MULTI-AWARD-WINNING GAME DEVELOPMENT SOLUTIONS
SUMO GROUP PLC ANNUAL REPORT & ACCOUNTS 2018
WE ARE
ENTERTAINMENT
SUMO GROUP PLC
REALISING
OUR VISION
Our aim is to become a global leader in premium
development and creative services to the video
game and wider entertainment industries.
Carl Cavers
Chief Executive Officer
TO BUILD A
GLOBAL BUSINESS
Read more on page 12
TO CREATE
GROUND-BREAKING GAMES
Read more on page 10
TO MAINTAIN A STRONG
COMPANY CULTURE
Read more on page 16
Our first full year as a quoted company was
a period of substantial growth and delivery.
Ken Beaty
Chairman
FINANCIAL HIGHLIGHTS
Revenue
£38.7m
(2017: £28.6m)
Gross profit
£18.4m
Adjusted EBITDA*
£10.4m
(2017: £13.3m)
(2017: £8.4m)
+35.3.%
+38.9%
+24.6%
Contracted or near
contracted revenue**
Gross margin
88%
(2017: 76%)
47.6%
(2017: 46.4%)
Net cash
£3.7m
2018
£12.4m
2017
CONTENTS
Strategic Report
At a Glance
Chairman’s Statement
Business Model
Our Vision
To create ground-breaking games
To build a global business
Driven by our people
To maintain a strong company culture
Chief Executive’s Review
Group Financial Review
Principal Risks and Uncertainties
Governance
Introduction to Governance
Corporate Governance
Board of Directors
Operating Board
Audit Committee Report
Directors’ Remuneration Report
Directors’ Report
Statement of Directors’ Responsibilities
Financial Statements
Independent Auditor’s Report
Consolidated Income Statement
Consolidated Statement
of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Group Financial Statements
Parent Company Balance Sheet
Parent Company Statement of Changes in Equity
Notes to the Company Financial Statements
Financial Calendar
Company Information
*
Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation,
amortisation, exceptional items, share-based payment charge, customer revenue included
within finance income, accrued royalty not yet received and contingent on future sales and
the investment in co-funded games expensed, is a non-GAAP metric used by management
and is not an IFRS disclosure.
** As at April 2019.
View more on our website
www.sumogroupplc.com
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01
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
AT A GLANCE
COMPLETE END-TO-END
GAMING SOLUTIONS
Sumo Group is one of Europe’s largest
providers of creative and development
services to the video games and
entertainment industries, now operating
from nine studios across the globe.
The Group offers end-to-end services from visual concept
design and pre-production through to development,
user-interface design, marketing and post-release support,
from its two operating businesses. Sumo Digital, c. 95% of
revenue, has six studios in creative hotspots across the UK
and one in Pune, India. Atomhawk, which was acquired in
June 2017, operates from two studios in the UK and Canada.
Our competitive advantage lies in our scale, systems,
creative and visual solutions and technology, which enable
us to deliver flexible, end-to-end co-development and
turnkey solutions for publishers and other developers.
Games announced or launched in 2018/19:
• Hitman 2 for IO
• Crackdown 3 for Microsoft
• Team Sonic Racing for SEGA
09 21%
STUDIOS AROUND
THE WORLD
NET INCREASE
IN EMPLOYEES
OUR FIRST FULL YEAR AS A QUOTED COMPANY
A year of substantial growth and delivery
January 2018
Took on CCP Games Newcastle Studio
bringing 34 people to the Group
February 2018
Atomhawk expands with move
to larger premises in Vancouver
May 2018
Team Sonic Racing for SEGA
announced (launch in May 2019)
March 2018
Sumo Digital’s Sheffield studios
refurbished with further expansion
planned in 2019
June 2018
Sumo Digital celebrates
15th birthday
August 2018
Acquisition of The Chinese Room
(see page 19)
At Gamescom Team Sonic Racing received
the Best Casual Game award and Jessica
Gaskell was awarded Games Dev Heroes
Winner for production
02
Sumo Group plc Annual Report 2018 STUDIOS
• SHEFFIELD
• PUNE
• NOTTINGHAM
• NEWCASTLE
• LEAMINGTON SPA
Concept art • Consultation • World building • Environment design
Level creation • Development • Story telling • Sound design
Interface creation • Intellectual property • Multi-platform functionality
Character creation • Testing • Publishing • Marketing
Product design • Strategy & implementation
December 2018
Staff numbers reach 592 increasing
by over 100 in 2018
February 2019
Crackdown 3 for
Microsoft launched
Sumo Group named SME of the Year
at the Yorkshire Business Awards
March 2019
Apple Arcade
announced
January 2019
Acquisition of Red Kite
September 2018
Board strengthened with
appointment of Andrea Dunstan as
Non-Executive Director (see page 36)
November 2018
Hitman 2 for IO launched
March 2019
Opening of Leamington
Spa Studio
April 2019
Appointment of Paul
Porter, one of Sumo
Digital’s co-founders,
to the Sumo Group
Board as Chief
Operating Officer
03
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT CHAIRMAN’S STATEMENT
INVESTING IN
PEOPLE FOR
FUTURE GROWTH
Ken Beaty
Chairman
I am pleased to report that 2018, our first
full year as a quoted company, was a period
of substantial growth and delivery for Sumo
Group. The Group’s shares were admitted to
AIM on 21 December 2017 and, in the financial
year ended 31 December 2018, we successfully
delivered on all of the strategic objectives set
out in our Admission Document.
Deliver and expand
The Group has grown substantially, generating
revenue and profitability in the year ended
31 December 2018 slightly ahead of market
forecasts. This strong performance is largely
driven by our talented and dedicated people,
who continue to provide exceptional creativity
and service and a high level of expertise. It has
been particularly pleasing to see many of our
people begin to invest in the Company’s new
share incentive plans, which were launched
in July 2018 to give colleagues the opportunity
to participate in the success of our business.
Overall, more than 61% of our colleagues
are participating either in the Sumo Group
plc Long Term Incentive Plan or the Share
Incentive Plan.
Our ability to attract and retain the best talent
in the industry is crucial to the Group’s success
and is a primary area of focus for the business.
We delivered nearly 14% organic growth in
overall headcount in 2018. The expansion of
the Group continues and our talent pool has
been strengthened further with hires in the
new financial year.
New strategic partners
As well as strengthening our excellent existing
client relationships, one of our key aims is to
broaden the growth opportunities available to
the Group by winning new clients.
We secured several new contracts in the final
weeks of 2018, to which we referred in our
Trading Update issued on 21 January 2019.
While we are unable to disclose full details, two
of these contracts are with Apple, a new client
for Sumo Group, for the development of games
for its Apple Arcade subscription service.
Acquire complementary
revenue streams
In addition to organic growth, we strengthened
the Group’s talent base further through
acquisitions and other means. Sumo Digital
took on the former CCP Games studio in
Newcastle on 1 January 2018, bringing 34
new people to the Group. In August 2018, we
acquired The Chinese Room in Brighton. In
January 2019, we completed the purchase
of Red Kite Games in Huddersfield. Both the
Newcastle and Brighton studios expanded
during the year and we are confident that
Red Kite Games will also grow successfully.
Atomhawk, our multi-award-winning visual
design company acquired in June 2017,
continues to perform well and we are reaping
the benefits of having premium creative art
services available for both external and
intra-group customers.
Develop valuable own intellectual
property (“own-IP”)
Shortly after our IPO, we established an IP
Creation Committee, which includes our
Non-Executive Director and industry guru Ian
Livingstone. This committee meets regularly
to review ideas emerging from our Game Jams
process, as well as ideas produced by Sumo
Digital’s concept team and those emanating
from our newly acquired businesses.
OUR FIRST YEAR ON AIM
2018 Highlights
Strong performance driven
fundamentally by organic growth
61%
More than 61% of our people are
participating in either the Sumo LTIP
or Share Incentive Plan.
9
The Group now operates from nine
studios across the globe, with two
added in the year and two post year end.
21%
The overall headcount has grown by 21%
with 14% being from organic growth. At
the year end the Group had 592 people, an
increase of over 100 on the previous year.
04
Sumo Group plc Annual Report 2018 ACQUISITION OF RED KITE GAMES
Red Kite Games is primarily
a work-for-hire studio, providing
game development services and
code solutions to the video games
industry.
Its talented and highly experienced
development team works with some of
the industry’s best-known publishers and
developers, most recently:
• Codemasters on DiRT 4
• Sony Computer Entertainment
on God of War III
• Remastered and Activision on
Call of Duty: Strike Team
What this brings to Sumo:
• Increased capacity
• Access to a new talent pool
in West Yorkshire
The Group’s ability to generate own-IP
opportunities is strengthening. Our new
relationship with Apple is for the development
of a Sumo Game Jam concept, with the
working title of “Spyder”. Our acquisition of The
Chinese Room added two original concepts
to the Group’s IP portfolio. With the additional
necessary investment provided by Sumo
Digital, one of these concepts, Little Orpheus,
is also being developed with Apple.
We continue to view monetisation of our
own-IP portfolio as an important driver of
future growth and profitability of the Group.
Board and governance
The Board has continued to develop its
governance structures and processes
throughout the year. In September 2018,
we confirmed our adoption of the Quoted
Companies Alliance updated Corporate
Governance Code and set out in detail how
we comply. The full statement covering this
is available on the Company’s website and is
in the Corporate Governance section of this
Annual Report.
The Board was strengthened further in the
same month by the appointment of Andrea
Dunstan as a new Non-Executive Director.
Andrea has brought additional and valuable
HR and remuneration experience to the Group
and has been appointed Chair of the Board’s
Remuneration Committee.
On 9 April 2019 we announced the
appointment of Paul Porter to the Board of
Sumo Group plc as Chief Operating Officer.
Paul is one of the co-founders of Sumo Digital
and has been Managing Director of that
27
Established by ex-Rockstar Games
developer Simon Iwaniszak in 2012,
the business operates from
a single studio in Huddersfield,
West Yorkshire, employing 27 people.
Sumo Digital has worked
successfully with Red Kite
for several years, collaborating
on a range of titles.
We are very much looking forward
to being part of Sumo Group.
Sumo Digital is such an exciting
business, working on incredible
projects. Being part of a creative,
ambitious and supportive Group,
which is delivering great results,
will present new opportunities and
new challenges to Red Kite. We have
exciting plans for the studio and
believe that Sumo Group will help
us to achieve our full potential.
Simon Iwaniszak
Studio Director of Red Kite
business since IPO. I am confident Paul will
make a significant and valuable contribution
both to the Board and the Group in his new role.
As a Board, we believe it is important to keep
our own performance under review. The
outcomes of an evaluation assessment carried
out in November 2018 are in the Corporate
Governance section of this Annual Report.
Ken Beaty
Chairman
Snake Pass (top) released in 2017 generated a return on investment of circa 130%.
05
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
BUSINESS MODEL
DELIVERING VALUE
FOR STAKEHOLDERS
HOW WE DELIVERED ON THE STRATEGY
A MODEL FOR LOW RISK GROWTH
Deliver and expand
• Revenue growth of over 35% in the year
• Headcount increased by 21%
• Continued development of franchise titles
• Further development of downloadable content,
managing online communities (collectively referred
to as ‘Games as a Service’) and generating royalties,
where our interests are clearly aligned with our clients
New strategic partners
• Contracts secured with new clients
• Two own-IP games being developed with Apple –
a new customer
• We plan to continue to win new clients through the
expansion of our publisher portfolio, collaborating
with other developers and extending our co-development
relationships, and through selective acquisitions
New revenue streams
• Took on the Newcastle Studio of CCP Games
• Acquisition of The Chinese Room in Brighton
• Post year end, acquisition of Red Kite Games
• Atomhawk, acquired in 2017, is performing well and
the Group is benefiting from its premium
creative art services
• We continue to develop complementary revenue
streams through moving into new premium services,
possibly through acquisition
Develop valuable own-IP
• The two new contracts with Apple are for the
development of a Sumo Game Jam concept, with the
working title of “Spyder” and one of The Chinese Room’s
original concepts, “Little Orpheus”
• In addition, The Chinese Room added a further
original concept to the Group’s intellectual property
portfolio
• The monetisation of our own intellectual property
(“own-IP”) portfolio is an important driver of future
growth and profitability of the Group
• We plan to release at least one self-funded own-IP
title in 2019
To see how we performed during the year
see the Chairman’s statement on pages 04 to 05.
06
e t s
a r k
Grow into ne w m
A w a r d - winning games
S U M O DIGITAL
CREATING A
SUCCESSFUL
INDUSTRY GAMES
DEVELOPMENT
GROUP
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ATOMHAW K
GROWTH DRIVERS
Continued expansion of our market with global games projected
to grow from $135 billion in 2018 to $174 billion in 2021
Market
• The average gamer is 34 years old
Technology
• Demand for new
• 45% of gamers in 2018 were female
• The continuing development
of Games As A Service
• The rapid growth of e-sports
estimated to be growing at up to
40% per annum is set to become
a $1 billion industry in its own
right in 2019
Environment
• Incentives such as Video Games Tax
Relief reduce the cost and risk of
development
• The UK games sector has a
long-standing heritage and
continues to be a major force
in the global games market
• UK universities currently offer
255 gaming related courses
cloud-based subscription
platform content supported
by recent announcements from
the world’s biggest publishers,
including Microsoft’s Project
xCloud, Google’s Stadia and
Apple Arcade
• Mobile and tablet devices:
ubiquitous, running
console-quality games
• Sumo is next generation ready
• PC gaming growing: new
content delivery platforms from
powerful organisations,
including Stream, Epic Games
Store and Discord
• Console market estimated
to grow 15% year on year
Sumo Group plc Annual Report 2018
Sumo Group has a relatively low risk, high visibility
business model, which generates both cash and
sustainable profit margins.
Our strategy is to deliver and expand; to win new clients; to add
complementary revenue streams; and to develop our own-IP. We believe
that our competitive advantage lies in our scale, management systems,
technology, creative and visual solutions, which enable us to offer flexible,
end-to-end co-development and turnkey solutions for publishers and
other developers.
Sumo Group is committed to its relatively low risk business
model. It does not take significant principal risk on game
development and the majority of Group revenues are
generated through low risk game development
(turnkey or co-dev) for a publisher.
Games derived from Sumo Group’s own-IP offer a stronger
potential return on investment but have a higher principal
risk. If a concept is for a relatively small game (c.£1m in
cost), we will take principal risk and fund the project in full,
either self-publishing, as we did with Snake Pass, or using
an external publisher. The Group derives a small percentage
of its revenues through own-IP game development.
As our talent pool grows, we are generating more own-IP
opportunities, including concepts which lend themselves
to larger, more complex game development. In this scenario
external funding is provided by a publisher for all or part
of the development costs for the game. This approach will
enable us to generate returns which best reflect the value
of the concept whilst minimising principal risk through
Sumo concept creation, developed in partnership with
a third party.
Below is a summary of how each contract type works.
On pages 08 to 09 you will find the full illustrative examples:
Contract type
Game development
(turnkey or co-dev)
Own-IP
Funding
Publisher
Sumo or third party
Ownership
Publisher
Sumo
New
Original concept creation
developed in partnership
with a third party
Co-funded with or fully funded
by partner
Publisher (Sumo may retain legal
ownership)
Payment Model
Milestone payments plus royalties as
earned
Game sale revenues or guaranteed
royalty (if funded by a third party)
Milestones and royalties
Accounting
Development fees recognised using
estimate of contract margin &
percentage of completion
Royalties earned subject to IFRS 15
recognition principles
Development costs expensed as
incurred
Recognise revenue as earned or
guaranteed royalties as contractual
obligation triggered
Capitalise development costs
as intangible asset with regular
impairment reviews (IAS 38)
Development fees as for game
development contract
Sumo investment expensed
as incurred
07
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
BUSINESS MODEL CONTINUED
How we maintain a low risk business model while
capitalising on our growing own-IP opportunities.
The following case studies illustrate typical scenarios
and are not designed to refer to any specific contracts.
CASE STUDY A – GAME DEVELOPMENT (TURNKEY OR CO-DEV)
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10 T11 T12 T13 T14 T15 T16
2018 Key Metrics
Number of live contracts
(31 Dec 18)
Development revenue
Royalty revenue
Accrued revenue >
Billed revenue
(31 Dec 18)*
9
£31.2m
£0.8m
£11.0m
Revenue – Dev fees (LHS)
Cum. cash flow (RHS)
Cum. revenue (RHS)
Revenue – Royalties (LHS)
Cum. margin (RHS)
T=period of time
(e.g. one quarter/three months)
GOOD DEVELOPMENT MARGIN, LOW DEVELOPMENT
RISK, SOME POTENTIAL UPSIDE POST LAUNCH
− Cash receipts from publishers are
− Sumo’s share of game sales in the form
non-refundable and scheduled broadly
to follow the expected percentage of game
completion
of royalties varies, depending on
contractual terms and ultimately depend
on the game’s success
− As a result, there is minimal balance
− The timing of royalty receipts is dependent
sheet exposure from accrued revenues at
any given time*
• Variable consideration, typically in the form
of royalty receipts are recognised as revenue
only when it is highly probable they will be
received:
on the publisher’s launch date
• Development costs are expensed as incurred
* There is one contract in 2018 where cash receipts are
contractually guaranteed following the game’s launch.
• A client generally originates the game
concept and retains control of the IP at
all times
• Sumo engages with the client to develop
the game to an agreed specification
and Sumo accrues a right to payment for
development work as it is performed.
Agreed revenue for this single Performance
Obligation to the client may contain
elements which are fixed or variable
• Fixed development revenues are recognised
using judgement and estimates on the
overall development phase contract margin
and percentage of contract completion at
each period end
CASE STUDY B – OWN-IP
2018 Key Metrics
Number of live development
projects (31 Dec 18)
Number of launched revenue
generating titles (31 Dec 18)
Own - IP revenue
Intangible asset value
(31 Dec 18)
T=period of time
(e.g. one quarter/three months)
1
2
£0.4m
£0.2m
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10 T11 T12 T13 T14 T15 T16
Intangible asset at cost (RHS)
Revenue – Royalties (LHS)
Cum. cash flow (RHS)
Cum. revenue (RHS)
Cum. margin (RHS)
08
Sumo Group plc Annual Report 2018
CASE STUDY B – OWN-IP CONTINUED
NO DEVELOPMENT MARGIN, HIGHER DEVELOPMENT
RISK, STRONG POTENTIAL RETURN ON INVESTMENT
• Where Sumo has created its own concept
and IP it may choose to self-fund a game’s
development
• Sumo develops the game concept ready for
launch using its own resources and retains
control over the developed IP at all times
• This would typically happen on smaller
games (c.£1.0m in cost), such as Snake
Pass, launched in March 2017
• During the development phase, no
development revenue is recognised.
Sumo capitalises its development costs
as an intangible asset with regular
impairment reviews in accordance with IAS 38
• Once the game is completed and launched,
Sumo recognises game revenues as they
are earned. The intangible asset is
amortised as the game generates revenues
and is subject to review for impairment at
all times
Or
• Sumo may choose to use a third party
to publish the game, transferring control of
the developed IP to a third party publisher
in exchange for consideration which may
be fixed or variable
• Typically, such contracts include fixed
guaranteed royalties from the publisher
which would be recognised at the point
at which the game is handed over to the
publisher
• In this scenario the intangible asset would
be derecognised at the point the game
is handed over to the publisher
• Variable revenues are recognised in
accordance with client sales after launch
CASE STUDY C – ORIGINAL CONCEPT CREATION
DEVELOPED IN PARTNERSHIP WITH THIRD PARTY
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10 T11 T12 T13 T14 T15 T16
Revenue – Dev fees (LHS)
Cum. cash flow (RHS)
Cum. revenue (RHS)
Revenue – Royalties (LHS)
Cum. margin (RHS)
LOWER DEVELOPMENT MARGIN, LOW DEVELOPMENT
RISK, STRONG POTENTIAL RETURN ON INVESTMENT
• Some of Sumo’s concept creations may
have the potential to be developed into
larger, more complex games
• Sumo engages with the chosen
development partner (“the client”) to fully
fund or co-fund the development of the
game to an agreed specification and Sumo
accrues the right to payment for
development work as it is performed
• Agreed revenue for this single Performance
Obligation to the client may contain elements
which are fixed or variable
− Fixed development revenues are recognised
using judgement and estimates on the overall
development phase contract margin and
percentage of contract completion at each
period end
− Variable consideration, typically in the
form of royalty receipts are recognised
as revenue only when it is highly probable
they will be received
− Development costs are recognised as incurred
• Partial funding
− When a publisher is partially funding
a game, contract margins during the
development phase may be lower than
those in a non own-IP game development
contract, as the Group’s investment in
the game’s development is expensed
as incurred
− In this scenario, any investment by Sumo
in developing game IP would typically result
in the receipt of a greater share of game
royalties, reflecting the Group’s share of the
risk and reward of a game’s development
2018 Key Metrics
Number of live contracts (31 Dec 18)
Fully funded
Partially funded
Development revenue
Royalty revenue
Sumo investment in
development expensed
3
2
£3.6m
£nil
£0.2m
T=period of time
(e.g. one quarter/three months)
− Game sales in the form of royalties are
recognised as revenue once it is highly
probable that they will be received
• Full funding
− Contract margins during the development
phase should be consistent with Case Study
A. The Group’s share of game royalties would
typically be higher than in Case Study A, to
reflect the investment in concept creation,
albeit overall game royalties ultimately
depend on the game’s retail success
£34.8m of the Group's £37.2m revenue from video
games is related to development contracts similar
to the illustrative case studies A and C.
09
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
OUR VISION
TO CREATE
GROUND-BREAKING GAMES
Our businesses have long-standing, close
relationships with most of the world’s largest
computer games publishers, developers,
platform manufacturers and entertainment
brands, including Microsoft, Sony, SEGA,
Warner Brothers and Marvel. Together
we have worked on some of the biggest
franchises in the entertainment industry,
such as Avengers, Mortal Kombat, Hitman,
Sonic All-Stars and Harry Potter.
In 2018 and early 2019, three of Sumo Digital’s
major projects were announced or officially
launched by clients:
• Hitman 2 for IO
• Crackdown 3 for Microsoft
• Team Sonic Racing for SEGA
The Group signed four new major projects in the last few
weeks of 2018, two of which are for Apple Arcade.
Following the resounding success of Snake Pass, published
in 2017, we have been actively generating new game
concepts to develop our own-IP further. Opportunities are
generated from three primary sources: Game Jams, which
we are now running across most of the Group, our Concept
Team and via acquisitions such as The Chinese Room.
Our new relationship with Apple is for the
development of a Sumo Game Jam concept,
with the working title of "Spyder". Our
acquisition of The Chinese Room added
two original concepts to the Group’s IP
portfolio. With the additional necessary
investment provided by Sumo Digital, one of
these concepts, Little Orpheus, is also being
developed with Apple.
Ken Beaty
Chairman
10
GAME JAMS
Game Jam is a platform created to nurture
the creative ideas of our people and bring
them to fruition. Held quarterly, people come
together for a day to develop their idea into a
rudimentary game. Games are judged a few
weeks later and then all staff get to vote on
their favourite.
It’s possible for a Game Jam game to become
a project with a dedicated team. Some ideas
like Snake Pass, are fully developed by Sumo
and others, like “Spyder”, we will team up with
a third party, in this case Apple.
WHAT DO GAME JAMS BRING TO THE
SUMO GROUP?
IDEAS
COLLABORATION
CREATIVITY
PUSHING THE BOUNDARIES
At Gamescom 2018, Team
Sonic Racing received the Best
Casual Game award.
Atomhawk won Best Art
Supplier at TIGA 2018.
Sumo Group plc Annual Report 2018
Throughout 2018, Sumo Digital
continued to work with some
of the world’s largest and most
exciting video game publishers.
Carl Cavers
Chief Executive Officer
SERVICING CLIENTS GLOBALLY
Clients in 2018:
Sumo Digital
Atomhawk
Both Sumo Digital and Atomhawk
11
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
OUR VISION CONTINUED
TO BUILD
A GLOBAL BUSINESS
MARKETS THAT CONTINUE
TO STRENGTHEN
Our market is strong and growing, with
the global games market estimated to
be $134.9bn and growing year on year at
around 10.9%. The latest quarterly update
of the Global Games Market Report forecast
that 2.3bn gamers worldwide would spend
$134.9bn on games in 2018 and the market
would grow to $174bn by 2021. In the UK,
it is believed that video games development
contributed £1.5bn towards GDP.
See the CEO report on pages 18 to 21 for more details.
