end are recorded as long term. The actuarial gain or loss is recorded separately within Other comprehensive income. The movements through the year are as follows: Group Opening liabilities at 1 January Liabilities in India recognised at 1 January 2018 Liabilities in France recognised at 1 January 2019 Service cost Interest cost Benefits paid Actuarial (gain) / loss recorded Closing liabilities at 31 December 2019 €’000 1,378 – 210 307 35 (48) 167 2,049 2018 €’000 1,055 188 – 247 32 (117) (27) 1,378 The Directors have considered the key specific risk factors which the Group faces due to the employee defined benefit plans which are in place. Having fully considered all specific elements of these plans the Directors believe that the key issues faced are as follows: • The plan is currently 100% unfunded, there are no specific assets to meet the future liabilities as they fall due, as such there will be a cash flow impact as the liabilities must be met with current working capital as they fall due. The Group has taken no specific actions to mitigate against these factors as due to the long-term nature of the plans it is expected that there will be no sudden financial impact on the Group’s results caused by any of these factors. A maturity profile of the obligation is not presented as the liability is not significant in the context of the Group, and due to the age profile of employees a significant outlay is not anticipated for the foreseeable future. In 2020, the Group expects the costs of the employee benefit plan to be in line with current year levels, as staff levels are anticipated to not change significantly in the period. The actuarial valuation is based on the Projected Unit Credit Method, in line with IAS 19. Cost for year Service cost Interest cost Liabilities in France recognised at 1 January 2019 Actuarial (gain) / loss Actuarial (gain) / loss Change due to experience Change due to demographical assumptions Change due to financial assumptions 2019 €’000 2018 €’000 307 35 210 167 719 2019 €’000 28 (24) 163 167 247 32 – (27) 252 2018 €’000 2 (38) 9 (27) GovernanceFinancial statementsSupplementary information 114 Notes forming part of the consolidated and company financial statements continued 19 Employee Defined Benefit Plans continued Assumptions Underlying the Actuarial Valuations and Sensitivities of the Assumptions For the actuarial valuations the following demographic and economic and financial assumptions were applied: • Mortality probabilities were derived from the population demographics, as recorded by the Government Statistics Offices in each jurisdiction. • Disability, retirement age and other relevant demographic assumptions were taken from relevant life assurance statistics. • Certain inputs were estimated by management including – – Employee attrition rates, estimated based on company experience in each jurisdiction. In Italy, TFR rules allow for early drawdown of benefits in certain circumstances. Such advances were estimated on the basis of company experience. 2019 2018 Economic and Financial Assumptions Salary increase Inflation Discount rate Key Statistics Staff (number) Average age (years) Average service (years) Interest Rate Sensitivities (0.25%) 0.25% Mortality Rate Sensitivities (0.025%) 0.025% Staff Turn Over Rate Sensitivities (0.50%) 0.50% Staff Salary Increases Rate Sensitivities (0.50%) 0.50% 3.38% 2.06% 1.64% 749 31 4 2019 €’000 2,179 1,964 2,056 2,054 2,090 2,046 2,033 2,103 3.08% 2.18% 2.43% 558 32 3 2018 €’000 1,456 1,308 1,379 1,378 1,389 1,369 1,370 1,390 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 115 2019 €’000 80 – 59,671 59,751 2018 €’000 40,071 – 230 40,301 20 Loans and Borrowings Group Expiry within 1 year Expiry between 1 and 2 years Expiry over 2 years In 2019 the Company amended and extended it’s existing Syndicated Bank revolving credit facility (‘RCF’). The RCF allows financing of up to €100 million, with an option to increase this by up to €40m to a total of €140 million. The RCF extends to October 2022, with an option to extend this maturity date by up to a further 2 years. In connection with the RCF, security has been granted over the major subsidiaries of the Group and the lenders also require the Group to comply with and report interest cover and leverage ratios in connection with its financial covenants. There were no changes to these covenant requirements in the amended RCF. The Group was in full compliance with its financial covenants throughout each of the periods presented. Non-compliance with terms of the RCF could result in lenders refusing to advance more funds, or in the worst case, calling in outstanding loans. While technically the borrowings are repaid and re-borrowed multiple times during the term of the RCF, so long as the Group remains compliant with the financial covenants and certain other terms of the RCF, the debt is rolled from one period to another, with the legal and commercial substance of a multi-year committed facility. Hence the Group has presented the RCF as a non-current liability, while in the prior period, the original RCF arrangement was presented as a current liability, because the arrangements were in the process of being re-negotiated. There were a number of drawdowns during the financial year to fund new acquisitions. During 2019, excess funds of €7.5m were used to make a partial repayment of outstanding loans. As at 31 December 2019 the Group had €59.5 million outstanding under the RCF, at a rate based on a margin over EURIBOR, plus a separate margin charged for the unutilised facility. Loans owed by Keywords Studios QC-Interactive Inc at the end of 2018 of €0.3m reduced to €0.25m during 2019. Loans and borrowings (classified as financial liabilities under IFRS 9), are held at amortised cost. Interest expenses which are calculated using the effective interest method, are disclosed in note 6. The currencies of these loans are as follows: Group Euro Canadian Dollars Company Euro 2019 €’000 59,500 251 59,751 2019 €’000 59,500 59,500 2018 €’000 40,000 301 40,301 2018 €’000 40,000 40,000 GovernanceFinancial statementsSupplementary information 116 Notes forming part of the consolidated and company financial statements continued 21 Investment in Subsidiaries Company 2019 €’000 30,670 2018 €’000 30,670 The results and financial position of all the subsidiaries are included in the consolidated financial statements. Details of the Company’s direct and indirect subsidiaries as at 31 December 2019 are set out below: Name Country of incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Registered office Keywords International Ltd Ireland 13-May-98 100% Whelan House, South County Business Park, Dublin 18, Ireland. Keywords International Co Ltd Japan 30-Nov-10 100% 5F, Aoba No.1 Bldg. 2-3-1 Kudanminami, Keywords International Inc. USA 26-Sep-12 Chiyoda, Tokyo, 102-0074 Japan. 100% 18300 Redmond Way, Suite 120, Redmond, WA 98052 KW Studios Limited* Liquid Violet Ltd* Keywords Studios QC-Games Inc. UK UK Canada (Quebec) 29-May-13 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 15-Jan-14 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 17-Feb-14 100% 1751 Richardson, suite 8400, Montréal, Québec, Canada H3K1G6 Babel Media USA Inc. USA 17-Feb-14 100% 251 Little Falls Drive, Wilmington, DE 19808, USA Babel Media India Private Limited India 17-Feb-14 100% 3rd floor, Vardhman Orchard Plaza, Plot No 4, LSC, West Enclave, Pitampura, New Delhi, 110034, India Babel Media Ltd* UK 17-Feb-14 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT Keywords International Pte. Limited Singapore 24-Apr-14 100% 20 Kallang Avenue, #06-6A, Lobby B, Keywords Studios Italy S.R.L. Keywords Studios Los Angeles Inc. (Formerly Binari Sonori America Inc.) Italy USA 08-May-14 08-May-14 Binari Sonori Audio Productions LLC USA 08-May-14 Pico Creative Centre, Singapore 339411 100% Via Egadi 2, Milano, MI, 20144, Italy 100% 350 N. Glenoaks Blvd., Suite 305, Burbank, CA 91502, USA 100% 350 N. Glenoaks Blvd., Suite 305, Burbank, CA 91502, USA Lakshya Digital Private Limited* India 09-Oct-14 100% 3rd floor, Vardhman Orchard Plaza, Plot No 4, LSC, West Enclave, Pitampura, New