We have added four new studios and plan
to continue the expansion in the coming year:
• Newcastle (CCP) – see case study on page 21
• Brighton – The Chinese Room – see case study
on page 19
• Huddersfield – Red Kite – see case study on page 05
• Leamington Spa – opened in March to focus on mobile
game development
DEVELOPMENTS IN THE MARKET
• Microsoft announced Project xCloud, its “Netflix
for games” video gaming streaming service on
any device
• Google has announced Stadia, its cloud-based system
• Apple introduces Apple Arcade – the world’s first
game subscription service for mobile, desktop
and the living room
• e-sports continues to expand with growth estimated
at 40% pa
12
Vancouver, Canada
Sheffield
Nottingham
Sumo Group plc Annual Report 2018
Newcastle
LOCATED IN NINE STUDIOS
IN THREE COUNTRIES
650*
talented people in the UK,
Canada and India
* At 31 March 2019.
In December, Sumo Group was
named SME of the Year at the
Yorkshire Business Awards 2018.
Pune, India
13
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
OUR VISION CONTINUED
DRIVEN
BY OUR PEOPLE
Sumo is a people business and our team
is highly talented and creative.
Sumo offers the opportunity to work
on many platforms and in many genres
of games using a variety of technologies.
We are committed to maintaining the Group’s
creative culture as we grow. Exceptional
talent drives opportunities.
AWARDS
Jessica Gaskell (below), one of our producers, was awarded
the Game Dev Heroes Winner – Production. Other members
of our team received nominations for numerous awards,
including Games Dev Heroes, Woman In Games and
GI.Biz 100 Future Talent List.
Insert Caption
We are committed to maintaining Sumo
Group’s creative and inclusive culture as
we grow. Exceptional talent drives growth.
Carl Cavers
Chief Executive Officer
14
ATTRACTING THE BEST TALENT
The appointment of Andrea Dunstan
as a Non-Executive Director brings
additional and valuable HR and
remuneration experience to the Group.
Sumo Group plc Annual Report 2018 INVESTMENT IN STUDIOS
Early in the year we completed
a significant refurbishment of our
Sheffield studios to create a larger
and much improved working
environment.
In February Atomhawk (Canada)
moved to larger premises in
Vancouver.
650
489
33%
PEOPLE AT
31 MARCH 2019
PEOPLE AT 31
DECEMBER 2017
INCREASE
15
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT OUR VISION CONTINUED
TO MAINTAIN A STRONG
COMPANY CULTURE
Interview with Paul Porter,
Chief Operating Officer.
Paul Porter is one of the co-founders of Sumo Digital.
When the business was established in 2003, the team totalled
just eight people. Today, the Group employs 650 and operates
from nine studios across the globe. Paul, who was previously
Managing Director of Sumo Digital, was appointed Chief
Operating Officer of Sumo Group plc on 1 April and joined the
Board on 9 April. He has more than 25 years’ experience in
the video games industry, having previously been Studio Head
at Infogrames Sheffield and the Head of Core Technology at
Gremlin Interactive.
What is your role at Sumo and how is that role
changing?
Until recently, I was focused on the day to day running of
Sumo Digital, managing the growth and development of our
established studios, bedding in newly acquired businesses,
looking after commercial contracts, overseeing business
development, marketing and driving IP development… and
everything in between. As COO, I will have a more strategic
focus on the Group’s growth plans and operations across
Sumo Group. Sumo Digital has a great new MD in Gary
Dunn, who has been with the business since October 2017.
The creation of the new COO role has expanded the
management team’s capacity, which is essential for
managing and continuing the Group’s rapid growth.
How do you work with clients at Sumo Digital?
People often assume that we are a “work for hire” studio,
just focusing on delivering other publishers’ IP and creative
ideas. Our people are extremely creative, and we use these
talents every day, so we still have plenty of creative input.
For example, we often take a publisher-owned franchise
and re-establish it. Sometimes we create new concepts or
ideas and partner with publishers to bring them to market.
Other times we undertake co-dev where we provide services
which lead to further creative collaboration.
We have deep, long-standing relationships with many
clients, who not only value but frequently rely on our
creative talents. For example, we worked closely with
Media Molecule on the Littlebigplanet franchise, creating
DLC for Littlebigplanet 2 and providing technical support
for Littlebigplanet VITA. As we got to really understand the
IP, this gave Sony and Media Molecule the confidence that
we could take the creative lead on Littlebigplanet 3 with
creative check-ins at key stages. Our relationship was
strong and they trusted us to deliver a game of outstanding
quality and appeal.
Q
A
Q
A
16
Q
A
Q
A
Q
A
So how does Sumo encourage creativity?
People who work at Sumo put their heart and soul into
developing outstanding experiences because they are
passionate about creating the best games on the market.
All we do is strive to provide them with everything they
need to enable them to do that great work. And, we actively
encourage all colleagues to take ownership of the projects
on which they are working. We also give people the time
to think creatively and bring their own ideas to the table.
What are Game Jams and how important are they
to the Group?
Game Jam is a platform that we created to nurture the
creative ideas of our people and bring them to fruition.
We aim to hold the Jams quarterly, when people come
together for the day and pick their own teams to help them
develop their idea into a rudimentary game. A few weeks
later, we hold a judging day, when those teams regroup to
play each other’s games. And then all staff get to vote on
their favourite. It’s possible for a Game Jam game to become
a project with a dedicated team, where the idea
is developed further.
Sometimes we have more than one great idea. Some ideas,
like Snake Pass, we fully develop and own in their entirety.
On others, like “Spyder”, we will team up with a third party,
in this case Apple.
I am delighted that we are working on two own-concept
games, “Spyder” and Little Orpheus for Apple Arcade,
Apple’s recently announced gaming subscription service.
“Spyder” was a Game Jam winner and Little Orpheus was
an idea originally created by The Chinese Room,
a company we acquired in August last year.
Why do the industry’s most creative people and
the world’s largest publishers want to work with
Sumo Group?
There is huge demand for talented people in the industry
as more people are playing games than ever before. I think
people choose to work with us because we give them the
space and environment to do what they love. Our track
record for attracting incredible talent through acquisition
is also pleasing. It shows that people like the way we work
and do business and want to be part of a successful group.
Talented people want to work with successful businesses,
working on exciting projects.
I think clients want to work with us because we have
a plethora of technical IP, we have a collaborative and
open approach and they trust us to deliver the best
creative content whilst finding solutions to the challenges
that go with bringing amazing games to market.
Sumo Group plc Annual Report 2018 I think people choose to work
with us because we give them
the space and environment to
do what they love.
Paul Porter
Chief Operating Officer
17
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT CHIEF EXECUTIVE’S REVIEW
POSITIONED
TO DELIVER ON
OUR STRATEGY
Carl Cavers
Chief Executive Officer
Introduction
Our first full year as a plc was another
successful and highly productive one for the
Group. Sumo is a people business and we
continue to grow rapidly; since IPO we have
increased our headcount overall by 33%. At the
year end we had 592 people (2017: 489) working
in seven studios (2017: five) in three countries.
Shortly after the year end, we acquired Red Kite
Games, a work-for-hire studio in Huddersfield
employing 27 people focused on engineering
and code support services. Sumo Digital has
recently opened a new studio in Leamington
Spa to focus on mobile game development,
which takes us to nine studios.
Our market is strong and growing and our
relatively low risk, high visibility business model
generates both cash and sustainable profit
margins. In 2018, three of our major projects
were announced or officially launched by
clients: Hitman 2 for IO Interactive, Crackdown
3 for Microsoft and Team Sonic Racing for
SEGA. In the last few weeks of the financial
year, we agreed terms or signed contracts
on four new major projects. These give us
excellent contracted or near contracted visibility
on 88.7% of our budgeted development fees for
Sumo Digital for 2019.
A challenge we face in presenting our
business to the outside world is the stringent
confidentiality requirements placed on us by
our clients, confidentiality which they value
highly. As much as we want to tell our investors
about all the exciting games on which we are
working, we are generally unable to do so. The
announcement of such games is, rightly, in
the hands of the publisher and I look forward
to updating investors on new clients and
games as projects progress. We are now able
to publicise that we are developing two games
for Apple’s recently announced subscription
gaming service, Apple Arcade. Shortly before
this announcement, Google also announced a
new cloud-gaming service, Stadia. These major
announcements are indicative of the positive
backdrop for content developers in our market.
Our business model remains relatively low risk.
The Group is generally not directly exposed
to the commercial success of a game but
can benefit from upside opportunity where
there are royalties in place. We are, however,
generating new opportunities to accelerate
the Group’s growth and increase our margins
through the development of own-IP games,
either self-funded or co-funded, and through
acquisition. The Group also benefits from being
able to reuse its own tools and technology and
having a significant presence in India, which
provides a lower cost base.
Concept creation
The development of our own-IP is an
important part of our strategy. We launched
our own game, Snake Pass, in March 2017.
The development cost was relatively low and
the game was a great success, generating a
return on investment of circa 130% to the end
of 2018, and sales continue. Our people are
highly talented and creative and, whilst our
primary focus is on developing clients’ IP, we
are generating some outstanding game ideas
of our own. We encourage creativity and will
continue to develop the best game ideas to
generate financial returns, but without taking
undue risk.
Concepts are created from three main sources:
from Game Jams, which we are now running
across most of the Group; from our concept
team; and from acquisitions, for example
The Chinese Room. The ideas generated are
rigorously tested both internally and externally
and we are highly selective in deciding which
concepts are worthy of investment and further
development. If a concept is for a relatively
small game, we will consider funding the
project in full and then either self-publishing,
as we did with Snake Pass, or using an
external publisher to leverage greater sales
opportunities. For larger projects, we are
now looking to obtain external funding from
a publisher for the majority or all of the cost,
thereby keeping our risk appropriately low while
also looking to generate higher returns through
royalties which reflect the value of the original
concept creation. Our contracts with Apple
for Little Orpheus and “Spyder” are excellent
examples of this and the accounting treatment
of these new types of project is considered in
the Business Model, on pages 6 to 9.
Results
I’m delighted with the continuing growth of
the Group. In the year ended 31 December
2018, revenue rose by 35.3% to £38.7m (2017:
£28.6m). These figures exclude £9.3m of
pass-through revenue in 2018 (2017: £2.0m) on
which Sumo Digital does not make a margin.
The underlying revenue for 2018 adjusted for
the impact of the adoption of IFRS 15 was
£38.9m, representing an increase of 35.9% on
the figure of £28.6m in 2017. This was driven
by continuing strong organic growth at Sumo
Digital and the first full year of ownership of
Atomhawk, which contributed revenue of £2.7m
in the year. Development fees for the year were
18
Sumo Group plc Annual Report 2018 ACQUISITION OF
THE CHINESE ROOM
The Chinese Room, an award-winning
independent game development studio in
Brighton, was acquired in August 2018. It is
best known for creating experimental first-
person games such as Dear Esther, Amnesia:
A Machine for Pigs, Everybody's Gone to the
Rapture and, most recently, So Let Us Melt.
The business was founded in 2010 and named
after John Searle's Chinese Room thought
experiment. Dear Esther received several
Independent Games Festival nominations and
the award for Excellence in Visual Art in 2012.
Dear Esther is recognised as creating a new
sub-genre of gaming, the "Walking Simulator".
Everybody’s Gone to the Rapture, which was
developed by The Chinese Room and published
by Sony Computer Entertainment, won three
BAFTAs amongst many other industry awards
in 2015.
Games published:
Dear Esther
Amnesia: A Machine for Pigs
Everybody’s Gone to the Rapture
So Let Us Melt
What this brings to Sumo Digital:
Multiple awards
including a BAFTA
for Everybody’s
Gone to the
Rapture
• Accelerates our own-IP
pipeline and adds new
intellectual property
and creative talent
• The opportunity to
develop a new studio
in the south of England,
allowing access to a new
pool of talent in a creative
hot-spot
• Extends the reach and
accelerates the growth
of our core business
Creative
talent
Dr Dan
Pinchbeck
New studio location
2,700 sq ft studio
in Brighton
Studio Director appointed
Recruitment underway
New talent pool in creative
hotspot
£37.5m (2017: £26.4m), an increase of 41.9%
on the prior year and an increase of 39.2% on
a like for like basis adjusted for the effect of
IFRS 15 and excluding acquisitions.
The Group achieved Adjusted EBITDA1
of £10.4m in 2018, a substantial increase
on the £8.4m reported in 2017.
Further details of the financial results,
including the impact of IFRS 15, a new
accounting standard for revenue, are set
out in the Group Financial Review.
Operational review
Sumo Digital
In June 2018, we celebrated the 15th
anniversary of Sumo Digital, the Group’s
largest business representing just over
95% of revenue. Sumo Digital is a developer
of AAA-rated video games, providing both
turnkey and co-development solutions to an
international blue-chip client base. Its full-
service development solution includes initial
concept and pre-production, production and
development and post-release support (end
to end full development lifecycle for games).
In 2018, the business operated from studios
in Sheffield, Nottingham, Newcastle, Brighton
and Pune in India. With the addition of Red
Kite Games and the opening of a new studio in
Leamington Spa post year end, Sumo Digital
now operates from seven locations.
1 Adjusted EBITDA, which is defined as profit before finance
costs, tax, depreciation, amortisation, exceptional items,
share-based payment charge, customer revenue
included within finance income, accrued royalty not
yet received and contingent on future sales and the investment
in co-funded games expensed, is a non-GAAP metric used
by management and is not an IFRS disclosure.
Studios and expansion
We started 2018 by taking on the Newcastle
studio of CCP Games, bringing a further 34
people to the business and an additional studio
location. This studio was quickly integrated and
has performed strongly under our ownership.
In December, we relocated the team to the
Northern Design Centre building in Gateshead
where the primary Atomhawk studio is located.
This talented and highly experienced
development team works with some of
the industry’s best-known publishers and
developers, most recently Codemasters on
DiRT 4, Sony Computer Entertainment (SCE)
on God of War III: Remastered and Activision
on Call of Duty: Strike Team. Early indications
show that this business is operating in line with
expectations as part of Sumo Digital.
In August, we acquired The Chinese Room,
an award-winning independent game
development studio in Brighton. The acquisition
accelerated our own-IP pipeline, as well as
adding new intellectual property and creative
talent. The Chinese Room had two original
concepts, one of which, 13th Interior, was at
prototype demo stage and the other is Little
Orpheus, which, following our input and
investment, is now being developed for Apple
Arcade. It also gave us the opportunity to
develop a new studio in the South of England,
allowing us to access an additional pool of
talent in a creative hot-spot, extending the
reach and accelerating the growth of our
core business. We are very pleased with the
progress and performance since acquisition.
At the year end, we had a team of nine in the
Brighton studio and we continue to recruit to
grow this team.
On 31 January 2019, post year end, we acquired
Red Kite Games, a work-for-hire studio
focusing on engineering and code support
services. The acquisition supports the Group’s
growth strategy by further increasing our
capacity and enabling us to access another new
talent pool in West Yorkshire. Red Kite Games
operates from a single studio in Huddersfield
and has a team of 27 people.
Sheffield continues to be our largest studio
and our head office. The studio had another
strong year and the team is currently working
on several exciting projects, including “Spyder”
for Apple Arcade. We completed a significant
refurbishment programme of these premises
in the first quarter of 2018 to create a larger
and much improved working environment for
our people. Our intention is to expand further into
an adjacent unit and continue our investment in
maintaining a desirable working environment.
The Nottingham studio performed well in the
year. Many of our people in Nottingham were
working on Team Sonic Racing. The team
has also been working with CCP Games and
on distributed development supporting other
studios in the Group. It is a highly versatile
studio and towards the end of the year started
working on two new projects.
Across the four UK studios in 2018, including
Brighton for part of the year, we achieved
utilisation rates of circa 95%, which is in line
with our targets. We consider these utilisation
rates to be sustainable, having regard to levels
achieved in previous years.
19
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
CHIEF EXECUTIVE’S REVIEW CONTINUED
Sumo Digital has been operating in India for
12 years. We have established a highly skilled
team at our studio in Pune which continues
to perform strongly. The relatively attractive
cost structure underpins our profit margins
and helps us to remain competitive. We now
have significant engineering talent and games
designers working with the long-established
art team and expect this studio to move to full
game development in the future. Accordingly,
we attended the India Game Development
Conference at Hyderabad in December 2018.
The utilisation rate at this studio increased to
92% in 2018 (2017: 90%).
Operating from multiple locations gives us
the capacity to deliver our headcount growth
targets and we are constantly reviewing
opportunities to accelerate growth by opening
studios in other strategic locations. The recent
opening of the new studio in Leamington Spa,
led by a highly regarded studio head, to focus
on mobile game development, is yet another
example of our growth strategy in action. We
are considering other new locations both in the
UK and abroad as well as looking at potential
acquisition opportunities.
Awards
We always appreciate being recognised by our
industry or outside organisations in the form
of awards. At Gamescom 2018, Team Sonic
Racing, which has a planned launch date of
May 2019, received the Best Casual Game
award. It was particularly pleasing that Jessica
Gaskell, one of our producers, was awarded the
Game Dev Heroes Winner – Production. Other
members of our team received nominations
for numerous awards, including Games Dev
Heroes, Woman in Games and GamesIndustry.
biz 100 Future Talent list.
In December 2018, Sumo Group was named
SME of the Year at the Yorkshire Business
Awards 2018.
Clients
Over the past few years, we have worked
with Sony, Microsoft (including Turn 10
Studios), SEGA, Deep Silver, IO Interactive
and CCP Games. Whilst constrained by client
confidentiality from providing further detail
until permitted, I am pleased to report that
Sumo Digital continued to work with some of
the largest publishers in the world during 2018
and that we were delighted to add Apple to our
client list late in the year.
During the year, the shift towards more
royalty arrangements as part of our contracts
continued. We are always keen to align our
interests with those of our clients and see the
opportunity for financial out-performance on
new iterations of proven games.
Atomhawk
Atomhawk performed well in the first full
year of ownership. It has two studios, one in
Newcastle and the other in Vancouver, where
the team moved to larger premises in February
2018. The two studios work together closely
and we have created an intra-company transfer
scheme to promote knowledge sharing across
the business.
Acquisitions
We have an interesting pipeline of
acquisition opportunities ranging in
activities, sizes and locations. The Group is
particularly keen to acquire owner-managed
businesses, where the vendors remain with
the business post acquisition and where we
can use our listed shares to provide suitable
ongoing incentive arrangements.
Atomhawk provides visual development
concept art and marketing art, as well as
motion graphics and user interface design.
Its expertise is in helping customers define
a visual look for their products, from inception
through development and, at the final point of
sale, through marketing imagery, videos and
box packaging design. The business primarily
serves the creative industries, working with
video games studios, as well as film and
television. It has international clients across
the entertainment sector. We have delivered
sustained and stable growth both in terms
of headcount and revenue in the year under
review with senior appointments in both
locations. Clients include 2K, WB Games,
Microsoft and LEGO in the UK and Zynga,
EA, Daybreak and Microsoft in Canada. The
business has expanded its motion graphics
and marketing art service lines, the latter area
focusing on the retail and theme park sectors.
I am pleased to report that Atomhawk won Best
Art Supplier at TIGA in 2018, recognising the
creative team’s efforts and exceptional talent
in the business.
Atomhawk continues to operate primarily
with its own client base but is increasingly
collaborating with Sumo Digital on projects
including own-IP.
Strategy
Sumo Group’s strategy remains unchanged:
to deliver and expand, to win new clients, M&A,
particularly with a view to add complementary
revenue streams, and to develop our own-IP,
both self-funded and co-funded opportunities:
• We plan to deliver and expand by developing
subsequent franchise titles, by developing
downloadable content, managing online
communities (collectively referred to as
‘Games as a Service’) and generating
royalties, where our interests are
clearly aligned with our clients;
• We plan to win new clients through the
expansion of our publisher portfolio,
collaborating with other publishers and
extending our co-development relationships,
and through selective acquisitions;
• We seek to develop complementary revenue
streams through moving into new premium
services, possibly through acquisition, as we
have done successfully with Atomhawk; and
• Following the highly successful release of
Snake Pass in 2017, we will continue
to develop our own-IP as referred to above.
We plan to release at least one self-funded
own-IP title in 2019.
People
We emphasise that Sumo Group is a people
business and its continuing success is entirely
dependent on recruiting and retaining talented
people. I am pleased to report that, at the end
of March 2019, our headcount had increased
to 650, an increase of 58 from 592 at the
end of December 2018. During 2018, our
headcount increased by more than 100 and
the year end headcount was significantly above
our expectation at the start of the year. It is
notable that this large increase was achieved
despite our staff attrition rate in the UK rising
to 13.8%. The attrition rate has now dropped
significantly and we will work to maintain
acceptable levels moving forward. The two
principal factors behind the increased attrition
were a Group-wide job levelling process, which
was undertaken in the year, and, whilst we
successfully transitioned most teams onto
other existing or new projects, the completion
of an unusually large number of major projects
in the year.
We are strengthening our HR team and
processes and have taken focused and planned
actions to improve staff retention. Such
measures include our incentive arrangements
and investing in our premises to provide a
high-quality working environment. Andrea
Dunstan, who has a wealth of relevant people
experience, joined the Board in September
as a Non-Executive Director and Chair of the
Remuneration Committee. I am very pleased
to note that, in this short period of time, she has
already made a positive impact on the business
and its processes.
The Group has continued to meet challenging
recruitment targets successfully over many
years. Good people are in high demand and
we must continue to focus on providing an
attractive employment opportunity for the best.
Video game developers tend to look for security
of employment and interesting work. Sumo
does offer the opportunity to work on many
platforms and in many genres of games using
various technologies. We recruit at all levels of
experience and have strong relationships with
universities both in the UK and abroad. We also
benefit from recruiting in many locations with
significant talent pools.
Of the four original founders of Sumo Digital,
three remain with the business: Darren Mills,
Studio Director of Sheffield, myself as CEO
and Paul Porter. Paul was appointed Chief
Operating Officer of Sumo Group on 9 April
2019 and joins the Board with effect from
today. He was previously Managing Director
of Sumo Digital.
20
Sumo Group plc Annual Report 2018
I am delighted that Paul is taking on this
important new role and welcome him to
the Board.
I am also pleased that Gary Dunn has taken
on Paul’s previous role as Managing Director
of Sumo Digital. Gary has impressed the
Board considerably since he joined the Sumo
Digital team as Portfolio Director in October
2017, demonstrating excellent leadership,
growing successful teams and managing
projects from concept to launch. We welcome
him to his new role and look forward to his
continuing contribution.
We are committed to maintaining Sumo
Group’s creative culture as we grow.
Exceptional talent drives opportunity and,
on behalf of the Board, I would like to thank
everyone at Sumo Group for their passion,
commitment and desire to create outstanding
games and imagery.
The market
Our market is strong and growing. In a recent
GamesIndustry.biz article the value of the
global games market was estimated to be
$134.9bn using data from Newzoo. The market
value was further analysed as $63.2bn for
Mobile, $38.3bn for Console and $33.4bn for
PC. Year on year growth rates of these three
segments were estimated to be 12.8%, 15.2%
and 3.2% respectively, giving an overall market
growth of 10.9%. The latest quarterly update of
the Global Games Market Report forecast that
2.3bn gamers worldwide would spend $134.9bn
on games in 2018 and that the market will
grow by c.30% to $174bn by 2021.
The UK is an important part of the global
video games market and the market is a very
important one for the UK. The TIGA Business
Opinion Survey 2019 reported that video games
development contributed nearly £1.5bn towards
UK GDP in the year to November 2017 and
an estimated £613m in direct and indirect tax
revenue to the Exchequer. TIGA estimates
that 37,536 people in the UK work directly
or indirectly for the video games industry,
including 13,277 people in games development.
UK operators are positive about the market
opportunity and the future. In the TIGA survey,
it was reported that 77% of operators planned
to expand their workforce in 2019 and 52% of
respondents said the outlook for investment
in their business was more optimistic than
12 months earlier, despite the uncertainty
surrounding Brexit.
There are several very interesting trends
developing in the market, including the move
to streaming, the rapid growth of e-sports and
the continuing development of Games as a
Service (“GAAS”).
Recently, Microsoft CEO Satya Nadella briefed
journalists at an invitational editors’ meeting
at Microsoft’s headquarters on what they
describe as “Netflix for games”. He discussed
Microsoft’s move to video game streaming with
Project xCloud, where a gamer can play high-
quality, blockbuster games on any device with
the game being powered by a remote computer.
On 19 March 2019, Google announced Stadia,
its cloud-based system able to run on PC,
mobile, tablet and TV. On 25 March 2019,
Apple announced Apple Arcade, and we are
delighted to be developing two games for this
subscription service. These are very significant
steps for the streaming of video games.
e-sports continues to grow rapidly. Recently
GamesIndustry.biz reported that this sector
is estimated to be growing at up to 40% per
annum. Total prize money awarded for e-sports
tournaments in 2018 was $140m. Global
e-sports revenues are expected to grow to
$1bn for 2019.
These trends underpin the drive for high quality
games, which supports Sumo Group’s business
model and growth strategy. The opportunities
for our business are further strengthened by
the ongoing move towards GAAS, in which
developers or publishers engage with players
over a protracted period following the release
of a game providing downloadable content
and other ongoing services. The Group is well
positioned to benefit from the changes in a very
dynamic market.