Delhi, 110034, India Edugames Solutions Private Limited India 09-Oct-14 100% D – 3/C, Munirka Flats, New Delhi – 110067 Lakshya Digital Singapore Pte. Ltd Singapore 09-Oct-14 100% 20 Kallang Avenue, #06-6A, Lobby B, Keywords Studios QC-Tech Inc. Canada (Quebec) Keywords International Barcelona SL Spain 09-Jan-15 06-Jan-15 100% 1751 Richardson Street Suite 8400 Pico Creative Centre, Singapore 339411 Montreal QC H3K 1G6 Canada 100% Passeig de Gràcia 49, 1er2a, 08007 Barcelona, Catalonia, Spain Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 117 21 Investment in Subsidiaries continued Company continued Name Keywords do Brasil Localizacao e Traducao Ltda Keywords (Shanghai) Information Technology Ltd Country of incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Registered office Brazil 18-Jan-15 100% Av. Churchill, 109 – Sala 204 – Centro, China 02-Apr-15 Rio de Janeiro-RJ, Brazil CEP: 20020-050 100% 142 Room, Building 7, No.311 Jin Gao Road, Pudong New District, Shanghai Keywords Studios Spain SLU Spain 16-Jul-15 100% Julián Camarillo 6A, 3B, 28037 Madrid, Spain Kite Team Mex S.de R.L. de. CV (Currently in process of changing name to Keywords Studios Mexico, S. de R.L. de C.V.) Mexico 16-Jul-15 100% Av. Insurgentes Sur 1853, Guadalupe Inn, 01020 Ciudad de México, CDMX Mexico Liquid Development LLC USA 19-Aug-15 100% 411 SW 2nd Ave #300, Portland, OR 97204, USA Keywords Asia Private Ltd Singapore 15-Mar-16 100% 20 Kallang Avenue #06-6A, Lobby B Pico Creative Centre Singapore 339411 Synthesis Deutschland GmbH* Germany 12-Apr-16 100% Holstenkamp 46 A, Bahrenfeld, 22525 Hamburg, Germany Synthesis Global Solutions SAS* Switzerland 12-Apr-16 100% Corso Elvezia 16, 6900 Lugano, Ticino, Switzerland Keywords Studios France SAS France 08-Jun-16 100% 11 rue Torricelli, 75017 Paris, France Player Research Ltd UK 26-Oct-16 100% 201 Temple Chambers, 3-7 Temple Keywords Studios QC-Interactive Inc. SPOV Ltd Xloc Inc. GameSim Inc. Avenue, London, England, EC4Y 0DT Canada (Quebec) UK USA USA 16-Nov-16 100% 1751 Richardson Street Suite 8400 Montreal QC H3K 1G6 Canada 16-Feb-17 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 08-May-17 100% 712 Presnell Court, Raleigh, NC 27615-1240, USA 16-May-17 100% 12000 Research Parkway, Suite 436, Orlando, FL 32826, USA Strongbox Ltd Seychelles 19-May-17 100% Suites 103, 106 and 107 Premier Building, Victoria, Mahe, Seychelles Red Hot Software (Shanghai) Ltd China 19-May-17 100% Dong Ti Yu Hui Road #860, Building 5, Red Hot Software (Zhengzhou) Ltd China 19-May-17 Eastern New Media Limited Hong Kong 19-May-17 4th Floor, Shanghai, China 100% Room 207, 11th Floor, Building No. 3, No. 57 Ke Xue Da Dao, Zheng Zhou, He Nan, China 100% Flat/Rm 4304, 43F, China Resources Building, 26 Harbour Road, Wanchai, Hong Kong PT Limitless Indonesia Indonesia 19-May-17 100% JI. Timoho II, No. 32, Yogyakarta, Around the Word GmbH Germany 03-Aug-17 100% Rosenstrasse 2, D-10178 Berlin D3T Ltd UK 19-Oct-17 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT GovernanceFinancial statementsSupplementary information 118 Notes forming part of the consolidated and company financial statements continued 21 Investment in Subsidiaries continued Company continued Name Country of incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Registered office Keywords US Holdings Inc. USA 23-Oct-17 100% 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, USA. Keywords Canada Holdings Inc. Keywords Studios BC Inc. Canada (Quebec) Canada (BC) 27-Oct-17 100% 1751 Richardson Street Suite 8400 Montreal QC H3K 1G6 Canada 27-Oct-17 100% 400-725 Granville Street, Vancouver, BC V7G 1G5, Canada VMC Consulting Corporation USA 24-Oct-17 100% 11611 Willows Road NE, Redmond, WA 98052, United States of America Sperasoft Poland Spólka z.o.o. Poland 13-Dec-17 100% Ul. Na Kozłówce 27, 30-664 Kraków, Poland Sperasoft Studios LLC Russia 13-Dec-17 100% 196084, Russia, Saint-Petersburg, Kievskaya street, 5 – building Sperasoft Inc. USA 13-Dec-17 100% 1013 Centre Road, Suite 403-B, Wilmington, DE 19805, USA Keywords Studios Ltd* Ireland 27-Mar-18 100% Whelan House, South County Business Keywords UK Holdings Limited Keywords Ventures Limited Laced Music Ltd Cord Worldwide Ltd Cord Artists Management Limited Paleblue Limited Fire Without Smoke Ltd Fire Without Smoke Inc. Blindlight LLC Snowed In Studios, Inc. Studio Gobo Limited Bitsy SG Limited UK UK UK UK UK UK UK USA USA Park, Dublin 18, Ireland. 28-Mar-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 06-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 07-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 07-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 07-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 07-Apr-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 29-May-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 29-May-18 100% 12701 Marblestone Drive, Suite 330, Woodbridge, Virginia, 22192 USA 08-Jun-18 100% 8335 Sunset Blvd. West Hollywood, CA 90069 USA Canada (Ontario) UK UK 19-Jul-18 100% 400 – 981 Wellington Street West Ottawa, Ontario K1Y 2Y1 Canada 17-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 17-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 119 21 Investment in Subsidiaries continued Company continued Name Electric Square Limited Alset Ltd Itsy SGD Limited d3t Development Ltd The Trailerfarm Limited Country of incorporation UK UK UK UK UK Date of incorporation / acquisition 17-Aug-18 Proportion of voting rights and ordinary share capital held Registered office 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 17-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 17-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 30-Aug-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 13-Sep-18 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT Sunny Side Up Inc. Canada 03-Jan-19 100% 355 De La Silice Street, Boischatel, Quebec City, G0A 1H0, Canada AppSecTest Limited UK 22-Jan-19 48% Unit 13 Orton Enterprise Centre, Keywords Studios Netherlands B.V. Netherlands 05-Feb-19 Wizcorp Inc. Japan 18-Apr-19 Bakewell Road, Peterborough, Cambridgeshire, United Kingdom, PE2 6XU 100% Juliana van Stolberglaan 4-10, 2595CL The Hague, the Netherlands 100% 3-10-14, Higashi-Nihonbashi 3-chome, Sunrise Tachibana 6F, Chuo-ku, Tokyo, Japan Descriptive Video Works Inc. Canada 11-Jun-19 100% 400-725 Granville Street, Vancouver, BC V7G 1G5, Canada Descriptive Video Works USA Inc USA 11-Jun-19 100% 300 Deschutes Way SW 304, Tumwater, Keywords Germany Holdings GmbH Germany 06-Sep-19 TV+SYNCHRON Berlin GmbH Germany 01-Oct-19 WA, 98501, United States 100% Moriz Seeler Straße 5-7, Franz Ehrlich Haus, 12489 Berlin, Germany 100% Moriz Seeler Straße 5-7, Franz Ehrlich Haus, 12489 Berlin, Germany Ichi Holdings Limited Ichi Limited UK UK 26-Nov-19 100% 201 Temple Chambers, 3-7 Temple Avenue, London, England, EC4Y 0DT 26-Nov-19 100% 201 Temple Chambers, 3-7 Temple Ichi Creative Ltd Inc. USA 26-Nov-19 Avenue, London, England, EC4Y 0DT 100% 1679 South DuPont Highway, Suite 100, City of Dover, Kent, 19901, USA 9145 – 9115 Inc. Canada 04-Dec-19 100% 1751 Richardson Office 8400, Montreal, Canada, H3K 1G6 Xcelerator Machine Translations Limited Ireland 12-Dec-19 100% Invent, Dublin City University, Glasnevin, Dublin 9, Ireland * indicates a direct subsidiary (all other holdings are indirect, being subsidiaries of various intermediate group holding companies). Post acquisition, the Group reviews entities to streamline activities and close any dormant entities acquired or restructured entities. GovernanceFinancial statementsSupplementary information 120 Notes forming part of the consolidated and company financial statements continued 21 Investment in Subsidiaries continued Company continued Re-structuring details are set out below: Country of incorporation Date of incorporation / acquisition Proportion of voting rights and ordinary share capital held Re-structuring details Date of re-structuring Canada 22-Dec-10 100% Merged into Keywords Canada 01-Jan-19 Holdings Inc. Name Keywords International Corporation Inc. Volta Creation Inc. Canada 28-Jul-16 100% Merged into Keywords Canada 01-Jan-19 Holdings Inc. Global Video Games Services Inc. Canada 16-Nov-16 100% Merged into Keywords Canada 01-Jan-19 Holdings Inc. Sillabit S.R.L Italy 12-Apr-16 100% Merged into Keywords Studios 01-Jan-19 Italy S.R.L. Cord World Wide Spain, SL Spain 07-Apr-18 100% Dissolved 23-Dec-19 22 Related Parties and Shareholders Italicatessen Limited, a company registered in Ireland, is related by virtue of a common significant shareholder. P.E.Q. Holdings Limited is 100% owner of Italicatessen Limited. At 31 December 2019, P.E.Q. Holdings Limited owned 5.37% (2018: 6.3%) of the Company. In addition, Mr. Giorgio Guastalla is a Director of Italicatessen Limited, P.E.Q. Holdings Limited and the Company, and owns, or controls, 90% of the share capital of P.E.Q. Holdings Limited. The following transactions arose with Italicatessen Limited, which provides canteen services to Keywords International Limited, on an arms length basis: Operating expenses Canteen charges The following are year-end balances owing by the Group: Italicatessen Limited 2019 €’000 73 73 2019 €’000 13 13 2018 €’000 44 44 2018 €’000 5 5 The Group paid the following amounts, on an arms length basis, to Mr. Giorgio Guastalla, Director of the Company, and shareholder of P.E.Q. Holdings Limited, in respect of rent on premises occupied by employees of the Group in Dublin. Operating expenses Rental payment 2019 €’000 2018 €’000 25 25 22 22 The details of key management compensation (being the remuneration of the Directors) are set out in note 10. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 121 22 Related Parties and Shareholders continued As at 31 December 2019 and 2018, the Company had amounts receivable from its subsidiaries as follows: Receivables from subsidiaries related to investment in acquisitions Receivables from subsidiaries relating to trading activities Company – Short Term (note 15) Company – Long Term (note 15) 2019 €’000 208,352 15,220 223,572 2019 €’000 15,220 208,352 223,572 2018 €’000 175,509 1,600 177,109 2018 €’000 1,600 175,509 177,109 23 Financial Instruments and Risk Management Interest Rate Risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The management monitors interest rate fluctuations on a continuous basis and acts accordingly. Where the Group has a significant amount of surplus cash, it invests in higher earning interest deposit accounts. Due to interest rate conditions, the interest rates for short-term deposits are at similar levels to those achieved for longer-terms. The effect of a strengthening or a weakening of 1% in interest rates charged during the reporting period on the interest expense would have resulted in the following pre-tax profit / (loss) impact for the year: Interest expense Credit Risk 2019 €’000 2019 €’000 2018 €’000 2018 €’000 1% Strengthening 1% Weakening 1% Strengthening 1% Weakening (503) 503 (352) 352 The Group’s main financial assets are cash and cash equivalents, as well as trade and other receivables which represent the Group’s maximum exposure to credit risk in connection with its financial assets. Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. Credit risk arising in the context of the Group’s operations is not significant with the total bad debt provision at the balance sheet date amounting to 3.0% of net trade receivables (2018: 4.6%). Customer credit risk is managed at appropriate Group locations according to established policies, procedures and controls. Customer credit quality is assessed and credit limits are established where appropriate. Outstanding customer balances are regularly monitored and a review for indicators of impairment (evidence of financial difficulty of the customer, payment default, breach of contract etc.) is carried out at each reporting date. Significant balances are reviewed individually while smaller balances are grouped and assessed collectively. Receivables balances are unsecured and non-interest-bearing. The trade receivables balances disclosed comprise a large number of customers spread across the Group’s activities and geographies with balances classified as “Not past due” representing 84% of the total trade receivables balance at the balance sheet date (2018: 74%). Trade and other receivables are carried on the consolidated statement of financial position net of bad debt provisions. Group Treasury manage bank balances centrally, and monitors the credit rating and stability of the institutions the Group banks with. GovernanceFinancial statementsSupplementary information 122 Notes forming part of the consolidated and company financial statements continued 23 Financial Instruments and Risk Management continued The ageing of trade receivables can be analysed as follows: Group At 31 December 2019 At 31 December 2018 Total €’000 43,243 37,019 Not past due €’000 36,208 27,504 1-2 months past due €’000 6,136 7,996 A provision for doubtful debtors is included within trade receivables and can be reconciled as follows: Provision at the beginning of the year Impairment of financial assets (trade receivables) charged to administration expenses Foreign exchange movement in the year Utilised Provision at end of the year 2019 €’000 1,717 500 54 (988) 1,283 More than 2 months past due €’000 899 1,519 2018 €’000 418 2,055 (30) (726) 1,717 Trade receivables loss allowance is estimated using a practical expedient to arrive at lifetime expected credit losses. Overdue receivables are evaluated to calculate an expected credit loss using a historical credit loss experience of 0.5% (2018: 0.5%). Taking into account internal and external information, the historical credit loss experience may be adjusted where it is determined that there has been a significant increase in credit risk. Where a receivable is credit impaired, the impairment is recognised immediately, and impaired balances are removed from the expected credit loss calculation. Trade receivables gross Credit impaired Expected credit losses At 31 December 2019 Trade receivables gross Credit impaired Expected credit losses At 31 December 2018 Total €’000 44,526 (1,071) (212) Not past due €’000 36,386 – (178) 1-2 months past due €’000 6,166 – (30) 43,243 36,208 6,136 Total €’000 39,074 (1,872) (183) 37,019 Not past due €’000 27,874 (234) (136) 27,504 1-2 months past due €’000 8,586 (551) (39) 7,996 More than 2 months past due €’000 1,974 (1,071) (4) 899 More than 2 months past due €’000 2,614 (1,087) (8) 1,519 Related party receivables of €nil were past due at 31 December 2019 (2018: €nil). Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 123 23 Financial Instruments and Risk Management continued Company As presented in note 22, receivables from subsidiaries relating to investments in acquisitions, comprise term loans extended to subsidiaries, while receivables from subsidiaries relating to trading activities, comprise trading balances repayable on demand. Balances are analysed in terms of the risk profile of the subsidiary. A small number of balances were deemed to be technically credit impaired under IFRS 9, and an expected credit loss of €212k (2018: €183k), was recognised in the period relating to these receivables. Taking into account internal and external information, it was determined that a significant increase in credit risk had not occurred in the reporting period for the remaining receivables from subsidiaries. A 12 month expected credit loss of €nil (2018: €nil) was recognised in the period relating to these receivables. Currency Risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The foreign exchange risk arises for the Group where assets and liabilities arise in a currency other than the functional currency of the entity. The Group’s policy, where possible, is for Group entities to manage foreign exchange risk at a local level by matching the currency in which revenue is generated with the expenses incurred and by settling liabilities denominated in their functional currency with cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them), cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group. The Group is predominantly exposed to currency risk on the balances held within working capital