Outlook
With the video games market forecast by
Newzoo to grow c.30% in the next three
years, driven by demand for new cloud-based
subscription platform content supported by
the world’s biggest publishers, we believe
that the outlook for Sumo Group is as good as
ever. We are successfully attracting major new
global publishers, as well as strengthening
our relationships with existing and previous
clients, and our business development pipeline
remains very healthy.
The challenge for the business is the
acquisition of talent to support and deliver on
these significant growth opportunities. Our
quest to attract talented people to the business,
both organically and through acquisition, is
delivering results and we will maintain a keen
focus on this aspect of the business in 2019.
Having successfully acquired Red Kite Games
at the beginning of the new financial year, we
are continuing to explore further interesting
acquisition opportunities.
We have had a positive start to the new financial
year and have an unusually high degree of
earnings visibility with around 88% of Sumo
Digital’s forecast 2019 development fees being
already contracted or near contracted. Current
trading is in line with the management’s
expectations and I remain confident that the
business will continue to deliver in 2019
and beyond.
Carl Cavers
Chief Executive Officer
SUMO NEWCASTLE STUDIO
In January 2018 Sumo Digital took
on the Newcastle studio of CCP
Games, bringing a further 34 people
to the business and an additional
studio location.
How it’s been integrated:
• Quickly integrated
• Performed well
34
• Relocated to the Northern Design Centre
building in Gateshead where the primary
Atomhawk studio is located
Team growth of 34 and new
location added
In the last few weeks of the
financial year, we agreed terms
or signed contracts on four new
major projects. These give us
unprecedented contracted or near
contracted visibility on 88% of our
budgeted development fees for
Sumo Digital for 2019.
Carl Cavers
Chief Executive Officer
21
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT GROUP FINANCIAL REVIEW
FINANCIAL
SUCCESS
A YEAR ON
David Wilton
Chief Financial Officer
These financial statements cover the financial
year ended 31 December 2018, the first full year
of Sumo Group as an AIM quoted company,
following the IPO in December 2017.
Results overview
The underlying trading of the Group was
strong in the year under review. Statutory
revenue for the year was £38.7m (2017:
£28.6m). Our revenue figures are now stated
excluding pass-through revenues upon which
Sumo does not make a margin and the 2017
comparative figures have been restated
accordingly. Pass-through revenue in 2018
was £9.3m (2017: £2.0m). These figures reflect
continuing strong organic growth at Sumo
Digital and the first full year of the ownership
of Atomhawk, which contributed £2.7m and
£0.7m of revenue and EBITDA respectively.
The 2018 figures also include four and a half
months of ownership of The Chinese Room
which performed ahead of expectations by
breaking even on revenue of £0.3m. The
like for like increase in adjusted revenue1,
excluding the effect of acquisitions, was
£8.6m, an increase on the prior year of 31.6%.
Adjusted EBITDA was £10.4m. This was
significantly ahead of the Adjusted EBITDA
in 2017 of £8.4m, an increase of 24.6% and
slightly ahead of the Board’s expectations.
1 The adjustment to revenue is to include £0.4m of
customer revenue included within finance income, and
exclude £0.2m of accrued royalty income not yet received
and contingent on future sales, following the adoption
of IFRS 15.
22
Revenue
Gross profit
Gross margin
Adjusted EBITDA3
Loss before tax
Exceptional items and
amortisation charges
Adjustments3
Cash flow from operations
Audited
2018
£’000
38,696
18,403
47.6%
10,407
(483)
(7,041)
(2,957)
(6,363)
Audited
Restated2
2017
£’000
28,591
13,252
46.4%
8,356
(27,973)
(30,282)
Increase/
(decrease)
£’000
10,105
5,151
–
2,051
27,490
23,241
–
3,252
(2,957)
(9,615)
2 2017 comparative restated for pass-through revenues and costs upon which Sumo does not make a margin. During the year the
directors reassessed their accounting treatment for certain ‘pass-through’ costs which are recharged at nil margin and concluded that
it would be appropriate for these costs to be netted against recharged income. This change in presentation reduced revenue and direct
costs for the year ended 31 December 2017 by £2m but had no impact upon gross profit, earnings or financial position.
3 Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, exceptional items, share-based
payment charge, customer revenue included within finance income, accrued royalty not yet received and contingent on future sales
and the investment in co-funded games expensed, is a non-GAAP metric used by management and is not an IFRS disclosure.
The underlying adjusted profit before share-
based payments charge, adjustment for
customer revenue included within finance
income, investment in co-funded games
expensed, exceptional items, amortisation of
customer contracts and relationships for the
year was £9.0m (2017: £7.5m also adjusted for
net finance costs relating to pre-IPO financial
structure), and reported loss before tax was
£0.5m (2017: £28.0m) as set out in note 29.
The reported loss before tax is stated after,
inter alia, the non-cash amortisation charge
of £6.9m.
The net cash outflow for the year was £8.6m
which was in line with our expectations at the
start of the year. Cash balances at the year end
were £3.7m (2017: £12.4m).
The audited results are the first prepared
having adopted IFRS 15: Revenue from
Contracts with Customers. In the Annual
Report 2017, the Board stated that it did not
expect the adoption of IFRS 15 to have a
material impact on the financial information
of the Group in the period of initial application.
In our Half Year Results 2018, we referred to
changed terms on one contract, which has
unusual payment terms. Under IFRS 15, there
were adjustments in the period under review
of £0.2m and £0.3m to revenue and interest
income respectively, relating to this contract,
and there will be further adjustments in 2019.
The adjustment to revenue of £0.2m comprises
two separate amounts: £0.4m adjustment
to development fees relating to the funding
income on the project and £0.2m recognition
of variable consideration on future royalty
income. Further details are set out in note 27.
Sumo Group plc Annual Report 2018
KEY PERFORMANCE INDICATORS
Gross margin
Adjusted EBITDA3
Operating cash flow
47.6%
2017: 46.4%
£10.4m
2017: £8.4m
£(6.4)m
2017: £3.3m inflow
RECONCILIATION TO UNAUDITED UNDERLYING INCOME STATEMENT
Revenue
Gross profit
Operating expenses excluding
depreciation, amortisation,
share-based payments charge,
exceptional items, the impact of
IFRS adoption and investment in
co-funded games expensed
Adjusted EBITDA
Depreciation
Net finance costs
Customer revenue included
within finance income
Accrued royalty not yet received
and contingent on future sales
Investment in co-funded games
expensed
Amortisation of software
Adjusted profit before tax,
share-based payment charge,
exceptional items and
amortisation of customer
contracts and customer
relationships
Operating expenses –
exceptional
Share-based payments charge
Amortisation of customer
contracts and relationships
Loss before taxation
Reported
Revenue
margin
2018 adjustments6
£’000
£’000
38,696
18,403
171
171
Adjustments4
£’000
–
208
Unaudited
underlying
2018
£’000
38,867
18,782
Reported
2017
£’000
28,591
13,252
(7,996)
10,407
(1,104)
212
(171)
–
–
(309)
(208)
–
–
–
(8,375)
10,407
(1,104)
(97)
(421)
421
250
(250)
(208)
(163)
208
–
–
–
–
–
(4,896)
8,356
(669)
(5,378)
–
–
–
–
–
(163)
–
(162)
Adjustments5
£’000
–
–
–
5,378
–
–
–
–
Unaudited
underlying
2017
£’000
28,591
13,252
(4,896)
8,356
(669)
–
–
–
–
(162)
8,973
(94)
(2,578)
(6,784)
(483)
9,043
2,147
7,525
(2,656)
–
(27,464)
(27,973)
4
5
6
The adjustment in 2018 in respect of gross margin is in relation to Sumo’s investment in co-funded games, which for statutory purposes is expensed.
The adjustment in 2017 in respect of interest cost is to reflect the ungeared structure of the Group following the IPO in December 2017.
The revenue margin adjustments are made up of customer revenue included within finance income, accrued royalty income not yet received and contingent on future sales, investment in co-funded games
expensed and net financing costs.
23
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
GROUP FINANCIAL REVIEW CONTINUED
As our talent pool grows, the Group is
generating more own-IP opportunities,
including concepts which lend themselves
to larger, more complex game development.
We remain committed to our relatively low
risk model, however, and, as such, we will not
take significant principal risk. Towards the
end of 2018, we began work on a new type of
co-development contract, under which external
funding is provided by a publisher for all or the
majority of the development costs for a game,
the concept of which was created by Sumo
Group. This new approach will enable us to
generate returns which best reflect the value
of a Sumo Group concept, whilst keeping
principal risk relatively low. Two such contracts
were signed in the latter stages of 2018, for
projects on which the publishers will pay for the
majority of the development costs, in exchange
for the right to access or use economic benefits
of the IP created, and Sumo Group will fund a
smaller proportion of the costs. The revenue
and profit are recognised on the development
fees payable by the publisher during the term
of the contract but the costs incurred by Sumo
Group are expensed. During 2018, the costs
incurred on these two projects amounted to
£0.2m in aggregate. The equivalent costs to
be incurred in 2019 will be larger.
During the year the Group incurred £0.1m
of transaction costs on the acquisition of
The Chinese Room.
The Board believes that it is helpful to include
alternative performance measures which
exclude certain non-cash charges and are
adjusted for the three matters referred to above
to present the underlying results of the Group.
These measures are reconciled to the income
statement in note 29.
The non-cash charges included in the Group’s
results relate to the amortisation of goodwill
and to share-based payments. The other three
adjustments are firstly for the financing of the
one contract under IFRS 15, secondly for the
costs expensed on the development of the
two games referred to above and thirdly the
transaction costs on the acquisition of The
Chinese Room.
To assist the understanding of how IFRS
15 applies to the three different types of
contract presently being undertaken by Sumo,
illustrative case studies are set out on the
Business Model pages 08 to 09.
24
Trading
Development fees for the year were £37.5m,
an increase of 41.9% on the £26.4m in 2017.
Atomhawk, which was acquired on 29 June
2017, contributed revenue of £2.7m in the year
(2017: £1.3m in the period post acquisition).
The Chinese Room, which was acquired on
13 August 2018, contributed £0.3m of revenue
in the year. On a like for like basis the Group’s
development fees, adjusted for the effect of
IFRS 15, increased by 39.2%.
The Group generated own-IP title revenue of
£0.4m (2017: £1.7m). Royalty income was £0.8m
(2017: £0.5m). Both these revenue figures are in
line with the Board’s expectations. The own-IP
revenue is generated from the ongoing sales of
Snake Pass which was launched in March 2017.
The royalty income now includes an amount of
£0.2m in recognition of variable consideration
under IFRS 15 which is future royalty income
expected to be received in 2019.
Statutory gross profit for the year was £18.4m,
an increase of 38.9% on the £13.3m in the
prior year.
Gross margin adjusted for IFRS 15 and
excluding royalties was 47.6% (2017: 45.4%).
Operating expenses for the year were £19.1m
(2017: £35.8m). Included within operating
expenses were amortisation and depreciation
of £6.9m and £1.1m respectively (2017: £27.6m
and £0.7m respectively).
The non-cash amortisation charge is explained
below. The overall increase in operating
expenses excluding amortisation and
depreciation was primarily due to investment in
people and systems, the inclusion of a full year
of Atomhawk and increased premises costs on
the newly acquired leasehold units in Sheffield.
The Group spent £0.6m on research and
development, all of which has been expensed.
One of the core reasons why the Group
became a public listed company was to use its
quoted shares to incentivise our people. The
Sumo Group plc Long Term Incentive Plan
and the Sumo Group plc Share Incentive Plan
were launched in March 2018 and July 2018
respectively. There is a non-cash charge under
IFRS 2 of £2.6m in 2018 to reflect the cost of
these plans.
The net finance income for the year was £0.2m
(2017: net finance cost of £5.4m). The Group
had no borrowings during the period and the
net finance income consists of the IFRS 15
financing income referred to above partially
offset by the bank commitment fee payable.
The Corporation Tax credit for the year was
£0.2m (2017: £4.5m credit). Further information
regarding taxation is set out in note 11.
Sumo Group plc Annual Report 2018 Profit margins
Statutory gross margin for the year was 47.6%
(2017: 46.4%). These margins reflect the royalty
income of £0.8m (2017: £0.5m) in the year
which flows directly through to gross profit.
The gross margin adjusted for IFRS 15 adoption
impact, investment in co-funded games
expensed and excluding royalties was 47.6%
(2017: 45.4%).
Adjusted EBITDA margin was 26.8% (2017:
29.2%). The reduction in EBITDA margin was
expected as we invest in the platform
to support future growth.
The gross margin is underpinned by the high
levels of, and rapidly increasing, demand for
premium development and creative services
to the video game and wider entertainment
industries combined with the Group’s delivery
and cost model. In particular, Sumo Group
benefits from its core technology which
enables accelerated prototyping, the efficiency
and de-risking of the development phase and
optimising development through the use of
proven technology. The Group also operates
from relatively low-cost locations, notably
in India.
The adjusted EBITDA margin for 2018 reflects
the significant investment in the year in the
Group’s overhead base to provide a strong
platform to support long-term growth.
Client concentration
During 2018 there were four major clients that
individually accounted for at least 10% of total
revenues (2017: three clients). In aggregate,
these four clients accounted for 65.9% of total
revenue and the top three accounted for 52.5%.
Due to the nature of Sumo Group’s market and
the services provided the Group will always
serve a relatively small number of clients at
any given time, usually on major long-term
contracts. The Group has strong relationships
with its clients, some of whom have been very
long-standing strategic partners. Over time,
our client concentration has reduced and it is
likely to continue to do so. Several contracts
secured in the final weeks of 2018 are with
significant clients with whom the Group has
not worked before, including Apple.
Video Games Tax Relief (VGTR)
Sumo Digital continues to claim and receive
significant amounts under VGTR. We include
VGTR within our direct costs and accordingly,
for both years, our gross profit and gross
margin reflect these amounts. We believe this
is the appropriate treatment of these credits,
as gross margin is best considered after taking
account of the effect of VGTR. The amounts
included for 2017 and 2018 are £8.3m and
£6.9m respectively.
25
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT GROUP FINANCIAL REVIEW CONTINUED
The Board expects the Group to
be significantly cash generative
in 2019.
David Wilton
Chief Financial Officer
Cash flow
As expected, net outflow of cash from operating
activities was £6.4m (2017: cash inflow £3.3m).
The principal factors behind the cash outflow
for the year were:
• the payment in 2018 of fees of £1.7m arising
on the December 2017 IPO;
• the timing of VGTR receipts; and
• the timing of milestone receipts, in
particular on one contract in which the cash
is receivable after the game is released.
This contract is the one referred to above
regarding IFRS 15. It accounted for £5.7m
of the increase in working capital and arose
primarily due to the payment terms on this
one contract whereby, for commercially
attractive terms, the Group is financing an
element of development combined with the
timing of milestone receipts. The increase in
working capital on this particular contract is
expected to reverse in 2019.
Capital expenditure in the year was £2.2m
(2017: £1.7m), most of which related to either
the refitting of the premises in Sheffield, which
was ongoing over the 2017 year end, or the
purchase of IT equipment and systems.
The cash cost of the acquisition of The Chinese
Room was £1.6m and it had cash balances of
£1.6m at the date of acquisition.
The Board expects the Group to be significantly
cash generative in 2019.
Cash balances at 31 December 2018 were
£3.7m (31 December 2017: £12.4m).
Cash balances
at 31 December 2018
£3.7m
(31 December 2017: £12.4m)
Treatment of acquisition and IPO costs
The net consideration of £0.6m paid for the
acquisition of The Chinese Room has been
capitalised and goodwill and other intangibles
of £0.6m are carried on the balance sheet as at
31 December 2018. £0.1m of transaction costs
were charged through the income statement
and are treated as an adjustment in the
calculation of Adjusted EBITDA.
In the previous year, transaction costs were
incurred in a number of areas in relation to
the IPO and raising of new financing. The
accounting treatment is governed by IFRS 3.
Accordingly, £1.9m and £2.5m of transaction
costs were charged to equity and through the
income statement respectively in that year.
Transaction costs of £0.2m were charged
through the income statement for the
acquisition of Atomhawk.
Shortly before our IPO in December 2017, we
made due diligence enquiries into the status
of VGTR. These enquiries indicated ongoing
cross-party support for the measure. A British
Film Institute report published in October 2018
showed that in 2016 the total development
spend in the video games sector was £1.25bn,
of which £390m accessed VGTR and that VGTR
supported spending generated £294m of direct
gross value added. For every £1 spend, the UK
has seen an additional £4 of gross value added
and, according to the BFI, it has generated
around 9,170 full-time equivalent roles. In 2017,
the EU Commission announced that the VGTR
scheme would continue until at least 2023.
It is worth noting that similar schemes are
in place in many other countries, notably
Canada, the US, and France, some of which
are at higher rates than in the UK. It is reported
that Germany, the Republic of Ireland and
Poland are considering introducing similar
incentive schemes.
In a recent survey by TIGA, respondents
referred to the need to make the UK’s Video
Games Tax Relief more internationally
competitive when asked about obstacles
to growth in the sector.
26
Sumo Group plc Annual Report 2018 Post balance sheet date events
On 1 February 2019, we announced the
acquisition of Red Kite Games, a work-for-hire
studio focusing on engineering and code
support services. The net consideration is circa
£1.5 million, as Red Kite Games has been
acquired with circa £0.5 million of cash on the
balance sheet. The business will continue to
operate under the Red Kite Games name, as
a wholly owned subsidiary of Sumo Digital.
Sumo Group has agreed to issue 1,162,791
shares to the vendors of Red Kite Games on the
first anniversary of the completion as part of the
acquisition consideration, which was completed
on 31 January 2019.
Since the year end, options have been granted
under the LTIP over 618,392 shares and 4,550
shares have been issued to date in 2019 under
the terms of the SIP.
David Wilton
Chief Financial Officer
Foreign currency
Until recently, virtually all the Group’s contracts
have been denominated in pounds sterling.
Atomhawk has generated revenues in foreign
currency, primarily US dollars. Costs are
incurred in India in local currency.
Two development contracts signed in late
2018 are denominated in US dollars, hence
Sumo will have relatively significant revenues
in that currency. It is Sumo Group’s policy to
hedge such revenues to protect the Group from
fluctuations in exchange rates and the forecast
revenue receipts on these two contracts have
been hedged accordingly in 2019.
Dividend
In line with the strategy set out at the time
of the flotation, the Directors intend to reinvest
a significant portion of the Group’s earnings
to facilitate plans for future growth. Accordingly,
the Directors do not propose a dividend at
the present time but it remains the Board’s
intention, should the Group generate
a sustained level of distributable profits,
to consider a dividend policy in future years.
Share issues
During the year, options were granted and
remain outstanding under the LTIP over an
aggregate of 8,631,278 shares. 4,618,735 shares
were issued on 9 March 2018 to be held in
order to satisfy the element of the proposed
LTIP awards which are to be held under a
joint ownership arrangement. The Group also
launched the Sumo Group plc Share Incentive
Plan (SIP) in July 2018 and 92,287 shares were
issued in 2018 under the terms of the SIP.
Sumo Group issued 357,485 shares to the
vendors of The Chinese Room as part of the
consideration upon acquisition which was
announced on 14 August 2018.
Balance sheet
Goodwill and other intangibles reduced by
£5.8m to £22.4m. The reduction reflects the
residual non-cash goodwill and amortisation
charge of £6.9m, following from the decision
taken in the previous year to review the policy
for historical intangible assets in respect
of client contracts and client relationship
intangible assets arising from the acquisition
by Perwyn in September 2016. Following the
review, these intangible assets were valued by
reference to the specific time period for each
of the client contracts in place at September
2016 and an assessment of the appropriate
time period for the client relationship from that
date, which we now consider to be two years.
We also took account of changes in the scope
of the client contracts and client relationships.
These amendments constituted a change
in accounting estimate, and the effect is to
amortise the historical intangible assets arising
on the September 2016 change of ownership
over a shorter period. The accelerated
amortisation charge arose in the nine months
up to September 2018, being the date of the
second anniversary of the Perwyn transaction.
The reduction in the intangible asset was partly
offset by the increase in other intangibles
arising from the acquisition of The Chinese
Room in the period.
Current assets were £28.9m (31 December
2017: £23.8m). Trade and other receivables
were £25.2m (31 December 2017: £11.4m).
The increase of £13.8m in trade receivables
is primarily due to the contract with unusual
payment terms which represented £5.7m
of the movement.
Cash balances at 31 December 2018 were
£3.7m (31 December 2017: £12.4m). The
Group has a £13m revolving credit facilities
agreement with Clydesdale Bank plc. Interest
is payable on amounts drawn down at the rate
of one and a half to two percent above LIBOR
and the term of the agreement is five years
from 15 December 2017. As at the date of
these financial statements, this facility
remains undrawn.
Trade and other payables reduced by £1.1m
to £11.0m at 31 December 2018.
The consolidated balance sheet at 31
December 2018 includes own shares of
£4.9m which relates to shares issued under
the terms of the Sumo Group plc Long Term
Incentive Plan.
27
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES
EFFECTIVELY
MANAGING OUR RISKS
During the Company’s first full year as a PLC, the Board
has regularly reviewed and updated the Company’s risk
management and internal control systems. This has
included discussion and review of the Group’s risk register,
facilitated by the Group Internal Auditor. The Board has
focused on ensuring that the register reflects the structure
and strategy implemented by the Group, and monitoring the
implementation of mitigating activities.
The items referred to below are regarded as the key risks
for the Group. These are not the only risks that might affect
the Group’s performance, but the Board believes that they
are currently the most significant and specific to the
Group’s business.
Risk
Description and mitigation
STRATEGIC
Mergers and acquisitions
Risk and potential impacts
Acquisitions may involve unforeseen liabilities, difficulties in realising cost or revenue expectations, loss of key employees
and customer relationship issues. Unanticipated operating difficulties and expenditure during integration could absorb
significant financial and management resources. A poorly implemented acquisition could damage the Group’s reputation,
brand and financial position.
Mitigating activities
The selection of potential target companies by senior management is typically based upon a high degree of pre-existing
knowledge of key individuals involved in the target.
All proposed acquisitions are subject to robust due diligence work, supported by external advisers, who also advise on
the detailed terms of any transaction.
Dependence on a concentrated client base
A loss, or significant reduction, in activity from one of our major clients could materially affect our ability to meet revenue
and operating performance targets. In the year ended 31 December 2018, our top four clients generated the majority of
revenues, contributing over 10% of total revenues each. This represents a broadening of our client base compared with
the position for 2017.
Mitigating activities
Senior management actively seek to diversify our client base and in 2019 we have started working with a number
of significant new clients.
The milestone delivery structure of our long-term contracts allows us to identify and address any potential issues with
clients promptly during the course of the contract, reducing the risk of a breakdown in relationships.
OPERATIONAL
Ability to recruit and retain skilled personnel
The successful delivery of our strategy and achievement of our growth targets depends on our ability to recruit and retain
high quality staff throughout the business.
Mitigating activities
We monitor our retention and recruitment levels on a weekly basis in line with the Group’s growth targets to ensure we
take swift action when targets are not met.
An annual review of remuneration packages is conducted to ensure that we remain competitive within the industry. The
Group has introduced an employee share plan to align the interests of the broader workforce with those of shareholders.
Formal feedback channels for employees include the annual satisfaction survey, appraisal programme and during the
induction and exit processes. We use the results to make changes to the way we work, improving the level of employee
engagement and satisfaction.
28
Sumo Group plc Annual Report 2018
Risk
Description and mitigation
OPERATIONAL
CONTINUED
IT security
A breach of IT security, unauthorised copying or software piracy could result in loss of business and reputational damage
for the Group, as well as associated negative financial impacts to revenue and costs.
Mitigating activities
Our project work is protected by copy protection technology intended to prevent piracy.
We conduct robust testing on our systems and software, including penetration testing by external consultants.
The implementation of action plans that arise from the results of testing is monitored by the Board.
Disaster recovery plans have been developed to ensure the business can recover from any interruptions with
minimal impact.
Stability of IT systems
The Group is reliant on the continuity of our IT systems to continue to operate effectively. Prolonged disruptions may affect
operational performance, and negatively impact the Group’s finances and customer relations.
Mitigating activities
We have an experienced and dedicated IT team, and use external consultants where we need to, ensuring we have
a good balance of skills and experience in the team.
Back-up servers are used, and server disaster recovery plans are in place to provide data resilience. Infrastructure
is regularly monitored and updated by the IT team.
Business continuity plans are in place for our main operations, including plans being developed at a studio and
project level.
BREXIT
The continued uncertainty around the potential ways the UK could leave the European Union makes it increasingly difficult
to predict the potential impact on the Group. Uncertain economic conditions are likely to result in additional risk for the
Group, particularly in respect of the availability of workers, foreign exchange rate fluctuations and regulatory changes.
Mitigating activities
The senior leadership team has compiled a Brexit report that outlines the Group’s ongoing risk assessment and planned
responses to the potential outcomes of Brexit, focusing on the riskiest “no-deal” scenario. External consultation has been
sought where appropriate.