across the Group and the exposure is concentrated in the movement of the Canadian Dollar, US Dollar and Sterling against the Euro. The effect of a strengthening or weakening of 10% in those currencies against the Euro at the reporting date on the working capital balances would, all other variables held constant, have resulted in the following pre-tax profit / (loss) impact for the year: US Dollar to Euro Canadian Dollar to Euro Sterling to Euro Total Financial Assets and Liabilities 2019 €’000 2019 €’000 2018 €’000 2018 €’000 10% Strengthening 10% Weakening 10% Strengthening 10% Weakening 3,052 1,779 1,535 (2,497) (1,455) (1,256) 2,140 2,026 884 (1,946) (1,842) (803) The carrying amount of the financial assets and liabilities shown in the Consolidated and Company Statements of financial position are stated at amortised costs, with the exception of contingent consideration held at fair value. Liquidity Risk Liquidity risk arises from the Group’s management of working capital and the financial charges on its debt instruments. The Group’s policy is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. The Directors consider liquidity risk is mitigated by the strong working capital position, with €120m of current assets, including cash of €42m available to settle liabilities as they fall due. GovernanceFinancial statementsSupplementary information 124 Notes forming part of the consolidated and company financial statements continued 23 Financial Instruments and Risk Management continued Liquidity Risk continued The following are the contractual maturities (representing undiscounted contractual cash flows) of the Group’s and Company’s financial liabilities: Group At 31 December 2019 Trade payables Deferred and contingent consideration (i) Other payables Loans and borrowings Loan interest Lease liabilities Total At 31 December 2018 Trade payables Deferred and contingent consideration (i) Other payables Loans and borrowings Loan interest Lease liabilities Total Company At 31 December 2019 Trade payables Deferred and contingent consideration (i) Other payables Loans and borrowings Loan interest Lease liability Total At 31 December 2018 Trade payables Deferred and contingent consideration (i) Other payables Loans and borrowings Loan interest Lease liability Total Within 1 year €’000 1-2 years €’000 2-5 years €’000 Over 5 years €’000 89,713 88,421 Total €’000 8,027 6,035 32,962 59,751 102 21,907 128,784 Total €’000 7,142 19,306 22,909 40,301 55 n/a Total €’000 139 – 16,859 59,500 102 626 Total €’000 285 – 6,003 40,000 55 n/a 8,027 5,966 32,746 80 102 7,741 54,662 Within 1 year €’000 7,142 18,249 22,904 40,071 55 n/a 139 – 11,298 – 102 203 285 – 5,435 40,000 55 n/a 46,343 45,775 – 69 216 – – 4,770 5,055 1-2 years €’000 – 1,057 5 – – n/a 1,062 – – – 59,671 – 7,382 67,053 – – – – – 2,014 2,014 2-5 years €’000 Over 5 years €’000 – – – 230 – n/a 230 – – – – – n/a – – – – – – 209 209 – – 5,561 59,500 – 214 65,275 – – – – – – – – – – – – n/a – – – 568 – – n/a 568 – – – – – n/a – 77,226 11,742 Within 1 year €’000 1-2 years €’000 2-5 years €’000 Over 5 years €’000 Within 1 year €’000 1-2 years €’000 2-5 years €’000 Over 5 years €’000 (i) Deferred and contingent consideration at 31 December 2019 has arisen on business combinations, and is based on set amounts to be paid in the future to sellers under share purchase agreements. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 125 24 Leasing The Group has entered into leases, across the business, principally relating to property. These property leases have varying terms and renewal rights. Group Right of use assets Cost At 1 January 2019 Adjustments from adoption of IFRS 16 Additions Acquisitions through business combinations at fair value Currency revaluation At 31 December 2019 Accumulated depreciation At 1 January 2019 Depreciation charge Currency revaluation At 31 December 2019 Net book value At 1 January 2019 At 31 December 2019 2019 €’000 – 23,138 4,315 990 941 29,384 – 7,849 66 7,915 – 21,469 Lease payments not recognised as a liability The Group has elected not to recognise a lease liability for short term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. The expenses in the period relating to payments not included in the measurement of the lease liability were as follows: Short-term leases Leases of low value assets The future minimum lease payments related to these leases were as follows: Not later than one year Later than one year and not later than five years Later than five years 2019 €’000 1,616 – 1,616 2019 €’000 651 – – 651 GovernanceFinancial statementsSupplementary information 126 Notes forming part of the consolidated and company financial statements continued 24 Leasing continued Group continued Lease liabilities The maturity analysis of the lease liabilities are as follows: Not later than one year Later than one year and not later than five years Later than five years 2019 €’000 Lease payments 8,281 12,321 2,718 23,320 2019 €’000 Finance charges 582 216 703 1,501 2019 €’000 Liabilities 7,741 12,152 2,014 21,907 The value of leases not yet commenced to which the lessee is committed, which are not included in lease liabilities at 31 December 2019, were €nil. The interest expense on the unwinding of the lease liabilities is presented in note 6, while the total cash outflow in relation to leases is presented in the Consolidated statement of cash flows. Impact analysis The impact of IFRS 16 on certain key metrics is as follows: IFRS performance measure Calculated with reference to reported performance Unwinding of liabilities (note 6) Depreciation (note 24) Leases expenses now reported under IFRS 16 Calculated excluding the impact of IFRS 16 2019 €’000 Operating profit 21,542 – 7,849 (8,114) 21,277 2019 €’000 2019 € cent Profit after tax Basic earnings per share 9,909 694 7,849 (8,114) 10,338 15.23 1.07 12.06 (12.47) 15.89 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 127 2019 €’000 – 785 – – 40 825 – 200 6 206 – 619 24 Leasing continued Company Right of use assets Cost At 1 January 2019 Adjustments from adoption of IFRS 16 Additions Acquisitions through business combinations at fair value Currency revaluation At 31 December 2019 Accumulated depreciation At 1 January 2019 Depreciation charge Currency revaluation At 31 December 2019 Net book value At 1 January 2019 At 31 December 2019 Lease payments not recognised as a liability The Company has elected not to recognise a lease liability for short term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. The expenses in the period relating to payments not included in the measurement of the lease liability were as follows: Short-term leases Leases of low value assets The future minimum lease payments related to these leases were as follows: Not later than one year Later than one year and not later than five years Later than five years 2019 €’000 – – – 2019 €’000 – – – – GovernanceFinancial statementsSupplementary information 128 Notes forming part of the consolidated and company financial statements continued 24 Leasing continued Company continued Lease liability The maturity analysis of the lease liability is as follows: Not later than one year Later than one year and not later than five years Later than five years 25 Capital Management Group Loans and borrowings (note 20) Less: cash and cash equivalents Net debt / (net cash) position Total equity Net debt / (net cash) to capital ratio (%) 2019 €’000 2019 €’000 Lease payments Finance charges 216 431 – 647 12 9 – 21 2019 €’000 59,751 (41,827) 17,924 222,958 8.0% 2019 €’000 Liability 204 422 – 626 2018 €’000 40,301 (39,871) 430 192,375 0.2% The Group manages capital by monitoring debt to capital and net debt ratios. This debt to capital ratio is calculated as net debt to total equity. Net debt is calculated as loans and borrowings (as shown in the Consolidated statement of financial position) less cash and cash equivalents. The liquidity risk and cash management for the Group is managed centrally by the Group Treasury function. The Board receives projections on a monthly basis as well as information regarding cash balances. The Group’s strategy is to preserve a strong cash base and secure access to finance at reasonable cost by maintaining a good credit rating. 