The Board receives regular updates of the paper with progress against the plan of action and any changes to the
perceived risks.
The Group has updated its hedging policy to ensure that sufficient hedging arrangements are in place to reduce
uncertainty and currency risk in our foreign currency contracts to an acceptable level.
We have identified all of our employees who might be directly affected by Brexit (approximately 50) and we are providing
them with information and guidance on the position as and when it is available.
The Strategic Report, which includes the Chairman’s statement, the Chief Executive’s review, the Group’s business model and strategy,
the Group financial review and the Principal risks and uncertainties, was approved by the Board and signed on its behalf by:
Carl Cavers
Chief Executive Officer
Carl Cavers
Chief Executive Officer
8 April 2019
29
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT INTRODUCTION TO GOVERNANCE
GOVERNANCE
OVERVIEW
The Group is committed to engaging
with our shareholders to ensure that
our strategy and business model
are understood.
Ken Beaty
Chairman
Ken Beaty
Chairman
The Board remains committed to effective
corporate governance as the basis for
delivering long-term value growth and for
meeting shareholder expectations for proper
leadership and oversight of the business. As
the Chairman of the Board, I am responsible
for corporate governance within the Group and
the Board is committed to maintaining a sound
ethical culture that feeds our risk management
and decision making. We believe that having
good corporate governance is the best way
to pursue medium to long-term success for
Sumo Group plc and our stakeholders. To this
end, since our IPO in 2017, we have adopted
the code published by the Quoted Companies
Alliance (“QCA” code) as our benchmark for
governance matters and believe that we are
in full compliance at the date of this report.
My role as Chairman of the Board remains
separate to, and independent of, that of the
Chief Executive and we both have clearly
defined responsibilities. These, along with the
terms of reference for all the Committees of
the Board, can be found on the Sumo Group
plc Investor Relations website.
This section of the Annual Report outlines
how we have applied the principles of the
QCA code during our first full year as a plc.
We will review and update our approach as
the Group continues to grow and will update
the Corporate Governance statement in the
AIM rule 26 section of the Company’s website.
Ken Beaty
Chairman
A YEAR OF PROGRESS
Governance highlights
Expansion of the Operating Board
The Operating Board has been a key area
of progress during the year, ensuring
that the “tone from the top” on matters
of risk is appropriately framed, and it has
recently been expanded. Details of the
Operating Board can be found on pages
38 and 39.
First Board evaluation completed
The Board carried out its first
performance assessment towards
the end of the year. This process,
and the tools used, were designed
by a third party consultant with
considerable experience of board
reviews and tailored to the Group’s
specific circumstances. Details can
be found on page 33.
30
Sumo Group plc Annual Report 2018 CORPORATE GOVERNANCE
DELIVERING
LONG-TERM GROWTH
GOVERNANCE PRINCIPLES
ACTION
PRINCIPLE 1
Establish a strategy and business model which
promote long-term value for shareholders.
Our strategy and business model are discussed in the Chief Executive’s
review on pages 18 to 21.
PRINCIPLE 2
Seek to understand and meet shareholder
needs and expectations.
The Company provides creative and development services to the video games and
entertainment industries, delivering full-service visual and development solutions.
We work with some of the largest video game producers in the world on long-term,
high-value contracts, as well as launching our own smaller, independent games.
Our growth targets will principally be achieved through:
• The organic growth of our contracted development fees model
• Targeted acquisitions aimed at bringing on board talent and intellectual
property to grow the Sumo Group.
The Group is committed to engaging with our shareholders to ensure that
our strategy and business model are understood. The Board believes that
the disclosures of this Annual Report provide the information necessary for
shareholders to assess the Company’s performance, business model and strategy.
The Executive Directors of the Company are in frequent contact with the Company’s
shareholders and brief the Board on shareholder issues. In 2018 we held investor
roadshows and briefings, hosted investor days at our Sheffield studios and held
frequent one to one meetings with investors and potential investors.
The Company’s largest shareholder is Perwyn Bidco (UK) Limited. Under the terms
of the Relationship Agreement entered into at the time of the Company’s admission
to AIM, Perwyn has nominated Ken Beaty to the Board as its nominated director
and has the right for a Perwyn observer to attend Board meetings.
The Chief Executive Officer and Chief Financial Officer are primarily responsible for
contact with our shareholders. To request any meetings or ask questions please
contact investors@sumogroupplc.com.
Any reports from analysts that refer to the Company or cover the video games
sector are circulated to the Board to support their understanding of the views
of the investment community.
Zeus as the Company’s broker and Belvedere as financial PR advisers provide
both attributable and anonymised feedback directly to the Board from shareholder
meetings and events such as the investor day. An update on investor sentiment and
shareholding changes is provided at every Board meeting.
The Chairman and the other Non-Executive Directors will always make themselves
available to meet shareholders. The Annual General Meeting (“AGM”) is a prime
opportunity for this. The Company held its first AGM in June 2018 and this acted as
a forum for dialogue between the Directors and our shareholders. At the meeting,
100% of the votes cast were in favour of every resolution proposed by the Board.
The business to be conducted at the AGM is set out in a separate Notice of Annual
General Meeting.
31
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
CORPORATE GOVERNANCE CONTINUED
GOVERNANCE PRINCIPLES
ACTION
PRINCIPLE 3
Take into account wider stakeholder and social
responsibilities and their implications for
long-term success.
PRINCIPLE 4
Embed effective risk management, considering
both opportunities and threats, throughout
the organisation.
32
The Board recognises that the long-term success of the Group relies on our
customers and employees. Engaging with these key stakeholders strengthens
our relationships and helps us make better business decisions to deliver our
commitments. The Board received regular updates on wider stakeholder
engagement feedback and closely monitors and reviews the results of the annual
Best Company’s Employee Engagement survey.
Employees
Without our dedicated and skilled employees we would not be able to operate at the
level that we do, and as a result we are committed to employee engagement and
making changes based on the feedback received to make Sumo Group plc a great
place to work.
Employees are given many opportunities to provide feedback through our employee
engagement survey, the annual appraisal process and the twice-yearly roadshows
carried out by the Operating Board.
Over the past year we have:
• Introduced share plans that allow our employees to become shareholders
of the business
• Invested considerable resources in our working environments, taking on board
staff feedback to introduce a canteen and shared social space in Sheffield
• Started a Diversity Steering Group aimed at increasing diversity within the
Company and the wider industry
• Completed our annual employee engagement survey to keep informed on
the major issues that our employees want us to change
• Hosted two Company-wide roadshows with our Operating Board, giving
employees the opportunity to ask questions and raise issues
Customers
The Group is in regular dialogue with existing and potential customers at all levels
in order to understand and respond to their current and future requirements.
Risk
As described in the letter from the Chairman of the Audit Committee on pages 40
and 41 of these accounts, the Board is committed to ensuring that risk management
is embedded within the business and is part of the way we work. This year we have
sought to further embed the risk management framework adopted last year by
updating the risk register and changing the way that it is communicated to and
reviewed by the Board.
Internal control
The Board has ultimate responsibility for the Group’s system of internal control and
reviewing its effectiveness. However, there are inherent limitations in any system
of internal control and accordingly even the most effective system can provide only
reasonable and not absolute assurance against material misstatement or loss.
The Board considers that the internal controls in place are appropriate for the size,
complexity and risk profile of the Group. The principal elements of the Group’s
internal control system include:
• Close management of the day-to-day activities of the Group by the Executive Directors
• Preparation and approval of budgets and regular monitoring of actual
performance against budget
• Detailed monthly reporting of performance against budget
• Continually updated profitability and cash flow forecasts to reflect actual
performance and revised outlook as the year progresses
• The appointment of a Group Internal Auditor in June 2018 to establish an internal
audit function within the Group focusing on risk-based audits
• Strengthened finance function that has implemented additional processes, policies
and systems that enhance the financial and operational control environment
• Risk assessments on important areas such as the Criminal Finances Act
• A treasury policy that is reviewed annually by the Board
• The risk management framework referred to above
Sumo Group plc Annual Report 2018 GOVERNANCE PRINCIPLES
ACTION
PRINCIPLE 5
Maintain the board as a well-functioning,
balanced team led by the Chair.
The composition of our Board is detailed on pages 36 and 37 of these accounts.
Part of the role of the Board’s Nomination Committee is to keep the composition of the Board
under review as the Company’s business evolves. In September 2018 we announced the
appointment of Andrea Dunstan as an additional independent Non-Executive Director. Andrea
extends the breadth of experience on the Board with her considerable HR and remuneration
experience and improves the Board’s diversity.
The Board is satisfied that it has a suitable balance between independence and knowledge of
the Company to enable it to discharge its duties and responsibilities effectively. All Directors
are encouraged to use their independent judgement and to challenge all matters, whether
strategic or operational. The Chairman holds regular update meetings with each Director to
ensure they are performing as they are required.
During the year, the Board concluded an assessment of its performance and more detail is
provided below.
PRINCIPLE 6
Ensure that between them the directors have
the necessary up-to-date experience, skills and
capabilities.
Directors’ details and biographies are on pages 36 and 37. The Board considers that they have
sufficient skills and experience to execute their duties and responsibilities effectively. As discussed
above, the appointment of Andrea Dunstan to the Board has enhanced our capabilities, particularly
through her extensive HR and remuneration experience.
As part of the Board performance assessment, each Board member provided information on
their individual skills and experience in areas relevant to the Group’s business. This exercise
indicated a high level of capability and also provided insight on additional areas that could form
part of the specification for any future appointees to the Board.
The Board receives regular and timely information on the Group’s operational and financial
performance. Relevant information is circulated to the Directors in advance of meetings. All
Directors have access to the advice and services of the Company Secretary who is responsible
for ensuring that the Board procedures are followed, and that applicable rules and regulations
are complied with. All Directors are allowed to obtain independent advice in furtherance of
their duties, if necessary, at the Company’s expense.
On appointment, Directors new to the Group will receive a full and tailored induction.
PRINCIPLE 7
Evaluate board performance based on clear
and relevant objectives, seeking continuous
improvement.
The Board carried out its first performance assessment towards the end of the year. This
process, and the tools used, were designed by a third party consultant with considerable
experience of Board reviews and tailored to the Group’s specific circumstances. It comprised
four elements:
• A questionnaire completed by every Board member and the Company Secretary covering
Board and Board Committee structure, processes, agendas and priorities. The questions
also sought each Board member’s assessment of their individual performance and allowed
members to give feedback on each other. The questionnaire was based on input provided by
an external consultant with considerable experience of Board reviews, but tailored to meet
the specific circumstances of the Company
• The compilation of the skills information referred to above under Principle 6
• A Board discussion facilitated by the Company Secretary of the outputs of the questionnaire
and skills matrix
• Individual conversations between the Chairman and each other Director and between the
Senior Independent Director and the Chairman regarding the feedback related to them
individually in the questionnaire.
The process identified a number of actions that the Board believes will contribute to improving
performance, and these will be implemented during 2019 (to the extent not already in place by
the end of 2018), including:
• Creating more time in Board discussions to cover strategy and industry developments
• Adding to the level of specific video games experience on the Board
• Ensuring that there is robust succession planning in place for senior roles
• A more proactive approach on the part of the Remuneration Committee to the structuring
of incentives
33
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT CORPORATE GOVERNANCE CONTINUED
GOVERNANCE PRINCIPLES
ACTION
PRINCIPLE 8
Promote a culture that is based on ethical values
and behaviours.
PRINCIPLE 9
Maintain governance structures and processes that
are fit for purpose and support good decision-making
by the board.
34
The Board aims to lead by example in this area and do what is in the best interests
of the Group. The processes in place by which it makes decisions and that are
documented in the terms of reference for its Committees, the requirement for
regular disclosure of other interests and the Company’s share dealing code all
require high standards of behaviour.
The Company’s employment policies, such as those applying to Whistleblowing and
Anti-bribery and Corruption, assist in embedding a culture of ethical behaviour.
The Board is also supportive of the charitable projects undertaken by the business.
Over the past year Sumo Group is proud to have:
• Partnered with Special Effect to raise money through a variety of events including
their Karting Grand Prix, the TwinTown 2018 Charity Rally Event and running our
own Snake Pass auction
• Helped to plant over 1,000 trees in Malawi via Fruitful Office who provide fruit
baskets for our employees twice a week. A tree is planted for each fruit basket
purchased
• Raised over £1,200 for The Sheffield Children’s Hospice and Games Aid with a
charity auction at our annual Big Day Out
• Collected donations of food and Christmas presents for Sheffield-based food bank,
Jubilee and a local homeless charity
The Board meets at least eight times each year in accordance with its scheduled meeting
calendar. This schedule may be supplemented by additional meetings as and when
required. The attendance by each Board member at scheduled meetings is shown in the
Board biographies on pages 36 and 37.
The Board and its Committees receive appropriate and timely information prior to each
meeting; a formal agenda is produced for each meeting; and Board and Committee
papers are distributed several days before meetings take place.
The Board makes decisions for the Group through a formal schedule of matters
reserved for its decision. Any specific actions arising are agreed by the Board or relevant
Committee and then followed up by the Company’s management.
Board Committees
The Board is supported by the Audit, Nomination and Remuneration Committees. Each
Committee has access to such resources, information and advice as it deems necessary,
at the cost of the Company, to enable the Committee to discharge its duties.
A detailed report of the composition, responsibilities and key activities of the Audit
Committee are set out in the Audit Committee Report and for the Remuneration
Committee in the Directors’ Remuneration Report.
The Nomination Committee is chaired by Ken Beaty, and its primary purpose is to identify
and nominate, for the approval of the Board, candidates to fill Board vacancies as and
when they arise. The Nomination Committee meets as required, and at least once a year.
Michael Sherwin, Ian Livingstone and Andrea Dunstan are the other members of the
Nomination Committee.
The Committee has terms of reference in place which have been formally approved by
the Board.
The Nomination Committee also reviews the structure, size, diversity and composition
of the Board and makes recommendations concerning the annual re-appointment of
any Non-Executive Director and the identification and nomination of new Directors. The
Committee will retain external search and selection consultants as appropriate.
During the year the Nomination Committee was involved in the appointment and
induction of Andrea Dunstan as an independent Non-Executive Director in September.
Andrea brings a wealth of experience in organisational development and HR strategy.
Operating Board
To monitor operational performance across the Group and ensure effective decision-
making, an Operating Board has been established. Details of membership of this board
is set out in this Annual Report. The Operating Board typically meets shortly before each
PLC Board meeting to ensure that executives are able to provide the most up to date
information to the PLC Board.
Sumo Group plc Annual Report 2018 GOVERNANCE PRINCIPLES
ACTION
PRINCIPLE 10
Communicate how the company is governed and is
performing by maintaining a dialogue with shareholders
and other relevant stakeholders.
Communicating to stakeholders
The Board communicates with shareholders through the Annual Report and Accounts,
full-year and half-year announcements, the AGM and one-to-one meetings with large
existing or potential new shareholders. A range of corporate information (including all the
Company announcements and presentations) is also available to shareholders, investors
and the public on our corporate website, www.sumogroupplc.com.
Company performance information is communicated with employees through the
internal newsletter and the Operating Board roadshows, within the limitations imposed
by adherence to the Company’s public company disclosure obligations.
Share capital structure
Details of the Company’s share capital structure can be found in the Directors’ Report
and in note 23 of the Group financial statements.
Going concern basis
The Group’s business activities, together with the factors likely to affect its future
development, performance and position, are set out in the Group financial review,
together with the financial position of the Group, its cash flows, liquidity position and
borrowing facilities. Financial projections have been prepared to December 2020 which
show positive earnings and cash flow generation and project compliance with banking
covenants at each testing date. Accordingly, the Directors have a reasonable expectation
that the Company and the Group have adequate resources to continue in operational
existence for the foreseeable future and they have adopted the going concern basis of
accounting in preparing the annual Group financial statements.
Forward-looking statements
This Annual Report contains forward-looking statements that involve risk
and uncertainties.
The Group’s actual results could differ materially from those estimated or anticipated in
the forward-looking statements as a result of many factors. Information contained in this
Annual Report and Accounts relating to the Company should not be relied upon as
a guide to future performance.
35
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT BOARD OF DIRECTORS
PROVEN
MANAGEMENT CAPABILITY
KEN BEATY
Non-Executive
Chairman of the Board (50)
CARL CAVERS
Co founder & Chief
Executive Officer (51)
ANDREA DUNSTAN
Independent Non-
Executive Director (59)
MICHAEL SHERWIN
Independent Non-
Executive Director (60)
NC
AC
RC
AC
NC
AC NC
RC
Appointment date:
November 2017
Experience:
Co-founder of Sumo Digital in 2003,
growing the business before a trade
sale to Foundation 9. Carl then
led a management buy-out with
Northedge Capital in 2014, followed
by a secondary buy-out with Perwyn
in 2016. This was followed by the
flotation of Sumo Group plc on
AIM in 2017. Carl received TIGA’s
coveted Most Outstanding Individual
Award in 2015 and he holds an
honorary doctorate from Sheffield
Hallam University
External appointments:
• Board member of TIGA
Skills brought to the Board:
Business leadership, strategy,
M&A, organic growth, client
relationships, contracts and
negotiations
Sector experience:
Almost 25 years’ extensive
experience in the video games
industry having held senior roles
previously at Gremlin Interactive
and Infogrames
Number of Board meetings
attended:
10
Appointment date:
September 2018
Experience:
Four years as Chief People
Officer for Premier Farnell plc
until January 2017. Prior to this,
Andrea worked as an executive
HR Director for numerous quoted
companies, including Wincanton
plc, AstraZeneca plc and Barclays
Bank plc
External appointments:
• Non-executive director and chair
of Remuneration Committee of
Macfarlane Group plc
• Non-executive director of TI
Fluid Systems plc
• Executive Council member
and Chair of Remuneration
Committee of Salford University
Skills brought to the Board:
HR strategy, organisational
development, remuneration
Sector experience:
Distribution and logistics,
pharmaceuticals, finance
Number of Board meetings
attended:
3
Number of Remuneration
Committee meetings attended:
1
Number of Audit Committee
meetings attended:
1
Number of Nomination Committee
meetings attended:
1
Appointment date:
December 2017
Experience:
Nine years as Chief Financial
Officer of Vertu Motors plc (until
March 2019). Extensive retail,
transactional and public market
experience, including nine years as
Group Finance Director of Games
Workshop PLC and three years
as a non-executive director of
Plusnet plc, an AIM listed internet
service provider. Michael qualified
as a chartered accountant with
Price Waterhouse where he held
positions in the UK, Paris and
Sydney
External appointments:
• None
Skills brought to the Board:
Financial reporting, corporate
governance, investor relations,
M&A
Sector experience:
Consumer goods, internet service
provider, motor vehicle
Number of Board meetings
attended:
10
Number of Remuneration
Committee meetings attended:
4
Number of Audit Committee
meetings attended:
4
Number of Nomination Committee
meetings attended:
2
Appointment date:
November 2017
Experience:
20 years as a private equity investor
and Partner with 3i Group plc. Prior
to this Ken trained and worked as a
graduate management accountant
with Shell oil company. Ken left 3i
in 2013 to pursue a plural career
as an independent company
chairman and NED and since
then has worked with a number
of private and private equity owned
companies as well as charities in
the arts, education and healthcare
sectors
External appointments:
• Chairman I&C Holdings Ltd,
private equity backed marine
construction services business
• Deputy Chairman Maggie’s
Yorkshire campaign
board, international cancer
care centres charity
• Governor & chair of Finance
Committee, The Frobelian
School (Horsforth) Ltd
Skills brought to the Board:
Strategy, corporate governance,
organic and acquisitive business
growth, financing, sounding board
for senior executive team
Sector experience:
Various business services,
industrial and consumer
Number of Board meetings
attended:
9
Number of Audit Committee
meetings attended:
4
Number of Nomination Committee
meetings attended:
2
36
Sumo Group plc Annual Report 2018 DAVID WILTON
Chief Financial Officer (56)
PAUL PORTER
Co founder & Chief
Operating Officer (47)
Appointment date:
November 2017
Experience:
Big four qualified chartered
accountant with more than 30
years’ post qualification experience
as CFO, Non-Executive Director
and Consultant after many years
in corporate finance, primarily in
mid cap M&A with Rothschilds.
David has held roles in both plc and
private equity backed companies
including as Group Finance Director
of WYG plc and as Non-Executive
Director and Chair of the Audit
Committee of Sweett Group plc
External appointments:
• None
Skills brought to the Board:
Financial management, M&A
and investor relations
Sector experience:
Broad range with focus on
people and professional services
Number of Board
meetings attended:
10
Appointment date:
April 2019
Experience:
Over 25 years’ experience in
developing video games and
co-founded Sumo Digital in
2003. He started his career
as a self-taught programmer
and released his first game in
1991. Prior to founding Sumo
Digital, Paul was Studio Head for
Infogrames Sheffield and Head
of Core Technology at Gremlin
Interactive. He was appointed
Chief Operating Officer of Sumo
Group plc in April 2019. Prior to
this he was Managing Director
of Sumo Digital
External appointments:
• None
Skills brought to the Board:
Video games development,
business leadership, client
relationships and negotiations
Sector experience:
Extensive experience in the video
games industry
Number of Board meetings
attended:
N/A
IAN LIVINGSTONE CBE
Independent Non-
Executive Director (69)
AC
RC
Appointment date:
November 2017
Experience:
44 years in the games industry.
Co-founder and former Joint
Managing Director of Games
Workshop; former Executive
Chairman of Eidos plc; former
Chairman of Playdemic Ltd
External appointments:
• Non-executive director
of Midoki Ltd
• Non-executive director
of Antstream Ltd
• Non-executive director
of Flavourworks Ltd
• Non-executive director
of Fusebox Ltd
• Non-executive director
of Playmob Ltd
• Non-executive director
of Creative England
• Non-executive director of
Aspirations Academies Trust
• Non-executive director of
National Citizens Service Trust
• Board member of UKIE
Skills brought to the Board:
Industry knowledge and experience,
strategy
Sector experience:
Games industry development and
publishing, strategy, acquisitions,
business models and funding
Number of Board meetings
attended:
10
Number of Remuneration
Committee meetings attended:
2
Number of Audit Committee
meetings attended:
4
Number of Nomination Committee
meetings attended:
2
COMMITTEE
MEMBERSHIP
NC
Nominations
Committee
AC
Audit Committee
RC
Remuneration
Committee
Chair of Committee
37
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
OPERATING BOARD
PROVEN
MANAGEMENT POTENTIAL
CARL CAVERS
Co founder &
Chief Executive Officer (51)
DAVID WILTON
Chief Financial Officer (56)
PAUL PORTER
Co founder &
Chief Operating Officer (47)
1
2
3
ANDY STEWART
Group Director of Finance (36)
4
Joining date:
October 2018
Experience:
Andy has held a number of senior
finance positions in the technology and
telecommunications sectors, including FTSE
listed business such as Experian and BT and also
three years as the Financial Controller at Plusnet.
He started his career at PwC, qualifying as a
chartered accountant in 2008. The majority of his
nine years at PwC was spent in its M&A Advisory
practice, delivering complex financial due diligence
projects to an array of different clients and sectors.
His time at PwC also included two years in its
Madrid office, working on pan-European and
global deals
Skills brought to the Board:
Finance operations, control and governance,
financial insight and reporting, M&A
(due diligence and integration)
Sector experience
Technology, telecommunications,
professional services
STEVEN WEBB
General Counsel and Company
Secretary (56)
5
Joining date:
December 2017
Experience:
After qualifying as a solicitor with Norton Rose,
Steven spent a number of years in private practice
specialising in corporate and commercial law,
before moving to his first Company Secretary
role with Kalon Group plc in 1994. He became
Company Secretary and General Counsel of
Yorkshire Water plc (later re-named Kelda Group
plc) in 1997 and spent 16 years in the same role at
Premier Farnell plc from 2000. Steven was also
a member of the Board of Governors of Leeds
Beckett University for six years, including time as
Deputy Chairman and Chairman
Skills brought to the Board:
Corporate governance, M&A (UK, US, Germany,
India, China), commercial negotiation, strategy
development
Sector experience
Manufacturing, utility, distribution
1
5
9
2
6
3
7
4
8
10
11
38
Sumo Group plc Annual Report 2018 STEVE SHREEVES
Group Director of IT (49)
6
TIM WILSON
Managing Director – Atomhawk (38)
7
DEAN TROTMAN
Commercial Director (43)
8
Joining date:
September 2018
Experience:
Following his first role programming Computer
Numerical Controlled manufacturing equipment,
Steve served in the Royal Air Force for 12 years as
an Electronics Technician working on everything
from airfield radars to satellite communications
After leaving the RAF he joined Premier Farnell
as a network engineer and, over 18 years there,
progressed to Global Head of IT Operations,
leading a team of approximately 100 IT staff across
the world
Skills brought to the Board:
Strong technical background in all elements of IT,
experience in management of global teams and
IT strategy definition and implementation
Sector experience:
Armed forces, distribution
Joining date:
February 2015
Experience:
Having graduated from Warwick University,
Tim had an 11 year career in the Marketing
and Communications sector, holding account
management and planning roles working for
brands including Virgin Money, Vodafone, Natural
History Museum and World Rowing. He joined
Atomhawk as Head of Operations in 2015, playing
a key role in the expansion of the studio’s growth of
headcount, revenue and international footprint. He
was appointed as Managing Director in September
2018 and oversees the Atomhawk studios in
Gateshead and Vancouver
Skills brought to the Board:
Strategy development, brand planning, operational
management, agency-model experience, M&A
Sector experience:
Video games, retail, tourism, leisure, sport,
finance, B-2-B
Joining date:
January 2019
Experience:
Dean began his Games Industry career fresh
from University, joining Codemasters Software as
Acquisitions Manager in 1997. This was followed
by 14 years as Commercial Director at SEGA
Europe, responsible for introducing multiple new
partnerships, projects, licences, and content as
well as the best-practice porting of high-profile
Japanese IP
Skills brought to the Board:
Developer and Publisher Relations, Commercial
Negotiation, Franchise Development, Games
Publishing
Sector experience:
Gaming industry
GARY DUNN
Managing Director – Sumo Digital (50)
9
RICHARD IGGO
Marketing Director (46)
10
KAREN MCLOUGHLIN
Group Director of HR (47)
11
Joining date:
October 2017
Experience:
After a 12 year career in Telecomunications,
Gary joined the games industry in 2002,
becoming Executive Producer for the Colin
McRae Rally Franchise, being promoted to the
Codemasters board after only three months,
Gary was responsible for all internal and external
development. Gary joined SEGA in 2005, and led
the integration of both Creative Assembly and
Sports Interactive into the company, notably
growing the former from 60 to 300 staff. Gary
returned to Codemasters in 2013, running
the development for the company once more,
including the F1 and DIrt Franchises. Gary ran his
own Consulting practice for three years before
joining Sumo
Skills brought to the Board:
Game development leadership, acquisition
and integration of games companies, games
publishing
Sector experience:
Telecommunications, video games
Joining date:
November 2018
Experience:
Richard has over 20 years of games industry
experience, having begun his career with Virgin
Retail in 1994 before moving to Gremlin Interactive
in 1998. From there, he progressed to Infogrames,
relocating from the UK to the United States in
order to manage Epic Games’ Unreal brand.
He then built and executed successful marketing
strategies for other US employers including
Telltale Games. After 17 years away, Richard
returned to the UK having worked on some of
the world’s biggest entertainment properties to
lead Sumo’s global marketing and PR activity in
support of recruitment, brand awareness and
self-published games
Skills brought to the Board:
Corporate and consumer communications,
marketing strategy development and execution,
branding
Sector experience:
Marketing, PR, publishing, manufacturing,
digital distribution
Joining date:
May 2005
Experience:
Karen began her career in the video games
industry in 1996 at Gremlin Interactive, where
she gained extensive experience in a gaming
and software development environment. In 2005,
as Sumo Digital was expanding, Karen joined
as Office Manager in Sheffield. In 2011, she
was promoted to HR Manager for Sumo Digital,
moving into her current role of Group Director of
HR in January 2018. Karen is a CIPD qualified HR
professional.
Skills brought to the Board:
HR leadership, acquisition, integration, TUPE
transfer, organisational change, employee
relations, talent management
Sector experience:
Public sector, video game development
39
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT AUDIT COMMITTEE REPORT
Dear shareholder,
I am pleased to present the Audit Committee Report describing our work during the past year. Following the Committee’s establishment in
December 2017, we have had a successful first year that saw the introduction of the Group’s internal audit function and improvements in the risk
management activities.
Committee governance
The Audit Committee consists of all three Independent Non-Executive Directors and I chair the Committee as an independent Non-Executive Director.
I am a qualified chartered accountant and was the Chief Financial Officer of another listed company until my retirement in March 2019.
The other independent Non-Executive Directors also have considerable experience in senior financial or operational roles. They are deemed to have
the necessary ability and experience to understand financial statements.
The Committee meets at least four times a year. Additionally, private meetings are held with the external auditor and the Group Internal Auditor
at which management are not present.
Key responsibilities
The terms of reference of the Committee are available on the Sumo Group plc Investor Relations website. In accordance with these, the Committee
is required, amongst other things, to:
• Monitor the integrity of the financial statements of the Group and external announcements of the results
• Advise on the clarity of disclosures and information contained in the Annual Report and Accounts
• Ensure compliance with applicable accounting standards and review the consistency of methodology applied
• Review the adequacy and effectiveness of the Group’s internal controls and risk management system
• Oversee the relationship with the external auditors, reviewing their performance and independence, and advising the Board members
on their appointment and remuneration
• Consider the effectiveness of the Group’s internal audit function and monitor management responsiveness to their findings
and recommendations
The Committee reports to the Board on all of these matters. The key work undertaken by the Committee during the year under review and up to the
date of this Annual Report is detailed below.
Internal audit
Following the Audit Committee’s recommendation last year, a Group Internal Auditor was recruited in June 2018 with the remit of establishing the
Group’s internal audit function.
The initial work undertaken has been focused on establishing a formal policy framework ahead of preparing for a programme of internal audits during
2019. These audits will support the introduction and improvement of key controls and policies and establish the framework within which the function
will operate.
The initiation of an internal audit function has been an important step for the Committee and the Board, and 2019 will see the function embedded
within the Group, building on this strong start.
Internal control and risk management
The Audit Committee supports the Board in reviewing the risk management methodology and the effectiveness of internal control.
This year the Group has strengthened the approach to risk assessment and monitoring, including an overhaul of the risk register and the introduction
of quarterly Operating Board risk review meetings. The engagement of the Operating Board has been a key area of progress during the year, ensuring
that the “tone from the top” on matters of risk is appropriately framed. This is coordinated by the Group Internal Auditor who reports on principal risks
and mitigation actions to the Committee.
External audit
The Audit Committee approves the appointment and remuneration of the Group’s external auditor and satisfies itself that they maintain their
independence regardless of any non-audit work performed by them. The Committee reviews its formal policy governing the performance of non-audit
work annually. The auditor is permitted to provide non-audit services which are not, and are not perceived to be, in conflict with auditor independence,
providing it has the skill, competence and integrity to carry out the work and is considered to be the most appropriate to undertake such work in the
best interests of the Group. All assignments are monitored by the Committee. The external auditor reports to the Committee on actions taken to
comply with professional and regulatory requirements in this regard.
The respective responsibilities of the Directors and external auditor in connection with the Group financial statements are explained in the Statement
of Directors’ Responsibilities and the Auditor’s Report. Details of services provided by and fees payable to the auditor are shown in note 10 to the Group
financial statements.
Whilst the Audit Committee has not adopted a formal policy in respect of the rotation of the external auditor, one of its principal duties is to make
recommendations to the Board in relation to the appointment of the external auditor. Various factors are considered by the Committee in this respect,
including the quality of the reports provided to the Committee and the level of understanding of the Group’s business. There is an active, ongoing
dialogue between the Committee and the external auditor on actions to improve the effectiveness and efficiency of the external audit process.
40
Sumo Group plc Annual Report 2018 Significant reporting issues and judgements
At the request of the Board, the Audit Committee considered whether the 2018 Annual Report was fair, balanced and understandable and whether
it provided the necessary information for shareholders to assess the Group’s performance, business model and strategy. The Committee was satisfied
that, taken as a whole, the 2018 Annual Report is fair, balanced and understandable.
The Audit Committee assesses whether suitable accounting policies have been adopted and whether appropriate estimates and judgements have
been made by management. The Committee also reviews accounting papers prepared by management, and reviews reports by the external auditor.
The significant reporting matters and judgements the Committee considered during the year included:
• The appropriateness of the Group’s approach to the adoption of IFRS 15 and the subsequent recognition of contract revenue. The Committee
considered the interpretation of the accounting standard and reviewed the key financial assumptions underpinning the figures. The Committee
was satisfied that the treatment of revenue was compliant with IFRS 15 and was applied consistently across the Group’s contractual income (see
the Financial Review and note 27 to the financial statements), in particular, the Committee encouraged the enhanced policy disclosure in note 2.
• The proposed transition methodology for the adoption of IFRS 16 ‘Leases’ in FY19 and the disclosures made in respect of these changes in the
current financial statements to determine whether they are appropriate. The Committee reviewed the key financial assumptions underpinning
the projected impact of the adoption of IFRS 16 and the justification for the proposed approach. The Committee concluded that the approach
was appropriate (more details can be found in note 30).
• The accounting treatment of Video Games Tax Relief credits within direct costs. The Audit Committee continues to be of the opinion that this
approach best reflects the substance and nature of these credits.
Michael Sherwin
Chair of the Audit Committee
8 April 2019
Sumo Group plc Annual Report 2018
41
FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT DIRECTORS’ REMUNERATION REPORT
Dear shareholder,
I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2018.
I chair the Remuneration Committee as an independent Non-Executive Director and Ian Livingstone and Michael Sherwin, who are also independent
Non-Executive Directors, are the other members of the Committee. We are supported by Steven Webb as Company Secretary.
The aim of this report is to provide shareholders with information to understand our remuneration strategy and its linkage to the Group’s
financial performance.
In preparing the report, we have taken account of the guidance issued by the Quoted Companies Alliance ("QCA"), as the Company has chosen to apply
the Corporate Governance Code published by the QCA.
Responsibilities
The Committee’s terms of reference are to review the performance of the Executive Directors and of the members of the Operating Board and
determine their terms and conditions of service, including their short and long-term rewards, having due regard to the interests of shareholders
and to any risks that might arise to the Company. In doing so, the Committee will have regard to the position of employees across the Group.
The Remuneration Committee met four times during the year and has five meetings scheduled for 2019.
During the year PwC provided the Committee with external remuneration advice, including on all aspects of remuneration policy for Executive
Directors. PwC also provided advice to the Company in relation to the drafting and implementation of Executive and all-employee incentive plans.
The Remuneration Committee is satisfied that the advice received was objective and independent. PwC received a fee of £72,000 for their advice during
the year to 31 December 2018.
Since the year end, the Committee has appointed FIT Remuneration Consultants ("FIT") to provide external remuneration advice in place of PwC.
FIT is a member of the Remuneration Consultants Group and the voluntary code of conduct of that body is designed to ensure objective and
independent advice is given to remuneration committees.
Our performance in 2018
As summarised in the Chairman’s statement, 2018 was another successful year for the Group, both in terms of delivering the expected financial
results and progressing on strategic targets. This is reflected in the pay out-turns below.
Key pay out-turns for 2018
Each of the Executive Directors received an annual bonus based on financial and strategic measures described in more detail later in this report.
Following a review by the Committee, David Wilton’s salary was increased during the year to reflect additional responsibilities, excellent performance
and the fact that his original salary was low compared to relevant comparators.
No long-term incentives vested during the year.
Looking forward to 2019
The key terms of the remuneration policy are set out on pages 43 to 45 and the key components of Executive packages are summarised as follows:
• Base salary, pension and benefits positioned competitively to the market in which the Company operates.
• Annual bonus – an annual bonus with performance criteria based on a mixture of profit-based and personal objectives as set by the
Remuneration Committee.
• Long Term Incentive Plan ("LTIP") – share-based awards with three-year performance criteria based on EPS growth and total shareholder return
over the performance period, with a further one–year holding period for 50% of the grant. It is not anticipated that any LTIP awards will be made
to Executive Directors during 2019 pending the outcome of a review of the plan being carried out by the Committee.
I do hope that this report clearly explains our approach to remuneration and enables you to appreciate how it underpins our business growth strategy.
Andrea Dunstan
Chair of the Remuneration Committee
8 April 2019
42
Sumo Group plc Annual Report 2018
As it is listed on AIM, the Company is not required to provide all of the information included in this report. However, in the interests of transparency this
has been included as a voluntary disclosure. The report is unaudited.
Our overall remuneration policy is to:
Be consistent and principled
• maintain a consistent Executive compensation strategy, based
on clear principles and objectives
Link pay to strategy
• support the Company’s strategy and its execution
Align with shareholders’ interests
• closely align Executive reward with shareholder returns
Be competitive
Link pay to performance
Reflect the internal landscape
And be clear
It has these elements:
Fixed
Variable based on performance
• ensure that the organisation can attract, motivate and retain
high-calibre talent to enable it to compete successfully in an
international market
• provide the opportunity for Executives and other colleagues to receive
competitive rewards for performance, aligned to the sustained success
of the overall Group, paying what is commensurate with achieving
these aims
• operate broadly-based incentives to recognise talented performers
throughout the Group and take account of pay and conditions for all
employees in the Group when setting Executive remuneration
• the Committee has regard to pay structures across the wider
Group when setting the remuneration policy for Executive Directors.
In particular the general basic salary increase for the broader workforce
is considered when determining the annual salary review for the
Executive Directors. While participation in the Group’s long-term
incentive plans is limited to those employees considered to have
the greatest potential to influence overall levels of performance, the
Group encourages equity ownership at all levels through our use
of a tax-advantaged Share Incentive Plan
• be easy to understand and supported by clear communication
Salary
Benefits
Pension or pension allowance
Annual bonus
Long-Term Incentive Plan
43
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT DIRECTORS’ REMUNERATION REPORT CONTINUED
The table below provides more detail on the key features of our remuneration policy and how it will operate in 2019:
Element
Policy
Purpose and link to strategy
BASE SALARY
Positioned competitively in line with the market.
With effect from 1 April 2019, Executive Directors’ salaries
will be as follows:
DISCRETIONARY
ANNUAL BONUS
• CEO £270,000
• CFO £220,000
Maximum opportunity for Executive Directors is 100%
of base salary.
• Performance is measured over one financial year.
• Weightings and targets are reviewed and set at the
start of each financial year.
• For 2019, 70% of the bonus will be based on Adjusted
EBITDA performance with the remaining 30% based
on the achievement of strategic objectives.
• Malus and clawback provisions apply in the case of:
– a material misstatement resulting in an adjustment
in the audited accounts of the Group or any Group
company; or
– action or conduct which, in the reasonable opinion
of the Board, amounts to fraud or gross misconduct.
To provide an appropriate level of fixed cash income
to recruit and retain talent through the provision of
competitively positioned base salaries. It is critical
to the success of the business that it can recruit
talented individuals at all levels.
Designed to motivate Executive Directors to focus
on annual goals and milestones which are
consistent with the Group’s longer-term strategic
aims. Forms part of the significant weighting of
overall remuneration to variable elements with
stretching performance measures.
Payment is dependent on achieving profitable
growth and strategic objectives that are essential
to deliver the strategy.
LONG TERM
INCENTIVE PLAN
(LTIP)
• As disclosed in the Admission Document, a nil-cost
option was granted to the CFO on Admission over
500,000 shares and becomes exercisable in June 2019,
subject to remaining in employment.
To ensure that the CFO, who had joined the
Company shortly before Admission, has a significant
interest in the Company’s performance aligned with
shareholders.
• In accordance with the intention referred to in the
Admission Document, awards under the LTIP were also
granted to the CEO and CFO in March 2018 under which:
– performance against earnings per share and
total shareholder return targets is measured over three
years.
– 50% of any part of the awards that vest is exercisable
once the performance has been confirmed, with the
balance not exercisable for a further year.
• Not anticipated that any further awards will be made
during 2019.
• Malus and clawback provisions apply in the case of:
– a material misstatement resulting in an adjustment
in the audited accounts of the Group or any Group
company; or
– action or conduct which, in the reasonable opinion
of the Board, amounts to fraud or gross misconduct.
Aligns the interests of the Executive Directors with
shareholders over the long term.
Incentivises delivery of stretching financial targets
that will provide value to shareholders.
Acts as a retention mechanism for key talent.
Further element of variable pay with stretching
performance measures.
Additional period post-vesting acts as a retention
mechanism.
PENSION
• Both Executive Directors are entitled to receive pension
contributions from the Company which are equal to 5%
of the base salary delivered as:
To recruit and retain the right people to deliver
the strategy.
– money purchase benefits; or
– a cash equivalent.
Not included as salary for the purposes of annual bonus
or LTIP awards.
The Executives are entitled to a standard Director benefits
package including a car allowance, private medical
expenses insurance and life assurance cover.
Information on the service contracts for Executive Directors
and letters of appointment for Non-Executive Directors is
provided below.
On a termination, the Company would be obliged to meet its
contractual obligations, but would apply a robust approach
to the relevant individual, mitigating any losses.
To recruit and retain the right people to deliver
the strategy.
Honour contractual commitments while not paying
more than is necessary.
BENEFITS
TERMINATION
44
Sumo Group plc Annual Report 2018 Recruitment remuneration arrangements
When hiring a new Executive Director, the Committee will set the Director’s ongoing remuneration in a manner consistent with the policy described
above. To facilitate the hiring of candidates of the appropriate calibre required, the Committee may make an award to ‘buy-out’ variable remuneration
arrangements forfeited on leaving a previous employer. In doing so, the Committee will take account of relevant factors including the form of award,
any performance conditions and the time over which the award would have vested. Recruitment awards will normally be liable to forfeiture or
“clawback”on early departure.
Appropriate costs and support will be covered if the recruitment requires relocation of the individual.
Communication with shareholders
The Remuneration Committee is committed to an ongoing dialogue with shareholders and will seek the views of significant shareholders when
formulating and implementing any changes to the remuneration policy, including when any major changes are being made to remuneration
arrangements. The Remuneration Committee Chair will be available to answer questions from shareholders regarding remuneration at the
Company’s Annual General Meeting.
Executive Director contracts and loss of office payments
Both Executive Directors entered into service agreements on 15 December 2017, which became effective upon Admission. The agreements require
a notice period of one year from the Company and from the Executive. It is the Committee’s intention that any future service contracts will be subject
to similar notice periods.
Other than payment of salary and benefits in lieu of notice, the Directors’ service agreements and letters of appointment do not provide for benefits
on termination of employment.
Outstanding awards made under the LTIP would normally lapse on an Executive leaving employment. However, there are specific rules of the plan
dealing with the treatment of awards on leaving. In summary, if an Executive were a ‘good leaver’, he or she may be entitled to retain his or her award,
although, for unvested awards:
• the number of shares under an award may be reduced to reflect any unexpired performance period (referred to as pro rating); and
• the award would normally remain subject to any applicable performance conditions.
A ‘good leaver’ is someone who leaves by reason of injury, disability, redundancy, on the sale or transfer out of the Group of his or her employing
business, on retirement with the agreement of the Committee or in other special circumstances at the Committee’s discretion. Someone dying
in service would also be a good leaver, with their personal representatives assuming their rights in respect of their awards.
Terms and conditions for Non-Executive Directors
Non-Executive Directors do not have service contracts but appointment letters setting out their terms of appointment. Ken Beaty and Ian Livingstone
were appointed on 20 November 2017 and Michael Sherwin on 21 December 2017. Andrea Dunstan was appointed on 24 September 2018.
The appointments may be terminated on one month’s notice by either party.
The Board considers that Andrea Dunstan, Michael Sherwin and Ian Livingstone are independent Non-Executive Directors.
The Non-Executive Directors receive an annual base fee reflecting their respective time commitments and do not receive any benefits in addition
to their fees, nor are they eligible to participate in any pension, bonus or share-based incentive arrangements.
The table of emoluments on page 46 shows the fees received by each Non-Executive Director for the year.
45
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
DIRECTORS’ REMUNERATION REPORT CONTINUED
Directors’ remuneration
Name of Director
C Cavers
D Wilton
Non-Executive
K Beaty
I Livingstone
M Sherwin
A Dunstan2
Aggregate
1 Part-year only – appointed September 2017.
2 Part-year only – appointed September 2018.
Fees/basic
salary (2017)
£’000
240 (189)
194 (541)
95 (98)
56 (55)
40 (7)
11 (0)
Benefits (2017)
£’000
Bonus (2017)
£’000
LTIP
£’000
Pension (2017)
£’000
2018 total
£’000
2017 total
£’000
19 (18)
13 (41)
180 (101)
157 (441)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11 (9)
9 (11)
–
–
–
–
450
373
95
56
40
11
20 (10)
1,025
317
1031
98
55
7
–
580
636 (403)
32 (22)
337 (145)
Annual bonus plan
The table below summarises performance and out-turns for the Executive Directors under the 2018 Annual bonus. The maximum bonus opportunity
for 2018 was 100% of base salary.
Adjusted pre-bonus EBITDA (75% of maximum)
£8.2m
£11.8m
£13.7m
£12.3m
66.4% of maximum
Threshold
Target
Maximum
Actual
Out-turn
Strategic objectives (25% of maximum)
See commentary below
100.0% of maximum
Carl Cavers
David Wilton
74.8% of salary
74.8% of salary
The strategic objectives set for the annual bonus plan were aligned with the four strategic priorities: deliver and expand; new strategic partners; own-
IP; and acquisitions, with equal weighting applied to each area. As noted earlier in this Annual Report, the Company has grown significantly during the
year, has acquired new clients, made significant progress on exploiting its own intellectual property and has established an acquisition approach that
has led to The Chinese Room and Red Kite Games joining the Group. The bonus payments referred to above reflect this excellent performance.
Long-Term Incentive Plan (LTIP)
The table below summarises the awards made to Executive Directors under the plan:
Nil-cost with no performance conditions outstanding as at 31 December 2018
Award date
Share price
at date
of grant
No of shares
vesting at
maximum
Face value
of shares
vesting at
maximum1
Vesting date
D Wilton
21 December 2017
100p
500,000
£500,000
21 June 2019
Nil-cost awards with performance conditions granted during 2018
Award date
Share price
at date
of grant
No of shares
vesting at
maximum
Face value
of shares
vesting at
maximum £2
EPS/annualised
TSR for
maximum
vesting3
No of shares
vesting at
threshold (8.75 of
maximum %)
EPS/annualised
TSR for
threshold
vesting
Performance
period ending
C Cavers
9 March 2018
106.5p
1,200,000
1,200,000
20.65p/30%
105,000
D Wilton
9 March 2018
106.5p
885,000
885,000
20.65p/30%
77,437
17.83p/10% 31 December
2020
17.83p/10% 31 December
2020
1 Using share price at grant.
2 Using the value of £1 per share used to determine the number of shares awarded.
3 The LTIP is based on TSR & EPS targets with EPS based on cumulative adjusted EPS (as defined in the LTIP Rules) which excludes share-based payment costs and amortisation, for the years ending
31 December 2018, 2019 and 2020.
The shares comprised in these awards are held in a joint ownership arrangement with the Sumo Group plc Employee Benefit Trust.
The charge for share-based payments appears as note 19 to the accounts.
46
Sumo Group plc Annual Report 2018
DIRECTORS’ REPORT
for the year ended 31 December 2018
The Directors present their report together with the audited Group financial statements of the Parent Company (the “Company”) and the Group for the
year ended 31 December 2018.
Business review and future developments
A review of the performance of the Group during the year, including principal risks and uncertainties, key performance indicators and comments
on future developments, is given in the Strategic Report.
Results and dividends
The Group recorded revenue in the year of £38.7m (2017: £28.9m) and loss after tax of £0.3m (2017: £23.4m).
No dividends have been paid or are proposed.
Events after the balance sheet date
On 31 January 2019, the Company acquired the entire issued share capital of Red Kite Games Limited and transferred the acquired shares to
Sumo Digital Limited.
Financial risk management
Information relating to the principal risks and uncertainties of the Group has been included within the Strategic Report. Further information relating
to the financial risks of the Group has been included within note 22, financial risk management.
Directors and their interests
The Directors of the Company who were in office during the year and up to the date of signing the Group financial statements were:
• Ken Beaty
• Carl Cavers
appointed 20 November 2017
appointed 20 November 2017
• David Wilton
appointed 20 November 2017
• Ian Livingstone
appointed 20 November 2017
• Michael Sherwin
appointed 21 December 2017
• Andrea Dunstan
appointed 24 September 2018
All the Directors will stand for election or re-election at the forthcoming AGM.
The Directors who held office during the year and as at 31 December 2018 had the following interests in the Ordinary Shares of the Company:
Name of Director
Carl Cavers1
David Wilton2
Ken Beaty
Ian Livingstone
Michael Sherwin
Andrea Dunstan
Number
6,601,907
64,070
1,463,639
2,153,287
20,000
20,000
1 The interests of Carl Cavers in Ordinary Shares set out above include his interests in 6,601,907 Ordinary Shares held by Aghoco 1337 Limited (as trustee of the Sumo Group plc Employee Benefit Trust).
2 The interests of David Wilton in Ordinary Shares set out above include his interests in 19,000 Ordinary Shares held in the name of his wife.