26 Deferred Tax Details of the deferred tax assets and liabilities, and amounts recognised in the Income statement are as follows: Accelerated capital allowances Defined benefit termination payments Available losses Rent free period provisions Fixed asset tax base versus accounting book value Deferred tax related to tax credits Deferred tax arising on items deductible on a paid basis Deferred tax arising on intangibles Net tax assets / (liabilities) Impact of change in tax rates Prior year (over) / under provision Total (credited) / charged to income statement 2019 €’000 Assets – 50 1,450 11 578 474 2,497 – 5,060 – – – 2019 €’000 Liabilities – – – – 575 3,637 1,507 3,803 9,522 – – – 2019 €’000 Net – 50 1,450 11 3 (3,163) 990 (3,803) (4,462) – – – 2019 €’000 (Credited) / charged to income statement (1) 16 (575) 19 484 695 469 (1,990) (883) (80) (95) (1,058) Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 129 26 Deferred Tax continued Accelerated capital allowances Defined benefit termination payments Available losses Rent free period provisions Fixed asset tax base versus accounting book value Deferred tax related to tax credits Deferred tax arising on items deductible on a paid basis Deferred tax arising on intangibles Net tax assets / (liabilities) Impact of change in tax rates Prior year (over) / under provision Total (credited) / charged to income statement 2018 €’000 Assets – 66 875 30 558 – 1,438 – 2,967 – – – 2018 €’000 Liabilities 1 – – – 71 2,468 155 5,793 8,488 – – – The deferred tax asset not recognised on available losses at the period end is €3.1m (2018: €3.9m). 27 Investment in Associate Opening balance Investment in AppSecTest Limited Additional investment in AppSecTest Limited Share of post-tax profit / (loss) of equity accounted associate Recognised as a business combination (note 28) 2018 €’000 Net (1) 66 875 30 487 (2,468) 1,283 (5,793) (5,521) – – – 2019 €’000 160 – 114 – (274) – 2018 €’000 (Credited) / charged to income statement 1 (3) 40 4 (100) (112) (415) (1,448) (2,033) (4) (364) (2,401) 2018 €’000 – 226 – (66) – 160 In May 2018, the Group, through the newly established Keywords Ventures Limited, invested £100k (€114k) for 15% of the share capital of AppSecTest Limited. Incorporated in the UK, AppSecTest is creating a cloud based automatic testing solution for mobile apps, including games (principally for GDPR compliance). A further investment of £100K (€112K) was made in September 2018 bringing the total investment to 30% of the share capital of the company. Following an additional investment on 20 January 2019, the Group considers this to be a business combination, having acquired effective control over the entity. GovernanceFinancial statementsSupplementary information 130 Notes forming part of the consolidated and company financial statements continued 28 Business Combinations / Acquisitions Completed in the Current Year Sunny Side Up €’000 AppSecTest €’000 GetSocial €’000 Wizcorp €’000 Descriptive Video Works €’000 TV+SYNCHRON €’000 Ichi €’000 Syllabes €’000 Kantan €’000 Total €’000 Date of acquisition 04-Jan-19 22-Jan-19 21-Feb-19 18-Apr-19 11-Jun-19 01-Oct-19 26-Nov-19 04-Dec-19 12-Dec-19 Canada UK Netherlands Japan Canada Germany UK / USA Canada Ireland Acquisition company jurisdiction Book value of identifiable assets and liabilities Property, plant and equipment Right of use assets Intangible assets Trade and other receivables – gross Bad debt provision Cash and cash equivalents Trade and other payables Lease liabilities Loan Fair value adjustments Identifiable intangible assets – development costs Identifiable tangible assets Pension liability – adjustment Deferred tax liabilities Total fair value adjustments Total identifiable assets Non-controlling interest Attributable to Keywords Goodwill Total consideration Net book value 248 270 116 (136) 44 – – 84 – 338 (218) – – 219 – – 2 – 67 (18) – – 10 – 125 – – – (19) – – 37 178 – 377 – 297 (847) (178) – – – – – – – – – – – – – – – – – – – – – 86 84 – 165 – 93 (83) (84) – 261 – – – – – 193 394 – 161 – 424 (530) (394) (402) (154) – – – – – 18 – – 205 – 512 107 76 – 81 – – 8 – – 722 732 125 484 1,559 – – 381 2,112 (347) (105) (1,128) (3,295) – – 388 (76) – 83 – – (732) (402) (255) 821 – – – – – – 41 – – 1,490 1,490 – 41 432 432 – – 41 1,922 1,963 248 270 116 (136) – (148) 248 3,845 4,093 122 152 274 – 116 54 170 – (136) 1,088 952 261 – 261 1,864 2,125 (154) 388 124 1,667 2,784 – – (154) 3,660 3,506 388 3,598 3,986 – 124 199 323 – (148) 1,667 2,636 2,490 16,950 4,157 19,586 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 131 28 Business Combinations / Acquisitions Completed in the Current Year continued Sunny Side Up €’000 AppSecTest €’000 GetSocial €’000 Wizcorp €’000 Descriptive Video Works €’000 TV+SYNCHRON €’000 Ichi €’000 Syllabes €’000 Kantan €’000 Total €’000 100% 48% Asset purchase 100% 100% 100% 100% Asset purchase 100% 3,342 274 170 952 – – 751 – – – – – – – – – 1,373 112 – 640 2,606 2,866 – – – – 900 1,120 197 126 – – 3,543 15,323 – – 238 – 614 4,025 4,093 274 170 952 2,125 3,506 3,986 323 4,157 19,586 – 60,179 – – – – – – – – – 35,560 68,608 70,246 – – – – 41,382 275,975 % Share capital acquired Satisfied by: Cash Deferred cash Deferred cash contingent on performance Shares to be issued Total consideration transferred Number of shares Issued at the date of acquisition Fixed amount agreed to be issued Net cash outflow arising on acquisition Cash paid in 2019 3,342 114 170 952 1,373 2,606 2,866 197 3,543 15,163 Less: cash and cash equivalent balances transferred Net cash outflow – acquisitions Related acquisition costs charged through to the Consolidated Statement of Comprehensive Income Pre-acquisition revenue in H1 Pre-acquisition revenue in H2 Pre-acquisition revenue with Keywords Group Post-acquisition revenue Pro forma revenue Pre-acquisition profit / (loss) before tax Post-acquisition profit / (loss) before tax Pro forma profit / (loss) before tax (338) (67) – (297) (93) (424) (512) – (381) (2,112) 3,004 47 170 655 1,280 2,182 2,354 197 3,162 13,051 101 – – – 2,378 2,378 – 701 701 – – – – – – – 7 25 – – 142 167 36 656 – – 1,202 1,858 (23) 1 (202) (755) (563) (202) (778) (562) 69 558 – – 852 1,410 7 273 280 151 35 1 135 535 1,285 1,859 217 309 4,909 1,006 700 199 353 2,258 (68) 1,245 – 175 – 50 – 22 (68) 6,066 3,468 2,734 466 684 13,165 (146) 480 28 (196) 151 413 (28) 3 (12) (170) 267 452 31 (208) (19) GovernanceFinancial statementsSupplementary information 132 Notes forming part of the consolidated and company financial statements continued 28 Business Combinations / Acquisitions Completed in the Current Year continued The acquisitions made in the year are in line with the Group’s strategy to grow organically and by acquisition, as it selectively consolidates the highly fragmented market for video game services. The companies will bring additional talent, expertise and industry experience to Keywords’ client base. Being able to offer the additional services to our clients will further enhance our reputation as the leading provider of services to the global video games industry. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed of acquisitions in the year are set out in the table above. The main factors leading to the recognition of goodwill on the acquisitions are the presence of certain intangible assets in the acquired entities, which are not valued for separate recognition, such as the experience and expertise in: • producing trailers for the marketing and support of video games in Sunny Side Up. • • • social media technology for the games industry in GetSocial. engineering services in Wizcorp, in particular for the mobile development market in Japan. audio description services for broadcast and over the top streamed programming in Descriptive Video Works. • dubbing and localising into German across a range of entertainment formats in TV+SYNCHRON. • • creative and marketing services to the video games, sports and entertainment sectors globally in Ichi. audio recording and casting services in French and English for the video games industry and media and entertainment customers in Syllabes. • automated translation technology in Kantan. The total amount of goodwill arising on business combinations completed in 2019, that is expected to be deductible for tax purposes was €nil. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 133 Total €’000 19,280 31,850 (10,835) 6 – 40,301 – 27,000 402 – – 27,000 402 (71) (7,902) (7,973) – 80 80 21 (80) 21 – 59,671 59,751 Current €’000 18,250 31,850 (10,100) 40,000 Non-current €’000 – – – – Total €’000 18,250 31,850 (10,100) 40,000 – 27,000 (7,500) 59,500 29 Supplementary Information to the Consolidated Statement of Cash Flows Group movement on Loans At 1 January 2018 Cash flows: Cash received via additional loans in the year Repayment of loans Non-cash flows: Amounts recognised on business combinations Non-current transferred to current At 31 December 2018 Current €’000 18,943 Non-current €’000 337 31,850 (10,835) 6 107 40,071 – – – (107) 230 Re-designated from current to non-current (40,000) 40,000 Cash flows: Cash received via additional loans in the year Loans acquired on acquisition (note 28) Repayment of loans Non-cash flows: Foreign exchange difference on Canadian loans Non-current transferred to current At 31 December 2019 Company movement on Loans At 1 January 2018 Cash flows: Cash received via additional loans in the year Repayment of loans At 31 December 2018 Re-designated from current to non-current (40,000) 40,000 Cash flows: Cash received via additional loans in the year Repayment of loans At 31 December 2019 – – – 27,000 (7,500) 59,500 As explained in note 20, following the renegotiation of the RCF, the Group has re-designated these borrowings as non-current. GovernanceFinancial statementsSupplementary information 134 Notes forming part of the consolidated and company financial statements continued 30 Events after the Reporting Date Since the year end the Group’s operations have been significantly impacted by the COVID-19 pandemic. This has resulted in restrictions being put in place requiring most of the Group’s studios to be temporarily closed. The Group has been able to move over 5,500 employees to work from home arrangements and whilst this has resulted in some short term disruption it has allowed production to continue across most of the Group’s operations. In consultation with clients, the Group continues to make preparations to move more of the production staff to this model, particularly in the Testing business (Functional and Localisation Testing) with the aim of establishing a new model of testing from home, where testing had previously been conducted from secure facilities. It is very difficult to predict how long the studio closures will be in place for, but demand for the Group’s services remain robust, the broader video games industry has historically shown resilience in times of economic downturn and the Group has the ability to flex its cost base in response to a reduction in trading activity. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Alternative performance measures 135 The Group reports a number of alternative performance measures (APMs) to present the financial performance of the business, that are not GAAP measures as defined under IFRS. The Directors believe that these measures, in conjunction with the IFRS financial information, provide the users of the financial statements with additional information to provide a more meaningful understanding of the underlying financial and operating performance of the Group. The measures are also used in the Group’s internal strategic planning and budgeting processes and for setting internal management targets. These measures can have limitations as analytical tools and therefore should not be considered in isolation, or as a substitute for IFRS measures. The principal measures used by the Group are set out below: Organic revenue growth – Acquisitions are a core part of the Group’s growth strategy. Organic revenue growth measures are used to help understand the underlying trading performance of the Group excluding the impact of acquisitions. Organic revenue growth is calculated by adjusting the prior year revenues, adding pre-acquisition revenues for the corresponding period of ownership to provide a like for like comparison with the current year, and applying the prior year’s (2018) foreign exchange rates to both years. Constant exchange rates (CER) – Given the international nature of the Group’s operations, foreign exchange movements can have an impact on the reported results of the Group when they are translated into the Group’s reporting currency of Euros. In order to understand the underlying trading performance of the business, revenue is also presented using rates consistent with the prior year in order to provide year over year comparability. Adjusted profit and earnings per share measures – Adjusted profit and earnings per share measures are used to provide management and other users of the accounts with a clear understanding of the underlying profitability of the business over time. Adjusted profit measures are calculated by adding the following items back to the equivalent GAAP profit measures: • Amortisation of intangible assets – Customer relationships and music licence amortisation commences on acquisition, whereas intellectual property / development costs amortisation commences when the product is launched. These costs, by their nature, can vary by size and amount each year. As a result, amortisation of intangibles is added back to assist with the understanding of the underlying trading performance of the business and to allow comparability across regions and categories. • Costs of acquisition and integration – The level of acquisition activity can vary each year and therefore the costs associated with acquiring and integrating businesses are added back to assist with the understanding of the underlying trading performance of the Group. • Share-based payments – The Group uses share-based payments as part of remuneration to align the interests of senior management and employees with shareholders. These are non-cash charges and the charge is based on the Group’s share price which can change. The costs are therefore added back to assist with the understanding of underlying trading performance. • Foreign exchange gains and losses – The Group does not hedge foreign currency translation exposures. The effect on the Group’s results of movements in exchange rates can vary each year and are therefore added back to assist with understanding the underlying trading performance of the business. Free cash flow measure – The Group aims to generate sustainable cash flow (Free cash flow) in order to support its acquisition program and to fund dividend payments to shareholders. Free cash flow is measured as net cash provided by operating activities after deducting aquisition and integration cash outlay, capital expenditure, tax and interest payments. IFRS 16 Leasing – The new leasing standard, IFRS 16 is effective from 1 January 2019 and has been adopted from that date with no restatement of prior year comparatives required. The new standard has not had a material impact on either adjusted profit before tax or the underlying net cash flows of the business but it has changed the presentation of the Consolidated statement of comprehensive income, the Consolidated statement of cash flows and the Consolidated statement of financial position. In order to aid the users of the accounts we have presented the current year APMs excluding the impact of IFRS 16 to aid comparability with the prior year comparatives. The remainder of this section provides a reconciliation of the APMs with the relevant IFRS GAAP equivalent. GovernanceFinancial statementsSupplementary information 136 Alternative performance measures continued Service line analysis The following table presents revenue growth by service line at both actual exchange rates (AER) and constant exchange rates (CER). Constant exchange rates are calculated by retranslating current year reported numbers at the full year average exchange rates for the prior year, in order to give management