In addition to the interests in Ordinary Shares shown above, the Group operates a Long-Term Incentive plan (the “LTIP”) for senior executives, under
which awards may be granted over shares in the Company. The maximum number of Ordinary Shares which could be issued to Directors in the
future under such awards at 31 December 2018 is shown below:
Name of Director
Carl Cavers
David Wilton
Number
1,200,000
1,385,000
The market price of the Company’s shares at the end of the financial year was 118.5p (on 31 December 2017: 115.0p) and the range of market prices
during the year was between 79.5p and 181.5p.
Further details on related party transactions with Directors are provided in note 24 of the Group financial statements.
Directors’ indemnities and insurance
The Company has made qualifying third party indemnity provisions for the benefit of the Directors, which were in force from their dates of appointment
and up to the date of this report.
47
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
DIRECTORS’ REPORT CONTINUED
for the year ended 31 December 2018
Significant shareholdings
As at 8 April 2019, the Company has been advised, in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority,
or was made aware through the IPO process of the following notifiable interests in 3% or more of its voting rights:
Perwyn Bidco (UK) Limited
Aghoco 1337 Limited (as Trustee of the Sumo Group plc Employee Benefit Trust)
BlackRock Investment Management (UK) Limited
Liontrust Investment Partners LLP
Swedbank Robur Fonder AB
Schroder Investment Management
41,170,961
19,162,865
14,395,963
8,000,000
7,807,391
6,500,000
27.4%
12.8%
9.6%
5.3%
5.2%
4.3%
Employees
The Group regularly provides employees with information on matters of concern to them, consulting them or their representatives regularly,
so that their views can be taken into account when making decisions that are likely to affect their interests. Employee involvement in the Group
is encouraged, as achieving a common awareness on the part of all employees of the financial and economic factors affecting the Group plays
a major role in its performance.
The Group recognises its responsibility to employ disabled persons in suitable employment and gives full and fair consideration to such persons,
including any employee who becomes disabled, having regard to their particular aptitudes and abilities. Where practicable, disabled employees
are treated equally with all other employees in respect of their eligibility for training, career development and promotion.
Share capital and voting
The Company has one class of equity share, namely 0.01p Ordinary Shares. The shares have equal voting rights and there are no special rights
or restrictions attaching to any of them or their transfer to other persons. The rights and obligations attaching to these shares are governed by
the Companies Act 2006 and the Company’s Articles.
Appointment and replacement of Directors and changes to constitution
Rules governing the appointment and replacement of Directors, and those relating to the amendment of the Company’s Articles of Association,
are contained within those Articles of Association, a copy of which is located on the Company’s website (www.sumogroupplc.com).
Notice of Annual General Meeting
A Notice of AGM, with explanatory notes, is made available to all shareholders.
Corporate governance
The Group’s statement on corporate governance can be found in the Corporate Governance section of this Annual Report which is incorporated
by reference and forms part of this Directors’ Report and on the Company’s website.
Disclosure of information to auditor
The Directors of the Company at the date of the approval of this report confirm that:
• so far as each Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and
• each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information
and to establish that the Company’s auditor is aware of that information.
Independent auditor
The auditor, Grant Thornton UK LLP, have indicated their willingness to continue in office and a resolution concerning their reappointment
will be proposed at the AGM.
By order of the Board
Steven Webb
Company Secretary
Sumo Group plc
Unit 32
Jessops Riverside
Brightside Lane
Sheffield
S9 2RX
Registered number: 11071913
8 April 2019
48
Sumo Group plc Annual Report 2018
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
for the year ended 31 December 2018
The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the
consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and
the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law, including FRS 101 “Reduced Disclosure Framework”). 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 and profit or loss of the Company and Group for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable IFRSs as adopted by the European Union or United Kingdom Generally Accepted Accounting Practice have been followed,
subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on the 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 enable them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Steven Webb
Company Secretary
Sumo Group plc
Unit 32 Jessops Riverside
Brightside Lane
Sheffield
S9 2RX
Registered number: 11071913
8 April 2019
49
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT INDEPENDENT AUDITOR’S REPORT
to the members of Sumo Group plc
Opinion
Our opinion on the financial statements is unmodified
We have audited the financial statements of Sumo Group plc (the “parent company”) and its subsidiaries (the “Group”) for the year ended
31 December 2018, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated
balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement, the parent company balance sheet, the
parent company statement of changes in equity, and 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 Group financial statements is applicable law and International
Financial Reporting Standards (“IFRSs”) as adopted by the European Union. The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial
Reporting Standard 101 ‘Reduced Disclosures Framework’ (United Kingdom Generally Accepted Accounting Practice).
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 2018 and
of the Group’s loss 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 United Kingdom Generally Accepted Accounting
Practice; 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 and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, including the FRC’s 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 12 months from the date when the
financial statements are authorised for issue.
Overview of our audit approach
• Overall materiality: £403,000, which represents approximately 4% of the Group’s expected Adjusted EBITDA;
• Key audit matters were identified as the recognition of contract revenue and the accounting treatment of Video Games Tax Relief credits;
• A full scope audit was performed of the financial statements of the Company, and all components determined to be significant. Full scope
procedures were performed for entities comprising 100% of external revenues. A targeted approach was adopted for components not
considered to be significant.
50
Sumo Group plc Annual Report 2018 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) that we identified. These
matters included those that 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.
Key audit matter – Group
How the matter was addressed in the audit – Group
The recognition of contract revenue
There is a risk that revenue may be misstated due to the improper
recognition of revenue.
Our audit work included, but was not restricted to:
• Performing walkthroughs of the systems and controls in place around
the recording of revenue;
As described on page 58 the Group adopted IFRS 15 ‘Revenue from
Contracts with Customers’ in the current year, choosing to apply the
“cumulative effect” modified retrospective method of transition. There is
significant judgement required in applying the standard’s five step model
to the Group’s contracts, including:
• Evaluation of the revenue recognition policies for compliance with
IFRS 15 “Revenue from Contracts with Customers”;
• Comparing a sample of contract revenue to the Group’s accounting
policy to determine whether it has been recognised in line with the
policy by:
• Identifying the relevant contract(s) requires judgement in determining
at what point an agreement with a customer creates enforceable
rights and obligations
• Identifying the performance obligations in the contract requires
judgement as to whether the Group is obligated to provide a service
(such as development), financing, goods (such as Intellectual Property
rights), or a combination of these
• Determining the transaction price requires judgement in assessing
the best estimate of variable consideration that is due and to what
extent this estimate should be constrained so as to quantify an
amount highly improbable to reverse
• Allocating the transaction price to the performance obligations in the
contract requires judgement in allocating the amount of revenue in
respect of each performance obligation, and considering whether any
significant financing component exists in the contract
• Recognising revenue when (or as) the entity satisfies a performance
obligation requires judgement as to whether revenue should
be recognised at a point in time, or over time. Where revenue is
recognised over time, significant management judgement is required
in assessing the expected contract outcome and stage of completion
at each reporting date.
– Confirming that a valid contract existed with the customer
by reference to evidence such as written agreements
– Challenging whether the identification of the performance obligations
within the contract by management is appropriate
– Challenging the appropriateness of the transaction price ascertained
by management by reference to relevant contract(s) and to
assumptions made, including those relating to variable revenues
– Determining whether the allocation of transaction price to
performance obligations is appropriate
– Challenging whether management’s assessment as to whether
performance obligations have been met, including the percentage of
completion assessment made by management where performed over
time, is appropriate in light of relevant evidence, including time records
and customer acceptance records
• Agreeing a sample of revenue transactions to invoice and customer
confirmations.
The Group’s accounting policy on the recognition of contract revenue is
shown in note 2 to the financial statements and related disclosures are
included in notes 4 and 27.
We therefore identified the recognition of contract revenue as
a significant risk, which was one of the most significant assessed
risks of material misstatement.
The Audit Committee identified the recognition of contract revenue as
a significant issue in its report on page 41, where the Audit Committee
also described the action that it has taken to address this issue.
The key judgements and estimates made in relation to this matter are
described in note 3.
Key observations
Based on our audit work, we found that contract revenue was recognised
in line with the Group’s accounting policies, and IFRS 15 ‘Revenue from
Contracts with Customers’.
51
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT INDEPENDENT AUDITOR’S REPORT CONTINUED
to the members of Sumo Group plc
Key audit matter – Group
How the matter was addressed in the audit – Group
The accounting treatment of Video Games Tax Relief
credits (VGTCs)
There is currently diversity in practice regarding the financial reporting
of VGTCs. As this is a tax credit, it may be expected that the accounting
treatment is set out in IAS 12 “Income Taxes”. However, a key judgement
is whether VGTCs constitute investment tax credits, which are not
defined within IFRS yet are specifically excluded from the scope of IAS
12 “Income Taxes” and IAS 20 “Accounting for Government Grants and
Disclosure of Government Assistance”.
The Directors are of the opinion that Video Games Tax Relief credits
(VGTCs) are most appropriately recognised as a deduction from direct
cost, rather than an element of taxation within the consolidated income
statement. VGTCs are material to the Group financial statements and key
to the financial structuring of the Group’s game development contracts.
Additionally, there is judgement involved in the recognition of VGTCs.
We have identified the accounting treatment of VGTCs as one
of the matters of most significance in the audit of the Group
financial statements.
Our audit work included, but was not restricted to:
• Understanding the differences in technical interpretation relating
to the accounting treatment of VGTCs;
• Assessing and challenging the appropriateness of management’s
inclusion of VGTCs as a deduction from direct costs in the light
of the nature of the Group’s business.
• Assessing the appropriateness of the Group’s accounting policy
relating to VGTCs to determine whether disclosures are in line with
IAS 12 “Income Taxes” and IAS 20 “Accounting for Government Grants
and Disclosure of Government Assistance”; and
• Using tax specialists to perform an assessment of the treatment
of qualifying costs within the VGTC computations and evaluating
the reasonableness of management’s calculation of VGTCs.
The Group's accounting policy for VGTCs is shown in note 2 to the
financial statements and related disclosures are included in note 6.
The Audit Committee identified the accounting treatment of VGTCs as
a significant issue in its report on page 39, where the Audit Committee
also described the action that it has taken to address this issue.
The key judgements and estimates made in relation to this matter
are described in note 3.
Key observations
Based on our audit work, we conclude that the accounting treatment
for VGTCs is in accordance with the Group’s accounting policies and
in line with the requirements of relevant accounting standards.
No key audit matters were identified that are unique to the Company.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of
a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit
work and in evaluating the results of that work.
Materiality was determined as follows:
Materiality measure
Group
Parent
Financial statements as a whole
Performance materiality used to drive
the extent of our testing
Communication of misstatements
to the Audit Committee
£403,000 which is approximately 4% of expected
Adjusted EBITDA. This benchmark is considered
the most appropriate because Adjusted EBITDA
is a key performance indicator of the Group.
Materiality for the current year is higher than
the level that we determined for the year ended
31 December 2017 to reflect the year on year
increase in Adjusted EBITDA.
£302,000 which is based on 1% of total assets,
capped to 75% of Group materiality. This
benchmark is considered the most appropriate
because the Company acts as a holding
company and does not trade.
Materiality for the current year is in line with the
level that we determined for the year ended 31
December 2017.
75% of financial statement materiality.
75% of financial statement materiality.
£20,000 and misstatements below that
threshold that, in our view, warrant reporting on
qualitative grounds.
£15,000 and misstatements below that
threshold that, in our view, warrant reporting
on qualitative grounds.
An overview of the scope of our audit
Our audit approach was a risk-based approach founded on a thorough understanding of the Group’s business, its environment and risk profile and
in particular included:
• evaluation by the Group audit team of identified components to assess the significance of that component and to determine the planned audit
response based on a measure of materiality. For example, significance as a percentage of the Group’s total assets, revenues and profit before
taxation or significance based on qualitative factors, such as specific uses or concerns over specific components;
• we performed a full scope audit of the financial statements of the parent company, and all components determined to be significant based
on their relative materiality to the Group and assessment of audit risk. Full scope procedures were performed for entities comprising 100%
of external revenues;
• the Group has components in Canada and India. We have assessed the risk of material misstatement for each of these components to conclude
which components require a full scope audit;
• a targeted approach was adopted for components with no external revenue and not considered to be significant.
52
Sumo Group plc Annual Report 2018 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.
Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
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 under the Companies Act 2006
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.
Matters on which we are required to report by exception
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 for the financial statements
As explained more fully in the Directors’ responsibilities statement set out on page 49, 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
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 the 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.
Use of our report
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.
Mark Overfield BSc FCA
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
Leeds
8 April 2019
53
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2018
Revenue
Direct costs
Video Games Tax Relief
Direct costs (net)
Gross profit
Operating expenses
Operating expenses – exceptional
Operating expenses – total
Group operating loss
Analysed as:
Adjusted EBITDA2
Amortisation
Depreciation
Share-based payment charge
Customer revenue included within finance income
Accrued royalty not yet received and contingent on future sales
Investment in co-funded games expensed
Exceptional items
Group operating loss
Finance cost
Finance income
Loss before taxation
Taxation
Loss for the year attributable to equity shareholders
Loss per share (pence)
Basic and diluted
Year ended
31 December
2018
£’000
Restated1
Year ended
31 December
2017
£’000
38,696
(27,191)
6,898
(20,293)
18,403
(19,004)
(94)
(19,098)
(695)
10,407
(6,947)
(1,104)
(2,578)
(421)
250
(208)
(94)
(695)
(99)
311
(483)
232
(251)
28,591
(23,635)
8,296
(15,339)
13,252
(33,191)
(2,656)
(35,847)
(22,595)
8,356
(27,626)
(669)
–
–
–
–
(2,656)
(22,595)
(5,381)
3
(27,973)
4,538
(23,435)
Note
4
6
7
13
14
27
27
7
7
8
9
11
12
(0.20)
(389.40)
1 2017 comparative restated for pass-through revenues and costs upon which Sumo does not make a margin. During the year the Directors reassessed their accounting treatment for certain “pass-through”
costs which are recharged at nil margin and concluded that it would be appropriate for these costs to be netted against recharged income. This change in presentation reduced revenue and direct costs for the
year ended 31 December 2017 by £2m but had no impact upon gross profit, earnings or financial position.
2 Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, exceptional items, share-based payment charge, customer revenue included within finance income, accrued
royalty not yet received and contingent on future sales and the investment in co-funded games expensed, is a non-GAAP metric used by management and is not an IFRS disclosure.
The notes on pages 58 to 84 form part of these Group financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Loss for the year attributable to equity shareholders
Other comprehensive expense:
Exchange differences on retranslation of foreign operations
Total other comprehensive expense
Total comprehensive expense for the year
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(251)
(23,435)
(48)
(48)
(16)
(16)
(299)
(23,451)
Items in the statement above are disclosed net of tax which is immaterial. The notes on pages 58 to 84 form part of these Group financial statements.
54
Sumo Group plc Annual Report 2018
CONSOLIDATED BALANCE SHEET
as at 31 December 2018
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Deferred tax asset
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Corporation tax payable
Total current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Reverse acquisition reserve
Merger relief reserve
Foreign currency translation reserve
Own shares
Retained earnings
Total equity
Note
13
14
20
16
17
18
23
23
2018
£’000
22,378
2,496
1,981
26,855
25,172
3,730
28,902
55,757
11,050
810
11,860
11,860
43,897
1,501
40,994
(60,623)
590
(21)
(4,919)
66,375
43,897
Restated1
2017
£’000
28,213
1,835
474
30,522
11,414
12,424
23,838
54,360
12,022
1,316
13,338
13,338
41,022
1,450
36,121
(60,623)
–
27
–
64,047
41,022
1 Prior year 2017 restated for a reclassification between trade receivables and trade payables, see notes 16 and 18.
The Group financial statements on pages 54 to 84 were approved by the Board of Directors on 8 April 2019 and were signed on its behalf by:
Carl Cavers
Director
David Wilton
Director
The notes on pages 58 to 84 form part of these Group financial statements.
55
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
Reverse
acquisition
reserve
£’000
Merger
relief
reserve
£’000
Foreign
currency
translation
reserve
£’000
Share
capital
£’000
Share
premium
£’000
45
352
–
–
–
–
–
–
–
–
–
–
1
18
1,065
(64)
–
385
–
7
28,879
88,867
(29,238)
(88,867)
38,061
(1,940)
–
–
–
(60,623)
–
–
–
1,405
35,769
(60,623)
Own
shares
£’000
Retained
earnings
£’000
Total
equity
£’000
–
(1,385)
(945)
–
(23,435)
(23,435)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(16)
(23,435)
(23,451)
–
–
–
–
88,867
–
–
8
28,897
89,932
(89,925)
–
38,446
(1,940)
88,867
65,418
64,047
41,022
(131)
(131)
63,916
40,891
–
(251)
(251)
–
–
–
–
–
–
(4,919)
–
(251)
–
–
2,711
(1)
–
(48)
(299)
4,923
590
2,711
–
(4,919)
(4,919)
2,710
3,305
43
–
(16)
(16)
–
–
–
–
–
–
–
–
27
–
27
–
(48)
(48)
–
–
–
–
–
–
(21)
(4,919)
66,375
43,897
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
590
–
–
–
590
590
Balance at 1 January 2017
Loss for the year
Exchange differences on retranslation
of foreign operations
Total comprehensive expense for the year
Transactions with owners:
Issue of shares in year
Issue of shares on conversion of debt
Issue of shares pre-IPO
Group reorganisation
Capital reduction
Issue of shares on IPO
Expenses of the IPO
Balance at 31 December 2017
1,450
36,121
(60,623)
IFRS 15 adoption impact (note 27)
–
–
–
Restated balance as at 1 January 2018
1,450
36,121
(60,623)
Loss for the year
Exchange differences on retranslation
of foreign operations
Total comprehensive expense for the year
Transactions with owners:
Issue of shares in year
Reserve on issue of shares on acquisition of subsidiary
Share-based payment transactions
SIP share issues and SIP reserve
Acquisition of shares by the Employee Benefit Trust
–
–
–
50
–
–
1
–
51
–
–
–
4,873
–
–
–
–
4,873
–
–
–
–
–
–
–
–
–
Balance at 31 December 2018
1,501
40,994
(60,623)
The notes on pages 58 to 84 form part of these Group financial statements.
56
Sumo Group plc Annual Report 2018
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2018
Loss for the financial year
Income tax
Net finance costs
Operating loss
Depreciation charge (note 14)
Amortisation of intangible assets (note 13)
(Decrease)/Increase in bad debt provision
Share-based payments charge
Increase in trade and other receivables
(Decrease)/Increase in trade and other payables
Cash flows from operating activities
Net finance costs
Tax paid
Net cash (used in)/generated from operating activities
Cash flows from investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Acquisition of subsidiary – net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Transaction costs relating to the issue of shares
Repayments of borrowings
Net cash generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Foreign exchange
Cash and cash equivalents at the end of the year
1 Prior year 2017 restated for a reclassification between trade receivables and trade payables, see notes 16 and 18.
The notes on pages 58 to 84 form part of these Group financial statements.
Year ended
31 December
2018
£’000
Note
Restated1
Year ended
31 December
2017
£’000
(251)
(232)
(212)
(695)
1,104
6,947
(11)
2,578
(13,739)
(1,072)
(4,888)
212
(1,687)
(6,363)
(513)
(1,740)
1
(2,252)
–
–
–
–
(8,615)
12,424
(79)
3,730
(23,435)
(4,538)
5,378
(22,595)
669
27,626
19
–
(916)
4,302
9,105
(5,378)
(475)
3,252
(120)
(1,586)
(2,287)
(3,993)
67,358
(1,940)
(56,718)
8,700
7,959
4,482
(17)
12,424
13
14
25
26
57
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS
for the year ended 31 December 2018
1 GENERAL INFORMATION
Sumo Group plc (the “Company”) is registered in England and Wales as a public limited company. The address of its registered office is 32 Jessops
Riverside, Brightside Lane, Sheffield S9 2RX.
The principal activity of the Company and its subsidiaries (together the “Group”) is that of video games development.
The Group financial statements present 12 months' results for the year ended 31 December 2018, and were approved by the Directors on 8 April 2019.
The Company financial statements are on pages 85 to 90.
2 BASIS OF PREPARATION AND ACCOUNTING POLICIES
The Group’s principal accounting policies, all of which have been applied consistently to all the periods presented, are set out below.
Basis of preparation
The Group financial statements have been prepared in accordance with International Financial Reporting Standards as endorsed by the European
Union (“IFRS”), International Financial Reporting Standards Interpretation Committee (“IFRS IC”) interpretations and those provisions of the
Companies Act 2006 applicable to companies reporting under IFRS. The Group financial statements have been prepared on the going concern basis
and on the historical cost convention modified for the revaluation of certain financial instruments.
The preparation of Group financial statements in conformity with IFRS requires the use of certain critical accounting estimates, which are outlined in
the critical accounting estimates and judgements section of these accounting policies. It also requires management to exercise its judgement in the
process of applying the Group’s accounting policies.
Going concern
These Group financial statements have been prepared on the going concern basis.
The Directors have reviewed the forecasts for the years ending 31 December 2019 and 31 December 2020 and consider the forecasts to be prudent
and have assessed the impact of them on the Group's cash flow, facilities and headroom within its banking covenants. Furthermore, the Directors
have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. Based on this work,
the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they
continue to adopt the going concern basis in preparing the financial statements.
Standards, amendments and interpretations adopted during the year:
In these financial statements the Group has, with effect from 1 January 2018, adopted IFRS 9 and IFRS 15.
IFRS 9 “Financial Instruments” replaced IAS 39 “Financial Instruments: Recognition and Measurement”. It makes major changes to the previous
guidance on the classification and measurement of financial assets and introduces an ‘expected credit loss’ model for the impairment of financial
assets. When adopting IFRS 9, the Group has applied transitional relief and opted not to restate prior periods. No differences arose on the transition
to IFRS 9.
IFRS 15 “Revenue from Contracts with Customers” and the related “Clarifications to IFRS 15 Revenue from Contracts with Customers” (hereinafter
referred to “IFRS 15”), replace IAS 18 “Revenue”, IAS 11 “Construction Contracts” and several revenue related interpretations. The new standard has
been applied retrospectively without restatement, with the cumulative effect of initial application recognised as an adjustment to the opening balance
of retained earnings at 1 January 2018. In accordance with the transition guidance, IFRS 15 has only been applied to contracts that are incomplete as
at 1 January 2018. Two transition differences noted for IFRS 15 are the separation of the financing element of one specific contract where the payment
profile extends beyond 12 months and the recognition of variable consideration (note 27). The transaction price from this contract has been adjusted
for the length of time between the period the services are transferred to the customer and payment date, and the prevailing interest rate of 6%. The
use of the 6% rate in this instance is considered to be a key judgement. Otherwise there are no new standards that have become effective in the period
that have had a material effect on the Group’s financial statements.
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Sumo Group plc Annual Report 2018 2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Standards, amendments and interpretations which are not effective or early adopted:
At the date of authorisation of the Group financial statements, the following new standards and interpretations which have not been applied in this
financial information were in issue but not yet effective:
• IFRS 16 “Leases”
The new accounting standard is effective for years commencing on or after 1 January 2019.
Under the new standard, the distinction between operating and finance leases is removed and most leases will be brought onto the statement of
financial position, as both a right-of-use asset and a largely offsetting lease liability. The right-of-use asset will be depreciated in accordance with
IAS 16 “Property, Plant and Equipment” and the liability will be increased for the accumulation of interest and reduced by lease payments. There will
be no impact on cash flow.
The Company has opted not to early adopt IFRS 16 and prior year financial information will not be restated resulting in no impact on retained earnings
on transition. We do not intend to grandfather the lease definition as it has no material impact on our lease population.
A key judgement associated with the adoption of this standard is the identification of the discount rate to be used to calculate the present value of the
future lease payments on which the reported lease liability and right-of-use asset are based.
We intend to use the modified retrospective transitional approach meaning that the right of use asset and the lease liability are brought onto the
balance sheet using the discount rate applicable at the transition date. The discount rate will therefore be based on the incremental cost of borrowing
as at 1 January 2019 where an interest rate is not implicit in the lease contract.
The Company plans to make use of the available exemptions and expedients where applicable. Given the current information available, however,
we expect that we will only apply the low value leases exemption and the expedient for leases with a short remaining term although this will remain
under review.
Note 30 provides a disclosure of the potential impact of IFRS 16.
Basis of consolidation
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed
to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are deconsolidated from the date control ceases.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
Revenue
Revenue arises from the provision of game development services. To determine whether to recognise revenue, the Group follows a five-step process
as follows:
1. Identifying the contract with a customer
2. Identifying the performance obligations
3. Determining the transaction price
4. Allocating the transaction price to the performance obligations
5. Recognising revenue when/as performance obligation(s) are satisfied
Revenue is measured at transaction price, stated net of VAT and other sales related taxes.
During the year the Directors reassessed their accounting treatment for certain “pass-through” costs which are recharged at nil margin and
concluded that it would be more appropriate for these costs to be netted against the recharged income. This change in presentation has reduced
revenue and direct costs for the year ended 31 December 2017 by £2m but had no impact upon reported gross profit, earnings or financial position.
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Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Third party funded game development
There is generally one performance obligation with customers, being the development of a completed project or game and, as such, the transaction
price is allocated to the single distinct performance obligation. The transaction price is set out in the contract and is made up of fixed elements in the
form of the development fee and guaranteed royalties and variable elements in the form of future royalties. At inception of each contract the Group
begins by estimating the amount of the royalty to be received generally using the “expected value amount” approach. This amount is then included in
the Group’s estimate of the transaction price only to the extent that it is highly probable that a significant reversal of revenue will not occur once any
uncertainty surrounding the royalty is resolved. In making this assessment, the Group considers the length of the royalty period, the extent of external
factors including how the publisher brings the game to market, expected critic scores and other expected game launches. The highly probable nature
of the variable consideration is reviewed for each game at each reporting cycle.
As the Group’s development activity creates and enhances the game that the customer controls as the game is developed, revenue is recognised over
time as the Group satisfies performance obligations by transferring the promised services to its customers in accordance with paragraph 35(b) of IFRS
15. The amount of revenue to recognise is determined based upon the input method that calculates actual costs incurred relative to the total budgeted
costs for the project based upon a percentage of completion calculation.
Estimates of revenues, costs or the extent of progress towards completion are revised if circumstances change. Any resulting increases or decreases
in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known.
Where the original contract is modified, for example for a change to the scope or price of the contract, the nature of modification is considered as to
whether it gives rise to a performance obligation distinct from the promises in the original contract. In cases where the modification gives rise to a
distinct performance obligation, the modification is treated as a new contract in its own right and the five-step model considered for this new contract.
Where it does not, the modification is accounted for as if it was part of the original contract. The effect that the modifications have on the transaction
price and the measure of progress towards the complete satisfaction of the performance obligation is recognised as an adjustment to revenue at the
date of the contract modification. The adjustment to revenue is made on a cumulative catch-up basis.
The fixed elements of the transaction price are invoiced based upon a payment schedule. If the services rendered by the Group exceed the payments,
a contract asset for amounts recoverable on contracts is recognised. If the payments exceed the services rendered, a contract liability representing
advances for game development is recognised.
There is one contract at 31 December 2018 that contains a financing component where the customer receives a benefit from the Group financing
the transfer of services to the customer, generally over a period of time extending beyond 12 months. For arrangements with a significant financing
component the transaction price is adjusted for both the length of time between when the Group delivers the services and when the customer pays
for those services, and the effects of the time value of money using prevailing interest rates.
When determining what rate to use, management considers the rate that would be reflected in a separate financing transaction between the Group
and the customer at contract inception taking into account the credit characteristics of the customer.
Licensing revenues
Should the Group develop its own games, it may opt to license the game to publishers. There is generally a single performance obligation to grant
a licence over the developed game. The transaction price includes only fixed elements, typically in the form of a guaranteed royalty. Revenue is
recognised at a point in time when the completed game is delivered and the customer has the right to use the asset. As the fixed element of the
transaction price will be recognised in advance of payments being received, a contract asset will be recognised. Game revenues from the right to
use asset will be recognised as earned, based upon the future sales of the game in accordance with paragraphs B63-B63B of IFRS 15.
Own-IP
The Group also creates its own concepts and IP. No revenue is recognised during the development phase. Once the game is completed and launched
the Group recognises the revenues as they are earned (at a point in time).
EBITDA and Adjusted EBITDA
Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) and Adjusted EBITDA are non-GAAP measures used by management to
assess the operating performance of the Group. Exceptional items, the impact of IFRS 15 adoption and the investment in co-funded games expensed
are excluded from EBITDA to calculate Adjusted EBITDA. For further explanation and details see note 29 and the consolidated income statement.
The Directors primarily use the Adjusted EBITDA measure when making decisions about the Group’s activities. As these are non-GAAP measures,
EBITDA and Adjusted EBITDA measures used by other entities may not be calculated in the same way and hence may not be directly comparable.
Foreign currency
Transactions in foreign currencies are translated into the Group’s functional currency at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that
date. Foreign exchange differences arising on translation are recognised in profit or loss.
On consolidation, the assets and liabilities of foreign operations which have a functional currency other than sterling are translated into sterling at
foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these subsidiary undertakings are translated at average rates
applicable in the period. All resulting exchange differences are recognised in other comprehensive income and documented in a separate component
of equity.
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Sumo Group plc Annual Report 2018 2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Classification of instruments issued by the Group
Instruments issued by the Group are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following two
conditions:
• they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities
with another party under conditions that are potentially unfavourable to the Group; and
• where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to
deliver a variable number of the Company‘s own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount
of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the items are classified as a financial liability. Where the instrument so classified takes the legal form of the
Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts
in relation to those shares.
Finance payments associated with financial liabilities are dealt with as part of finance expenses. Finance payments associated with financial
instruments that are classified in equity are dividends and are recorded directly in equity.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property,
plant and equipment.
Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and
equipment. Depreciation is provided on the following basis:
Leasehold improvements
Over period of lease
Fixtures and fittings
Computer hardware
25% straight line
50% straight line
It has been assumed that all assets will be used until the end of their economic life. Freehold land is not depreciated.
Intangible assets
All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition
and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately, or which arise from legal or
contractual rights regardless of whether those rights are separable, and are initially recognised at fair value.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested
annually for impairment.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses.
Computer software purchased separately, that does not form an integral part of related hardware, is capitalised at cost. Amortisation is charged
to profit or loss on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite and is presented within
operating expenses. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date.
Other intangible assets are amortised from the date they are available for use.
The estimated useful lives are as follows:
Customer relationships
Customer contracts
Software
2 years
Over period of contract
2 years
Impairment
For goodwill that has an indefinite useful life, the recoverable amount is estimated annually. For other assets, the recoverable amount is only
estimated when there is an indication that an impairment may have occurred. The recoverable amount is the higher of fair value less costs to sell
and value in use.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment
losses are recognised in profit or loss.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the
cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash–generating unit is the smallest
identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
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Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Post-employment benefits
Defined contribution plans
Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss as incurred.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is
probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting
the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks
specific to the liability.
Operating lease payments
Operating leases are leases in which substantially all the risks and rewards of ownership related to the asset are not transferred to the Group.
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received
are recognised in profit or loss over the term of the lease, as an integral part of the total lease expense.
Taxation
Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in profit or loss except to the extent that it relates to items
recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or in equity, respectively.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet
date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes, except to the extent that it arises on:
• the initial recognition of goodwill where the initial recognition exemption applies;
• the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination;
• differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities,
using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset in respect of tax losses is recognised only to the extent that it is probable that future taxable profits will be available against which
the asset can be utilised.
Video Games Tax Relief
Video Games Tax Relief has only been recognised where management believe that a tax credit will be recoverable based on their experience of
obtaining the relevant certification and the success of similar historical claims. Such credits are recognised as part of direct costs in order to reflect
the substance of these credits to the Group and cash flows are presented within operating activities. The debit is recorded on the balance sheet as
“VGTR recoverable” within current assets.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank borrowings that are repayable on demand and form an integral part
of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the statement of cash flows.
Trade and other receivables
Trade and other receivables are initially recorded at fair value and thereafter are measured at amortised cost using the effective interest rate.
A loss allowance for expected credit losses is recognised based upon the lifetime expected credit losses in cases where the credit risk on trade
and other receivables has increased significantly since initial recognition. In cases where the credit risk has not increased significantly, the Group
measures the loss allowance at an amount equal to the 12-month expected credit loss. This assessment is performed on a collective basis
considering forward-looking information.
Financial derivatives
The Group uses derivative financial instruments to hedge its exposure to risks arising from operational activities, principally foreign exchange risk.
In accordance with treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. The Group does not hedge
account for these items. Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is determined by direct
reference to active market transactions or using a valuation technique where no active market exists. At certain times the Group has foreign currency
forward contracts that fall into this category.
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Sumo Group plc Annual Report 2018 2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing
borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the
borrowings on an effective interest basis.
Trade and other payables
Trade payables are initially recorded at fair value and thereafter at amortised cost using the effective interest rate method.
Segmental reporting
The Group reports its business activities in one area: video games development, which is reported in a manner consistent with the internal reporting to
the Board of Directors, which has been identified as the chief operating decision maker. The Board of Directors consists of the Executive Directors and
the Non-Executive Directors.
Exceptional costs
The Group presents as exceptional costs on the face of the income statement, those significant items of expense, which, because of their size, nature
and infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial
performance in the period. This facilitates comparison with prior periods and trends in financial performance more readily. Such costs include
professional fees and other costs, directly related to the purchase of businesses.
Share capital
Share capital represents the nominal value of shares that have been issued.
Share premium
Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted
from share premium, net of any related income tax benefits.
Reverse acquisition reserve
The reverse acquisition reserve was created as a result of the share for share exchange under which Sumo Group plc became the parent undertaking
prior to the IPO. Under merger accounting principles, the assets and liabilities of the subsidiaries were consolidated at book value in the Group
financial statements and the consolidated reserves of the Group were adjusted to reflect the statutory share capital, share premium and other
reserves of the Company as if it had always existed, with the difference presented as the reverse acquisition reserve.
Merger relief reserve
Represents the difference between the fair value and nominal value of shares issued on acquisition of a Group subsidiary.
Foreign currency translation reserve
Represents the exchange differences on retranslation of foreign operations.
Own shares
The Group holds shares in an Employee Benefit Trust. The consideration paid for the purchase of these shares is recognised directly in equity.
Any disposals are calculated on a weighted average method with any gain or loss being recognised through reserves.
The assets and liabilities of the Employee Benefit Trust (“EBT”) have been included in the Group financial statements. Any assets held by the EBT
cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries. The cost of purchasing own shares
held by the EBT is shown as a deduction within shareholders‘ equity. The proceeds from the sale of own shares are recognised in shareholders’ equity.
Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the income statement.
Retained earnings
Retained earnings includes all current period retained profits.
Direct costs
Included within direct costs are all costs in connection with the development of games, including an allocation of studio management costs.
Video Games Tax Relief is presented within direct costs as it is directly related to the level of expenditure incurred. See note 6.
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Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
2 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Share-based payments
The Group operates equity-settled share-based remuneration plans for its employees. None of the Group’s plans are cash-settled.
All goods and services received in exchange for the grant of any share-based payment are measured at their fair values using the Monte Carlo and
Black Scholes models.
Where employees are rewarded using share-based payments, the fair value of employees’ services is determined indirectly by reference to the
fair value of the equity instruments granted. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions
(for example profitability and sales growth targets and performance conditions). The fair value of the options, appraised at the grant date, includes the
impact of market based vesting conditions.
All share-based remuneration is ultimately recognised as an expense in profit or loss with a corresponding credit to retained earnings. Where vesting
periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share
options expected to vest.
Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are
subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any adjustment to
cumulative share-based compensation resulting from a revision is recognised in the current period. The number of vested options ultimately exercised
by holders does not impact the expense recorded in any period.
Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, are allocated to share capital up to the nominal
(or par) value of the shares issued with any excess being recorded as share premium.
3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
Accounting estimates
Impairment of goodwill and other intangible assets
The carrying amount of goodwill is £21,379,000 (2017: £20,791,000) and the carrying amount of other intangible assets is £999,000 (2017: £7,422,000)
as at 31 December 2018. The Directors are confident that the carrying amount of goodwill and other intangible assets is fairly stated and have carried
out an impairment review. The forecast cash generation for the Cash-Generating Unit (CGU) and the Weighted Average Cost of Capital (WACC)
represent significant assumptions and should the assumptions prove to be incorrect there would be a significant risk of a material adjustment
within the next financial year.
The cash flows are based on a three-year forecast with growth rates between 17% and 36%. Subsequent years are based on a reduced growth rate
of 2.0% into perpetuity.
The discount rate used was the Group’s pre-tax WACC of 12%. The WACC used for the impairment review is reflective of the industry sector WACC
rather than the WACC used in investment decisions.
Given the significant headroom in the carrying value of goodwill compared to the calculation of the net present value of the future cash flows, and
bearing in mind the market value of the Group, the Directors cannot foresee a reasonable downside scenario in which the goodwill would be impaired
in the foreseeable future and hence detailed sensitivity disclosures have not been presented.
Accounting judgements
Judgements in applying accounting policies and key sources of estimation uncertainty
In the preparation of the Group financial statements, the Directors, in applying the accounting policies of the Group, make some judgements and
estimates that affect the reported amounts in the financial statements. The following are the areas requiring the use of judgement and estimates that
may significantly impact the financial statements.
Goodwill and intangible assets arising on acquisition
The process of estimating the value of customer contracts and customer relationships on acquisition includes an element of forecasting and
judgement. The Directors review customer contracts and customer relationships on an annual basis which also involves an element of judgement as
to the length of the contract and relationship. These judgements concerning the length of customer contracts and relationships have largely resolved
during 2018 as the balances naturally unwind through the amortisation charge, given the relatively short length of the customer contracts. Details of
the period end impairment review of goodwill have been disclosed in note 13 to the financial statements.
64
Sumo Group plc Annual Report 2018 3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES CONTINUED
Revenue recognition on development contracts
There are a number of judgements in respect of the recognition of revenue on development contracts, including:
• the determination of the number of distinct separate performance obligations in a contract. This is based upon judgement around whether the
customer can benefit from the use of the service on its own or together with other resources that are readily available to it, and also whether the
promise to transfer the service is separately identifiable from other promises in the contract. As explained in the accounting policy for revenue,
there tends to be one distinct performance obligation, being the development of a completed project or game;
• whether the Group transfers control of the game over time, and therefore satisfies the performance obligation and recognises revenue over time.
This requires judgement as to whether the customer controls the game as it is created and enhanced. As the customer approves the development
work as it progresses, and is involved in directing the development activity, it is generally considered that control is transferred over time and
revenue is recognised accordingly;
• recognition over time is determined based upon judgement and estimates on the overall contract margin and percentage of completion of the
contract at each period end. These judgements are based on contract value, historical experience and forecasts of future outcomes. These include
specific judgement in respect of contracts for which variations may be in the process of being negotiated, and so the contracts are accounted for on
the basis of the best estimate of the revenue expected to be received on the contract, which are all expected to be resolved relatively shortly after the
financial year end;
• for revenue contracts with a significant financing component the transaction price is adjusted for both the length of time between when the Group
delivers the services and when the customer pays for those services, and the effects of the time value of money using prevailing interest rates.
When determining what rate to use, management consider the rate that would be reflected in a separate financing transaction between the Group
and the customer at contract inception taking into account the credit characteristics of the customer. This involves a certain degree of judgement;
• variable consideration is constrained on contract inception until the time at which it is considered highly probable that the revenue will not reverse
in future periods. As this determination includes a number of factors outside the control of the Group, it is inherently difficult to estimate, and may
result in revenues being recognised in a later period than when the performance obligations were satisfied.
Video Games Tax Relief
The process of claiming Video Games Tax Relief requires estimates to be accrued at the period end. Whilst the Company undertakes a detailed
exercise involving external professional support in calculating the accrual, these claims are subject to review and approval by HMRC prior to payment.
It is also in the Directors’ judgement that presenting Video Games Tax Relief as a deduction from direct costs best reflects the substance and nature of
these credits. See note 6.
4 SEGMENTAL REPORTING
The trading operations of the Group are only in video games development and are all continuing. This includes the activities of Sumo Digital Limited,
Mistral Entertainment Limited, Sumo Video Games Private Limited, Cirrus Development Limited, Sumo Digital (Genus) Limited, Sumo Digital (Atlantis)
Limited, Atomhawk Design Limited, Atomhawk Canada Limited and The Chinese Room Limited. The central activities, comprising services and assets
provided to Group companies, are considered incidental to the activities of this single segment and have therefore not been shown as a separate
operating segment but have been subsumed within video games development. All assets of the Group reside in the UK, with the exception of
non-current assets with a net book value of £397,000 (2017: £400,000) which were located in India and Canada.
Major clients
In 2018 there were four major clients that individually accounted for at least 10% of total revenues (2017: three clients). The revenues relating to these
clients in 2018 were £8.1m, £6.6m, £5.7m and £5.1m (2017: £7.7m, £4.7m, and £3.2m).
Analysis of revenue
The amount of revenue from external customers can be disaggregated by location of the customers as shown below:
UK & Ireland
Europe
Rest of the World
Year ended
31 December
2018
£’000
14,775
7,935
15,986
38,696
Restated
Year ended
31 December
2017
£’000
9,237
10,861
8,493
28,591
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Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
4 SEGMENTAL REPORTING CONTINUED
Revenue by category
The Group’s revenue can be disaggregated by category as shown below:
Development fees
Video Game Industry
Art & Leisure
Film & TV
Retail
Total development fees
Own-IP
Royalties
Total revenue
Year ended
31 December
2018
£’000
Restated
Year ended
31 December
2017
£’000
37,225
134
–
134
37,493
438
765
38,696
26,282
96
15
25
26,418
1,695
478
28,591
The above are recognised over time, with the exception of “Own-IP”, which is recognised at a point in time.
On third party game development contracts, the estimated transaction price for the performance obligation includes both fixed (‘development
fees’) and variable revenues (such as “royalties”) and is reassessed at each reporting date (with changes in the estimate recognised in the income
statement), and recognised over time.
2018 “Royalties” of £765,000 include £250,000 (2017: nil) of variable consideration recognised in advance. This is an IFRS 15 adoption requirement,
to recognise variable consideration as part of the transaction price to the extent that it is highly probable not to reverse once the uncertainty is resolved
in future periods.
The following aggregated amounts of transaction prices relate to the performance obligations from existing contracts that are unsatisfied or partially
unsatisfied at 31 December 2018.
Revenue expected to be recognised
Assets and liabilities relating to contracts with customers
The Group has recognised the following assets and liabilities relating to contracts with customers:
Contract assets – amounts recoverable on contracts
Contract liabilities – advances for game development
2019
£’000
16,291
2018
£’000
11,310
512
2020
£’000
5,389
2017
£’000
3,461
1,259
Note
16
18
Contract assets – amounts recoverable on contracts represents contracts whereby the services rendered by the Group at the reporting date exceed
the customer payments. The significant increase in 2018 is principally due to the extended payment terms on one particular development contract.
Included within the above contract assets are amounts of variable consideration that are highly probable of not reversing of £250,000 (2017: £nil).
In the event that this variable consideration is not received, a provision for credit losses will be recorded. There are no provisions for credit losses in
respect of contract assets at either year end.
In cases where the payments exceed the services rendered as at the balance sheet date, a contract liability is recognised for advances for
game development.
Contract liabilities for 2017 have been restated between this category and Contract assets – amounts recoverable on contracts to better reflect the
individual nature of the contracts.
Contract liabilities represent customer payments received in advance of performance obligations that are expected to be recognised as revenue
in 2019. These amounts recognised will generally be utilised within the next reporting period.
Amounts recognised in revenue in 2018 relating to performance obligations satisfied in previous periods total £515,000, representing variable
consideration in the form of royalties.
66
Sumo Group plc Annual Report 2018
5 EMPLOYEES AND DIRECTORS
The average monthly number of persons (including Directors) employed in the Group during the period was:
Management (Directors)
Non-executives (Directors)
Development
Administration
Staff costs (including Directors) are outlined below. Directors’ remuneration is also set out in the Remuneration Report:
Wages and salaries
Share-based payments
Defined contribution pension cost
Social security costs
Other
Year ended
31 December
2018
Year ended
31 December
2017
5
3
464
80
552
4
4
383
53
444
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
21,390
2,578
713
2,034
14
26,729
15,785
–
509
1,497
9
17,800
Key management compensation
The following table details the aggregate compensation paid in respect of the key management, which is considered to be the Board.
Salaries and other short-term employee benefits
Post-employment benefits
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
1,005
20
1,025
1,152
37
1,189
There are no defined benefit schemes for key management. Pension costs under defined contribution schemes are included in the post-employment
benefits disclosed above.
The total remuneration of the Directors of the Company was £1,005,000 (2017: £570,000). The highest paid Director received total emoluments of
£439,000 (2017: £308,000).
6 DIRECT COSTS (NET)
Direct costs
Video Games Tax Relief
Year ended
31 December
2018
£’000
27,191
(6,898)
20,293
Restated
Year ended
31 December
2017
£’000
23,635
(8,296)
15,339
67
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
7 EXPENSES BY NATURE
Exceptional items
Employee benefit expense (note 5)
Depreciation charges (note 14)
Amortisation and impairment charges (note 13)
Operating lease payments
Investment in co-funded games expensed
Other expenses
Total direct costs and operating expenses
Year ended
31 December
2018
£’000
Restated
Year ended
31 December
2017
£’000
94
26,729
1,104
6,947
1,230
208
3,079
39,391
2,656
17,800
669
27,626
876
–
1,559
51,186
Investment in co-funded games expensed represents the costs incurred by the Group on its percentage of the game development that is considered
equivalent to the intangible asset on an own-IP development.
Exceptional items
Exceptional items include external costs in relation to:
• 2017 – the IPO and reorganisation in 2017 which primarily relate to professional fees (£2,453,000)
• 2017 – the acquisition of Atomhawk Design Limited and Atomhawk Canada Limited (£203,000)
• 2018 – the acquisition of The Chinese Room Limited (£94,000)
8 FINANCE COST
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
–
–
99
99
(53)
841
4,593
5,381
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
309
2
311
–
3
3
Fair value movement on foreign exchange forward contracts
Debt refinancing cost release
Bank and other interest
Finance costs
9 FINANCE INCOME
IFRS 15 financing income
Interest income
Finance income
68
Sumo Group plc Annual Report 2018
10 AUDITOR’S REMUNERATION
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor at costs as detailed below:
Fees payable to Company’s auditor and its associates for the audit of financial statements
Fees payable to Company’s auditor and its associates for other services:
The audit of subsidiary financial statements
Audit related assurance services
Taxation compliance services
Taxation advisory services
Other assurance services
Acquisition and IPO related
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
30
69
7
27
54
20
–
35
60
–
32
42
24
500
Amounts paid to the Group’s auditor in respect of services to the Company, other than the audit of the Company’s financial statements, have not been
disclosed separately as the information is required to be disclosed on a consolidated basis.
11 TAXATION
Analysis of credit in year
Current tax
Current taxation charge for the year
Adjustments for prior periods
Total current tax
Deferred tax
Origination and reversal of timing differences
Adjustments in respect of prior periods
Total deferred tax
Tax on loss on ordinary activities
Reconciliation of total tax (credit):
Loss on ordinary activities before tax
Loss on ordinary activities multiplied by the rate of corporation tax in the UK of 19% (2017: 19.25%)
Effects of:
Permanent differences
Share-based payments
Fixed asset permanent differences
Effects of different tax rates in overseas jurisdictions
Non-taxable income
Effect of change in rates
Adjustments in respect of previous periods
Total taxation (credit)
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
1,268
(128)
1,140
(2,337)
965
(1,372)
1,080
(58)
1,022
(5,622)
62
(5,560)
(232)
(4,538)
(483)
(92)
544
37
15
22
(1,663)
68
837
(232)
(27,973)
(5,384)
968
–
(40)
50
(475)
339
4
(4,538)
Taxation on items taken directly to equity was a credit of £132,328 (2017: £nil) and relates to deferred tax on share option schemes.
Factors that may affect future tax charges
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 (on 26 October 2015) and Finance Bill 2016
(on 7 September 2016). These included reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020,
and this has been reflected in these financial statements.
69
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
12 EARNINGS PER SHARE
Basic and diluted earnings per share are calculated by dividing the earnings attributable to equity shareholders by the weighted average number
of Ordinary Shares in issue.
When calculating basic earnings per share, the weighted average number of shares has been adjusted to exclude shares held in the Employee Benefit
Trust (21,235,933 at 31 December 2018 and 16,617,198 at 1 January 2018).
When calculating diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of 3,712,737 (2017: 950,000)
of potentially dilutive options granted to employees. The restatement of 2017 figures to include a warrant for 1,450,000 shares issued at the date of the
IPO has had no impact upon earnings per share.
The calculation of basic and diluted profit/(loss) per share is based on the following data:
Earnings (£’000)
Earnings for the purposes of basic and diluted earnings per
share being profit for the year attributable to equity shareholders
Number of shares
Weighted average number of shares for the purposes of basic earnings per share
Weighted average dilutive effect of warrants
Weighted average dilutive effect of conditional share awards
Weighted average number of shares for the purposes of diluted earnings per share
Earnings/(losses) per Ordinary Share (pence)
Basic and diluted (loss) per Ordinary Share
Year ended
31 December
2018
Restated
Year ended
31 December
2017
(251)
(23,435)
128,560,945
1,450,000
3,712,737
5,498,686
1,450,000
950,000
133,723,682
7,898,686
(0.20)
(389.40)
The effects of share options that could potentially dilute basic earnings per share in the future were not included in the calculation of diluted earnings
per share because they are antidilutive for the periods presented.