and other users of the accounts better visibility of underlying trading performance against the prior period. Art creation* Game development (previously Engineering)* Audio Functional testing* Localisation Localisation testing Player support 2019 Revenue AER €m 2019 Revenue CER €m 2018* Revenue AER €m Change from 2018 FY, AER % Change from 2018 FY, CER % 43.6 66.3 40.5 68.9 48.5 22.6 36.1 41.5 64.4 39.8 65.6 47.3 21.9 34.2 34.0 35.2 34.2 47.8 44.0 19.7 35.9 326.5 314.7 250.8 28.2% 88.4% 18.4% 44.1% 10.2% 14.7% 0.6% 30.2% 22.1% 83.0% 16.4% 37.2% 7.5% 11.2% (4.7%) 25.5% * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. Pro forma revenue Pro forma revenue is calculated by adding pre-acquisition revenues of current year acquisitions, excluding any pre-acquisition revenues with the Keywords Group, to the current year revenue numbers. Art creation Game development (previously Engineering) Audio Functional testing Localisation Localisation testing Player support 2019 Revenue at AER €m 2019 Pre-acquisition revenue AER €m 2019 Pro forma Revenue AER €m 43.6 66.3 40.5 68.9 48.5 22.6 36.1 326.5 2.5 0.7 3.2 – 0.7 – – 7.1 46.1 67.0 43.7 68.9 49.2 22.6 36.1 333.6 Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 137 Organic revenue at constant exchange rates Organic revenue at constant exchange rates is calculated by adjusting the prior year revenues, adding pre-acquisition revenues for the corresponding period of ownership, and applying the 2018 foreign exchange rates in both years. Art creation* Game development (previously Engineering)* Audio Functional testing* Localisation Localisation testing Player support 2018* Revenue at AER €m 2018 Pre-acquisition revenue €m 2018 Like for like revenue €m Revenue growth €m 2019 Revenue at CER €m 34.0 35.2 34.2 47.8 44.0 19.7 35.9 4.9 12.0 4.7 0.1 – – – 38.9 47.2 38.9 47.9 44.0 19.7 35.9 250.8 21.7 272.5 2.6 17.2 0.9 17.7 3.3 2.2 (1.7) 42.2 41.5 64.4 39.8 65.6 47.3 21.9 34.2 314.7 2019 Organic revenue growth % 6.7% 36.4% 2.3% 37.0% 7.5% 11.2% (4.7%) 15.5% * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. Adjusted operating costs This comprises Administrative expenses as reported on the Consolidated statement of comprehensive income adding back amortisation of intangible assets, share option expense, costs of acquisitions and integration, depreciation, non-controlling interest and deducting bank charges. Calculation Reference in Financial Statements Administrative expenses Share option expense Costs of acquisition and integration Amortisation of intangible assets Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Depreciation – property plant and equipment Note 13 Depreciation – right of use assets Note 24 Non-controlling interest Consolidated statement of comprehensive income Bank charges Note 6 Adjusted operating costs Revenue from contracts with customers Consolidated statement of comprehensive income Adjusted operating costs as a % of revenue 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018 €’000 (98,687) (265) (98,952) (73,123) 9,775 4,348 7,318 7,295 7,849 113 (629) – – – – 9,775 4,129 4,348 5,296 7,318 6,872 7,295 5,316 (7,849) – – – 113 – – (629) (503) (62,618) (8,114) (70,732) (52,013) 326,463 19.2% 326,463 250,805 21.7% 20.7% GovernanceFinancial statementsSupplementary information 138 Alternative performance measures continued Adjusted operating profit The adjusted operating profit consists of the Operating profit adjusted for amortisation of intangible assets, share option expense and costs of acquisition and integration. Calculation Operating profit Share option expense Costs of acquisition and integration Amortisation of intangible assets Adjusted operating profit Reference in Financial Statements Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Revenue from contracts with customers Consolidated statement of comprehensive income Adjusted operating profit as a % of revenue 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018 €’000 21,542 (265) 21,277 22,685 9,775 4,348 7,318 42,983 326,463 13.2% – – – 9,775 4,129 4,348 5,296 7,318 6,872 (265) 42,718 38,982 326,463 250,805 13.1% 15.5% EBITDA EBITDA comprises Operating profit, adjusted for amortisation of intangible assets, depreciation, while deducting the share of profit from associates and bank charges. Calculation Operating profit Amortisation of intangible assets Depreciation on property plant and equipment Depreciation on right of use assets Share of profit from associates Bank charges EBITDA Reference in Financial Statements Consolidated statement of comprehensive income Consolidated statement of comprehensive income Note 13 Note 24 Consolidated statement of comprehensive income Note 6 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* €’000 21,542 (265) 21,277 22,685 7,318 7,295 – – 7,318 6,872 7,295 5,316 7,849 (7,849) – (629) – – – – – (66) (629) (503) 43,375 (8,114) 35,261 34,304 * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 139 Adjusted EBITDA Adjusted EBITDA comprises EBITDA, adjusted for share option expense, costs of acquisition and integration and non-controlling interest. Calculation EBITDA Share option expense Costs of acquisition and integration Non-controlling interest Adjusted EBITDA Reference in Financial Statements As above Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Revenue from contracts with customers Consolidated statement of comprehensive income Adjusted EBITDA as a % of revenue 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 (8,114) 35,261 9,775 2018* €’000 34,304 4,129 43,375 9,775 4,348 113 – – – 4,348 5,296 113 – 57,611 (8,114) 49,497 43,729 326,463 17.6% 326,463 250,805 15.2% 17.4% * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. Adjusted profit before tax Adjusted profit before tax comprises Profit before taxation as reported on the Consolidated Statement of Comprehensive Income, adjusted for costs including amortisation of intangible assets, share option expense, costs of acquisitions and integration, foreign exchange gains and losses, non-controlling interest and unwinding of discounted liabilities. Calculation Profit before tax Amortisation of intangible assets Share option expense Costs of acquisition and integration Reference in Financial Statements Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Consolidated statement of comprehensive income Foreign exchange (gain) / loss Note 6 Non-controlling Interest Consolidated statement of comprehensive income Unwinding of discounted liabilities – deferred consideration Note 6 Adjusted profit before tax Revenue from contracts with customers Consolidated statement of comprehensive income Adjusted profit before tax as a % of revenue 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* €’000 17,371 437 17,808 22,094 7,318 9,775 4,348 1,658 113 330 40,913 326,463 12.5% – – – (7) – – 7,318 6,872 9,775 4,129 4,348 5,296 1,651 113 (791) – 330 311 430 41,343 37,911 326,463 250,805 12.7% 15.1% * The prior year comparative has been re-classified to reflect the current year presentation as the Directors consider this to be more meaningful. GovernanceFinancial statementsSupplementary information 140 Alternative performance measures continued Adjusted effective tax rate The adjusted effective tax rate is the tax expense as reported on the Consolidated Statement of Comprehensive Income, adjusted for the tax impact of the adjusting items in arriving at adjusted profit before tax, as a percentage of the adjusted profit before tax. Calculation Reference in Financial Statements Adjusted profit before tax As above Tax expense Effective tax rate before tax on adjusting items Tax arising on bridging items to adjusted profit before tax ** Adjusted tax expense Adjusted effective tax rate Consolidated statement of comprehensive income Calculation; Tax expense / Adjusted profit before tax Calculation; Adjusted tax expense / Adjusted profit before Tax 40,913 7,462 18.2% 1,703 9,165 22.4% 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* Restated €’000 430 41,343 7,462 37,911 7,191 18.0% 19.0% 1,703 1,448 9,165 22.2% 8,639 22.8% * The prior year comparative has been restated to reflect the tax impact of the bridging items to adjusted profit before tax as the Directors consider this to be more meaningful. ** Being mainly amortisation of intangible assets €1,605k (2018: €1,448k). Adjusted earnings per share The adjusted profit after tax comprises the adjusted profit before tax, less the tax expense as reported on the Consolidated Statement of Comprehensive Income, adjusted for the tax impact of the adjusting items in arriving at adjusted profit before tax. The adjusted earnings per share comprises the adjusted profit after tax divided by the non-diluted weighted average number of shares as reported in note 8. Calculation Reference in Financial Statements Adjusted profit before tax As above Tax expense Consolidated statement of comprehensive income Tax arising on bridging items to adjusted profit before tax ** Adjusted profit after tax Denominator (weighted average number of equity shares) Note 8 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* Restated €’000 40,913 (7,462) (1,703) 430 41,343 (7,462) 37,911 (7,191) (1,703) (1,448) 31,748 430 32,178 29,272 65,081,403 65,081,403 65,081,403 64,335,162 2019 Reported € c per share 2019 IFRS 16 Adj € c per share 2019 Pre IFRS 16 € c per share 2018* € c per share Adjusted earnings per share Calculation; Adjusted profit after tax / weighted average number of shares 48.78 0.66 49.44 45.50 Adjusted earnings per share % growth 7.2% 8.7% 45.9% * The prior year comparative has been restated to reflect the tax impact of the bridging items to adjusted profit before tax as the Directors consider this to be more meaningful. ** Being mainly amortisation of intangible assets €1,605k (2018: €1,448k). – – – – – Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 141 Return on capital employed (ROCE) ROCE represents the adjusted profit before tax expressed as a percentage of the average total capital employed. As the Group continues to make multiple acquisitions each year, the calculation adjusts the profit before tax and the capital employed as if all the acquisitions made during each year were made at the start of that year. Total adjusted Profit before tax comprises adjusted Profit before tax, plus net interest costs, unwinding of discounted liabilities, bank charges, and pre-acquisition profits of current year acquisitions. Capital employed represents equity as reported on the statement of financial position adding back retirement benefits, cumulative amortisation of intangible assets, acquisition related liabilities and net borrowings. Calculation Reference in Financial Statements Adjusted profit before tax As above Interest received Interest expense Unwinding of discounted liabilities – lease liabilities Bank charges Pre-acquisition profits of current year acquisitions Adjusted profit before tax including pre acquisition profit excluding interest Note 6 Note 6 Note 6 Note 6 Note 28 2019 Reported €’000 40,913 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 430 41,343 (74) 934 694 629 151 – – (694) – – (74) 934 – 629 151 2018 €’000 37,911 – 502 – 503 4,896 43,247 (264) 42,983 43,812 Total equity Consolidated statement of financial position 222,958 2,435 225,393 192,375 Retirement benefits Cumulative amortisation of intangibles assets Acquisition related liabilities Loans and borrowings Cash and cash equivalents Capital employed Return on capital employed Note 19 Note 12 Note 18 Note 20 Consolidated statement of financial position Adjusted profit before tax including pre acquisition profit excluding interest expense / average capital employed 2,049 20,017 6,035 59,751 (41,827) – – – 1 – 2,049 20,017 6,035 59,752 1,378 12,786 19,306 40,301 (41,827) (39,871) 268,983 2,436 271,419 226,275 16.1% (0.3%) 15.8% 19.4% GovernanceFinancial statementsSupplementary information 142 Alternative performance measures continued Free cash flow Free cash flow represents net cash flow provided by operating activities adjusted for capital expenditure, acquisition and integration cash outlay and interest payments, and is presented both before and after tax. Calculation Reference in Financial Statements 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* Restated €’000 Consolidated statement of cash flows 32,781 (8,049) 24,732 27,650 Net cash provided by operating activities Acquisition and integration cash outlay: Costs of acquisition and integration Fair value adjustments to contingent consideration Consolidated statement of comprehensive income 4,348 Consolidated statement of cash flows (493) – – – – – 4,348 5,296 (493) (766) (13,145) (9,440) (391) (1,599) 74 – (502) 20,639 6,304 26,943 Acquisition of property, plant and equipment Consolidated statement of cash flows (13,145) Investment in intangible assets Consolidated statement of cash flows Consolidated statement of cash flows (391) 74 Interest received Interest paid Free cash flow after tax Consolidated statement of cash flows (2,130) 694 (1,436) Income taxes paid Consolidated statement of cash flows Free cash flow before tax 21,044 13,288 34,332 (7,355) – (7,355) 13,689 13,288 26,977 * The prior year comparative has been restated to reflect the current year presentation as the Directors consider this to be more meaningful. Adjusted free cash flow Adjusted free cash flow is a measure of cash flow adjusting for capital expenditure that is supporting growth in future periods (as measured by capital expenditure in excess of maintenance capital expenditure). This is represented by free cash flow before tax, plus capital expenditure in excess of depreciation. Calculation Reference in Financial Statements 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* Restated €’000 Free cash flow before tax As above 34,332 (7,355) 26,977 26,943 Capital expenditure in excess of depreciation: Acquisition of property, plant and equipment Consolidated statement of cash flows 13,145 – 13,145 9,440 Depreciation Consolidated statement of cash flows Capital expenditure in excess of depreciation Adjusted free cash flow (15,144) (1,999) 7,849 7,849 (7,295) 5,850 (5,316) 4,124 32,333 494 32,827 31,067 * The prior year comparative has been restated to reflect the current year presentation as the Directors consider this to be more meaningful. Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report 143 Adjusted cash conversion rate Adjusted cash conversion rate is the adjusted free cash flow as a percentage of the adjusted profit before tax: Calculation Reference in Financial Statements Adjusted free cash flow Adjusted profit before tax As above As above Adjusted cash conversion ratio Free cash flow before tax and capital expenditure adjusted as a % of adjusted profit before tax 2019 Reported €’000 2019 IFRS 16 Adj €’000 2019 Pre IFRS 16 €’000 2018* Restated €’000 32,333 40,913 79.0% 494 430 32,827 41,343 79.4% 31,067 37,911 81.9% * The prior year comparative has been restated to reflect the current year presentation as the Directors consider this to be more meaningful. GovernanceFinancial statementsSupplementary information 144 Company information Directors Secretary Andrew Day Georges Fornay Charlotta Ginman Ross Graham Giorgio Guastalla Jon Hauck David Reeves Liam O’Donoghue Registered Number 8548351 Registered Office Auditors Remuneration Consultants Principal Bankers 201 Temple Chambers 3-7 Temple Avenue London EC4Y 0DT BDO Registered Auditors Beaux Lane House Mercer Street Lower Dublin 2 Mercer Kepler Tower Place West London EC3R 5BU Barclays Bank 27 Soho Square London W1D 3QR HSBC Bank plc 1 Grand Canal Square Grand Canal Harbour Dublin 2 Silicon Valley Bank 14-18 Finsbury Square London EC2A 1BR Citibank Europe plc 1 North Wall Quay Dublin 1 Nominated Adviser and Broker Financial PR Adviser Solicitors Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT MHP Communications 6 Agar Street London WC2N 4HN DWF LLP 20 Fenchurch Street London EC3M 3AG Keywords Studios plc Annual Report and Accounts 2019OverviewStrategic report Supplementary informationGovernanceFinancial statements K e y w o r d s S t u d i o s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 Keywords Studios plc Whelan House South County Business Park Dublin 18 Ireland T: +353 190 22 730 www.keywordsstudios.com