13 GOODWILL AND OTHER INTANGIBLE ASSETS
Software
£’000
Customer
contracts
£’000
Customer
relationships
£’000
Cost
As at 1 January 2017
Additions
Arising on acquisition on 29 June 2017
As at 31 December 2017
Additions
Acquisition of subsidiary (note 25)
As at 31 December 2018
Amortisation
As at 1 January 2017
Charge for the year
As at 31 December 2017
Charge for the year
Effect of translation to presentation currency
As at 31 December 2018
Net book value
As at 31 December 2017
As at 31 December 2018
70
249
120
–
369
513
–
882
54
162
216
163
(11)
368
153
514
14,285
–
437
14,722
–
–
21,432
–
246
21,678
–
–
Goodwill
£’000
19,225
–
1,566
20,791
–
588
Total
£’000
55,191
120
2,249
57,560
513
588
14,722
21,678
21,379
58,661
952
12,646
13,598
700
–
14,298
715
14,818
15,533
6,084
–
21,617
–
–
–
–
–
–
1,721
27,626
29,347
6,947
(11)
36,283
1,124
424
6,145
61
20,791
21,379
28,213
22,378
Sumo Group plc Annual Report 2018
13 GOODWILL AND OTHER INTANGIBLE ASSETS CONTINUED
The cost of customer relationships was determined as at the date of the respective changes in ownership by reference to expected future contracts.
The valuations used the discounted cash flow method. The discount rate applied at that time to the future cash flows was 9.75%.
The customer contracts represent contracted revenues. The valuation used the discounted cash flow method, based on estimated profit margins
considered on a contract by contract basis. The discount rate applied at that time to the future cash flows was 9.75%.
Goodwill and other intangible assets have been tested for impairment. The method, key assumptions and results of the impairment review are
detailed below:
Goodwill is attributed to the only cash-generating unit (“CGU”) within the Group, video games development. Goodwill and other intangible assets have
been tested for impairment by assessing the value in use of the CGU. The value-in-use calculations were based on projected cash flows in perpetuity.
Cash flows were based on a three-year forecast with growth rates between 17% and 36%. Subsequent years were based on a reduced rate of growth
of 2.0% into perpetuity.
These growth rates are based on past experience, and market conditions and discount rates are consistent with external information. The growth
rates shown are the average applied to the cash flows of the individual CGUs and do not form a basis for estimating the consolidated profits of the
Group in the future.
The discount rate used to test the cash-generating units was the Group’s pre-tax WACC of 12% (2017: 9.75%).
As a result of these tests no impairment was considered necessary.
All amortisation charges have been treated as an expense and charged to operating expenses in the income statement.
14 PROPERTY, PLANT AND EQUIPMENT
Cost
As at 1 January 2017
Additions
Arising on acquisition on 29 June 2017
As at 31 December 2017
Additions
Transfers
Acquisition of subsidiary (note 25)
As at 31 December 2018
Depreciation
As at 1 January 2017
Charge for the period
As at 31 December 2017
Effect of translation to presentation currency
Charge for the period
As at 31 December 2018
Net book value
As at 31 December 2017
As at 31 December 2018
Leasehold
improvements
£’000
Fixtures and
fittings
£’000
Computer
hardware
£’000
187
607
–
794
622
(104)
–
1,312
19
45
64
–
214
278
730
1,034
113
100
2
215
413
104
2
734
16
54
70
–
157
227
145
507
808
879
15
1,702
705
–
2
2,409
172
570
742
(21)
733
1,454
960
955
Depreciation charges are allocated to direct costs and operating expenses in the income statement.
Total
£’000
1,108
1,586
17
2,711
1,740
–
4
4,455
207
669
876
(21)
1,104
1,959
1,835
2,496
71
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
15 INVESTMENTS
Details of the investments in which the Group holds 20% or more of the nominal value of any class of share capital are as follows:
Class of share capital held
By Parent Company
By the Group
Nature of business
Proportion held
Project Republica Topco Limited
Project Republica Bidco Limited
Sumo Digital Holdings Limited
Sumo Digital Group Limited
Sumo Digital Entertainment Limited
Sumo Digital Limited
Sumo Digital (Genus) Limited
Sumo Digital (Atlantis) Limited
Cirrus Development Limited
Aghoco 1337 Limited
Mistral Entertainment Limited
Sumo Video Games Private Limited
Sumo Games Development Limited
(formerly Riverside Games Limited)
Atomhawk Design Limited
Atomhawk Canada Limited
The Chinese Room Limited
Riverside Games Limited
(formerly Aghoco 1788 Limited)1
Aghoco 1789 Limited1
Aghoco 1790 Limited1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
83%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Holding company
83%
Holding company
83%
Holding company
83%
Holding company
83%
Holding company
83%
Video game development
83%
Video game development
83%
Video game development
83%
83%
Video game development
83% Employee benefit trust trustee
Video game development
83%
Video game development
83%
83%
83%
83%
83%
83%
83%
83%
Dormant
Visual design
Visual design
Video game development
Dormant
Dormant
Dormant
All the companies listed above are incorporated in England and Wales, and have a registered address of 32 Jessops Riverside, Brightside Lane,
Sheffield, S9 2RX, with the following exceptions:
Company
Country of incorporation
Address
Sumo Video Games Private Limited
Atomhawk Canada Limited
India
Canada
1 Towards the end of 2018, the Group acquired three new shelf companies which at the 2018 year end remained dormant.
MCCIA Trade Tower, B Building,
205-206, Senapati Bapat Rd, Chattushringi,
Gokhalenagar, Pune, Maharashtra 411016
Suite 678, 999 Canada Place,
Vancouver, British Columbia, V6C 3E1
17% of the share of Project Republica Topco Limited is owned by the Group’s founder shareholders. These shares are subject to put and call options
to be satisfied by shares in Sumo Group plc, held by an employee benefit trust, the Sumo Group plc Employee Benefit Trust, which was set up on
13 December 2017. As such, beneficial control of all entities listed above is considered to remain with the Group. On this basis there has been no
accounting for non-controlling interest.
There are no restrictions on the Group’s ability to access or use the assets and settle the liabilities of the Group’s subsidiaries.
72
Sumo Group plc Annual Report 2018
16 TRADE AND OTHER RECEIVABLES
Amounts falling due within one year:
Trade receivables not past due
Trade receivables past due
Trade receivables past due and impaired
Less provision for trade receivables
Trade receivables net
Prepayments and accrued income
Other debtors
VGTR recoverable
Contract assets – amounts recoverable on contracts
Work in progress on self-published titles
As at
31 December
2018
£’000
Restated
as at
31 December
2017
£’000
5,387
558
8
(8)
5,945
850
542
6,288
11,310
237
25,172
1,151
185
19
(19)
1,336
1,654
304
4,659
3,461
–
11,414
Trade and other receivables are all current and any fair value difference is not material. A loss allowance for expected credit losses is recognised
based upon the lifetime expected credit losses in cases where the credit risk on trade and other receivables has increased significantly since initial
recognition. In cases where the credit risk has not increased significantly, the Group measures the loss allowance at an amount equal to the 12-month
expected credit loss. This assessment is performed on a collective basis considering forward-looking information.
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
Euro
United States Dollar
Movements on the Group’s provision for impairment of trade receivables are as follows:
At beginning of period
Provision for receivables impairment
Receivables written off during the year as uncollectable
Unused amounts reversed
At 31 December
As at
31 December
2018
£’000
As at
31 December
2017
£’000
–
111
111
2018
£’000
19
–
–
(11)
8
4
178
182
2017
£’000
–
19
–
–
19
The creation and release of provision for credit losses have been included in ‘other expenses’ in the income statement (note 7). Amounts charged
to the allowance account are generally written off, when there is no expectation of recovering additional cash.
The other classes within trade and other receivables do not contain impaired assets and therefore no provisions for credit losses have been recorded.
The Group contracts with customers with very low credit risk and the history of credit losses has been negligible, as demonstrated by the tables above.
With this in mind, there is not considered to be any significant degree of judgement in the calculation of credit loss provisions.
The “Contract assets – amounts recoverable on contracts” category for 2017 has been restated to better reflect the individual nature of the contracts
between this category and contract liabilities. £1.3m of contractual amounts in advance of revenue have been reclassified (note 18).
73
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
17 CASH AND CASH EQUIVALENTS
Cash and cash equivalents
Cash at bank and in hand
The following amounts were held in foreign currencies:
British Pound
Canadian Dollar
United States Dollar
Indian Rupee
Euro
18 TRADE AND OTHER PAYABLES
Trade payables
Contract liabilities
Tax and social security
Other payables, accruals and deferred income
The fair value of financial liabilities approximates their carrying value due to short maturities.
The carrying amounts of the Group’s trade and other payables are denominated in the following currencies:
British Pound
Euro
United States Dollar
Indian Rupee
Canadian Dollar
2018
£’000
2017
£’000
3,730
12,424
2018
£’000
3,437
59
102
125
7
3,730
2018
£’000
4,639
512
605
5,294
2017
£’000
11,937
30
335
122
–
12,424
Restated
2017
£’000
2,468
1,259
474
7,821
11,050
12,022
2018
£’000
10,929
8
97
–
16
11,050
2017
£’000
11,906
27
25
64
–
12,022
The “Contract liabilities” category for 2017 has been restated to better reflect the individual nature of the contracts between this category and
contract assets. £1.3m of contractual amounts in advance of revenue have been reclassified (note 16).
74
Sumo Group plc Annual Report 2018
19 SHARE-BASED PAYMENTS
In the year ended 31 December 2018 the Group operated two equity-settled share-based payment plans as described below.
The Group recognised total expenses of £2,578,633 in respect of equity-settled share-based payment transactions in the year ended 31 December 2018.
The Sumo Group plc Long Term Incentive Plan (the “LTIP”)
The Group operates a Long-Term Incentive Plan for senior executives, further details of which can be found in the Directors’ Remuneration Report in
the Group financial statements.
The Group has made awards to certain Directors and employees.
The vesting of most of these awards is subject to the Group achieving certain performance targets under the LTIP, as set out in the Directors’
Remuneration Report, and is based on the Group meeting the adjusted earnings per share (AEPS) and (in some cases) total shareholder return (TSR)
conditions in the following weightings:
Performance condition
Cumulative AEPS
Cumulative TSR
Tier 2-4 participants
Tier 1 participants
Proportion of award Proportion of award
100%
–
35%
65%
Details of the maximum total number of Ordinary Shares which may be issued in future periods in respect of awards outstanding at
31 December 2018 are shown below.
At 1 January 2018
Granted in the year
Lapsed/forfeited in the year
At 31 December 2018
31 December
2018
Number of shares
950,000
8,897,530
(266,252)
9,581,278
Options over 3,708,435 shares are subject to both the AEPS and TSR performance conditions and the remainder are subject only to the AEPS
performance condition.
The estimate of the fair value of the services received in return for the awards is measured based on the Monte Carlo and Black Scholes models.
The aggregate of the estimated fair values of the awards at 31 December 2018 shown above is £0.92. The fair value of the TSR award takes into
account the likelihood of achieving the performance conditions.
For awards granted in the current year, the inputs into the Monte Carlo and Black Scholes models are as follows:
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
TSR performance to date of calculation
Fair value per option
TSR condition
31 December
2018
AEPS condition
31 December
2018
£1.065
£nil
38%
3 years
0%
0.86%
(5.1)%
£0.31
£1.065 to £1.75
£nil
–
3 years
–
–
–
£1.065 to £1.75
Expected volatility was determined using the median volatility of comparator sector companies. 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.
75
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
19 SHARE-BASED PAYMENTS CONTINUED
Share Incentive Plan (SIP)
The Group operates an all-employee share ownership plan. Under the SIP, the Group has made awards of conditional shares to certain employees.
Details of the maximum total number of Ordinary Shares which may be issued in future periods in respect of conditional share awards outstanding
at 31 December 2018 are shown below.
At 1 January 2018
Granted in the year
Lapsed/forfeited in the year
At 31 December 2018
31 December
2018
Number of
conditional shares
–
92,287
(6,200)
86,087
The estimate of the fair value of the services received in return for the conditional share awards is measured based on a Black Scholes model.
The aggregate of the estimated fair values of the awards at 31 December 2018 shown above is £1.73, before taking into account the likelihood of
achieving non-market-based performance conditions.
For awards granted in the 2018 year, the inputs into the Black Scholes model are as follows:
Share price at grant date
Exercise price
Expected volatility
Expected life
Expected dividend yield
Risk-free interest rate
Fair value per option
31 December
2018
£1.24 to £1.75
£nil
–
3 years
–
–
£1.24 to £1.75
Expected volatility was determined using the median volatility of comparator sector companies. 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.
20 DEFERRED TAX
Asset/(liability) at beginning of period
Credit to income statement
Credit to equity
Foreign exchange adjustments
On acquisition of subsidiary
Asset at 31 December
The deferred tax asset/(liability) relates to the following:
Accelerated capital allowances on property, plant and equipment
On intangible assets
On share-based payments
On losses
76
2018
£’000
474
1,372
132
4
(1)
1,981
39
(63)
586
1,419
1,981
2017
£’000
(4,963)
5,560
–
–
(123)
474
17
(1,284)
–
1,741
474
Sumo Group plc Annual Report 2018
21 COMMITMENTS AND CONTINGENCIES
Capital commitments
Contracted for but not provided in the financial statements
Operating lease commitments
Within 1 year
Later than 1 year and less than 5 years
After 5 years
As at
31 December
2018
£’000
As at
31 December
2017
£’000
94
693
955
2,604
2,340
5,899
825
2,949
3,002
6,776
The Group leases various office units under non-cancellable operating lease agreements. The lease terms are between one month and 15 years.
The Group also leases various plant and machinery and vehicles, with terms between six months and four years. The lease expenditure charged to the
income statement during the year is disclosed in note 7.
22 FINANCIAL RISK MANAGEMENT
The Group uses various financial instruments. These include loans, cash, forward foreign exchange contracts, issued equity investments and various
items, such as trade receivables and trade payables, that arise directly from its operations. The main purpose of these financial instruments is to raise
finance for the Group’s operations.
The existence of these financial instruments exposes the Group to a number of financial risks, which are described in more detail below.
The main risks arising from the Group’s financial instruments are market risk, cash flow interest rate risk, credit risk and liquidity risk. The Directors
review and agree policies for managing each of these risks and they are summarised below.
Market risk
Market risk encompasses three types of risk, being currency risk, interest rate risk and price risk. In this instance price risk has been ignored as it is
not considered a material risk to the business. The Group’s policies for managing interest rate risk are set out in the subsection entitled “interest rate
risk” below.
Currency risk
The Group contracts with certain clients in Euros and US Dollars and manages this foreign currency risk using forward foreign exchange contracts
which match the expected receipt of foreign currency income.
Liquidity risk
The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs by closely managing the cash balance
and by investing cash assets safely and profitably.
The Group policy throughout the period has been to ensure continuity of funding. Short-term flexibility is achieved by revolving working capital facilities.
The table below analyses the Group’s non-derivative and derivative financial liabilities into relevant maturity groupings based on the remaining period
at the balance sheet date to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are
essential for an understanding of the timing of cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows.
At 31 December 2018
Borrowings
Forward foreign exchange contracts
Trade and other payables
At 31 December 2017
Borrowings
Forward foreign exchange contracts
Trade and other payables
Less than
1 year
£’000
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over 5 years
£’000
–
–
11,050
–
–
–
–
–
–
–
–
–
Less than
1 year
£’000
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over 5 years
£’000
–
–
11,997
–
–
–
–
–
–
–
–
25
77
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
22 FINANCIAL RISK MANAGEMENT CONTINUED
Interest rate risk
The Group finances its operations through a mixture of retained profits, bank borrowings and loan notes. The Directors’ policy to manage interest rate
fluctuations is to regularly review the costs of capital and the risks associated with each class of capital, and to maintain an appropriate mix between
fixed and floating rate borrowings.
Sensitivity to interest rate fluctuations
As the debt was settled as part of the IPO proceeds there is minimal interest rate risk and therefore sensitivity to interest rate disclosures have not
been made.
Credit risk
The Group’s principal financial assets are cash and trade receivables. The credit risk associated with cash is limited, as the counterparties have high
credit ratings assigned by international credit-rating agencies. The principal credit risk arises therefore from the Group’s trade receivables. In order
to manage credit risk the Directors set limits for clients based on a combination of payment history and third party credit references. Credit limits are
reviewed on a regular basis in conjunction with debt ageing and collection history.
The Directors consider that certain of the Group’s trade receivables were impaired for the period ended 31 December 2018 and, accordingly, a provision
of £8,000 has been created. See note 16 for further information on financial assets that are past due.
Summary of financial assets and liabilities by category
The carrying amount of financial assets and liabilities recognised at the balance sheet date of the reporting periods under review may also be
categorised as follows:
As at
31 December
2018
£’000
As at
31 December
2017
£’000
6,487
11,310
3,730
21,527
(11,050)
(11,050)
10,477
2,496
21,379
999
850
237
6,288
(810)
1,981
33,420
43,897
1,640
3,461
12,424
17,525
(12,022)
(12,022)
5,503
1,835
20,791
7,422
1,654
–
4,659
(1,316)
474
35,519
41,022
Financial assets
Trade and other receivables
Amounts recoverable on contracts
Cash and cash equivalents
Financial liabilities
Financial liabilities measured at amortised cost
Trade and other payables
Net financial assets and liabilities
Non-financial assets and liabilities
Plant, property and equipment
Goodwill
Other intangible assets
Prepayments and accrued income
Work in progress on self-published titles
VGTR recoverable
Corporation tax payable
Provisions for deferred tax
Total equity
78
Sumo Group plc Annual Report 2018
22 FINANCIAL RISK MANAGEMENT CONTINUED
Capital management policies and procedures
The Group’s capital management objectives are:
• To ensure the Group’s ability to continue as a going concern; and
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
This is achieved through close management of working capital and regular reviews of pricing. Decisions on whether to raise funding using debt or
equity are made by the Board based on the requirements of the business.
Capital for the reporting period under review is shown as total equity in the table above.
23 SHARE CAPITAL
At 31 December 2017
Issue of shares in the year
At 31 December 2018
Ordinary
Shares
0.01
Total share
capital
£’000
145,000,000
5,068,507
150,068,507
1,450
51
1,501
Share
premium
£’000
36,121
4,873
40,994
During 2018, 4,711,022 shares were issued in relation to share-based payments (see note 19 “Share-based payments” for details on the Group’s
share-based employee remuneration programmes). Of these 4,618,735 were issued to the Employee Benefit Trust and 92,287 to the SIP trust.
On 13 August 2018, 357,485 shares were issued in relation to the purchase of The Chinese Room (see note 25 Business combinations).
When calculating basic earnings per share, the weighted average number of shares has been adjusted to exclude shares held in the Employee Benefit
Trust (21,235,933 at 31 December 2018 and 16,617,198 at 1 January 2018).
24 RELATED PARTY TRANSACTIONS
Identity of related parties
The Directors consider there to be no ultimate controlling party during the period. Related parties include representatives of major shareholders
and parent and intermediate parent entities ultimately owned by the same shareholders.
There were no related party transactions during the year.
In 2017, there were related party purchases of £306,000 with balances due at year end of £6,000. In addition, interest on loans from related parties
of £2,921,000 was charged throughout the period.
Key management compensation is disclosed in note 5.
79
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
25 BUSINESS COMBINATIONS
Acquisition of The Chinese Room Limited
Under an agreement dated 13 August 2018, the Group acquired the share capital of The Chinese Room Limited, a video development company
registered in the United Kingdom, for consideration of £2.2m.
The book and fair values of the assets and liabilities acquired are set out below:
Book value
recognised at
acquisition
£’000
Fair value
adjustments
£’000
Fair value
£’000
Assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Liabilities
Corporation tax payable
Trade and other payables
Deferred tax
Goodwill
Summary of net cash inflow from acquisition
Cash paid
Cash acquired
Cash consideration transferred
Purchase consideration
Cash paid
Ordinary Shares issued
Total purchase consideration
Acquisition costs charged to expenses
4
139
1,619
1,762
(37)
(100)
(1)
(138)
–
–
–
–
–
–
–
–
4
139
1,619
1,762
(37)
(100)
(1)
(138)
1,624
588
2,212
1,618
(1,619)
(1)
1,618
594
2,212
94
Consideration transferred
The acquisition of The Chinese Room was settled in cash amounting to £1.6 million and approximately £0.6 million through the issue of 357,485 new
Ordinary Shares in Sumo Group (“Consideration Shares”) to the Sellers on completion. The Consideration Shares will be subject to a 12-month lock up
period, during which time (subject to customary exceptions) such shares cannot be disposed of without Sumo Group consent, and thereafter to orderly
market provisions for a further 12 months.
Acquisition related costs amounting to £94,000 are not included as part of consideration transferred and have been recognised as an expense in the
income statement as part of operating expenses – exceptional.
Goodwill
Goodwill of £588,000 is primarily related to growth, technical knowledge and market diversification. Other intangible assets, including IP at “concept
phase” at the point of acquisition had a fair value of £nil.
Contribution to the Group results
The Chinese Room Limited generated a loss of £21,000 for the five months from acquisition. Revenue for the period was £7,000. If The Chinese Room
Limited had been acquired at the beginning of the period then revenue would have increased by £19,000 and loss decreased by £8,000.
80
Sumo Group plc Annual Report 2018
26 NOTES TO THE CASH FLOW STATEMENT
Non-current borrowings
Current borrowings
27 IFRS 15 ADOPTION IMPACT
As at
1 January
2017
£’000
52,630
4,088
56,718
As at
31 December
2017
£’000
–
–
–
Cash flows
£’000
(52,630)
(4,088)
(56,718)
In 2018, the Group has adopted new guidance for the recognition of revenue from contracts with customers (IFRS 15). The new standard has been
applied retrospectively without restatement, with the cumulative effect of initial application recognised as an adjustment to the opening balance of
retained earnings at 1 January 2018. Consequently, the comparative numbers are not restated.
Two transition differences noted for IFRS 15 are the separation of the financing element of one specific contract where the payment profile extends
beyond 12 months and the recognition of variable consideration.
The financial impact to revenue, interest and retained profits is set out below:
Customer revenue included within finance income
Accrued royalty not yet received and contingent on future sales
Increase in interest income
Credit/(debit) to retained earnings
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(421)
250
309
138
(183)
–
52
(131)
The 2017 debit to retained earnings has resulted in a restated retained earnings balance as at 1 January 2018 of £63,916,000.
The financial impact of the adoption of IFRS 15 on the 2018 income statement is set out below:
Revenue
Direct costs
Video Games Tax Relief
Direct costs (net)
Gross profit
Operating expenses
Operating expenses – exceptional
Operating expenses – total
Group operating loss
Finance cost
Finance income
Loss before taxation
Taxation
Profit/(loss) for the year attributable to equity shareholders
Pre-IFRS 15
Year ended
31 December
2018
£’000
IFRS 15 adoption adjustments
Customer
revenue
£’000
Accrued
royalty
£’000
Post-IFRS 15
Year ended
31 December
2018
£’000
38,867
(27,191)
6,898
(20,293)
18,574
(19,004)
(94)
(19,098)
(524)
(99)
2
(621)
258
(363)
(421)
250
38,696
–
–
–
(421)
–
–
–
(421)
–
309
(112)
21
(91)
–
–
–
250
–
–
–
250
–
–
250
(47)
203
(27,191)
6,898
(20,293)
18,403
(19,004)
(94)
(19,098)
(695)
(99)
311
(483)
232
(251)
81
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
28 POST BALANCE SHEET EVENTS
On 31 January 2019, the Group acquired Red Kite Games Limited for a total consideration of circa £2.0 million. The net consideration is circa
£1.5 million, as Red Kite had circa £0.5 million of cash on the balance sheet at the date of acquisition. The Company will continue to operate
under the Red Kite name, as a wholly owned subsidiary of Sumo Digital Limited.
The draft book and fair values of the assets and liabilities acquired are set out below:
Book value
recognised at
acquisition
£’000
Fair value
adjustments
£’000
Fair value
£’000
39
202
547
788
(23)
(27)
(2)
(52)
(13)
–
(5)
(18)
–
(97)
–
(97)
26
202
542
770
(23)
(124)
(2)
(149)
621
1,384
2,005
505
(542)
(37)
505
1,500
2,005
–
Assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Liabilities
Corporation tax payable
Trade and other payables
Deferred tax
Goodwill
Summary of net cash inflow from acquisition
Cash paid
Cash acquired
Cash consideration transferred
Purchase consideration
Cash paid
Ordinary Shares issued
Total purchase consideration
Acquisition costs charged to expenses
82
Sumo Group plc Annual Report 2018
29 ALTERNATIVE PERFORMANCE MEASURES
Revenue
Gross profit
Revenue
Gross profit
Audited
year ended
31 December
2018
£’000
38,696
18,403
Audited
year ended
31 December
2017
£’000
28,591
13,252
Customer
revenue
included within
finance
income
£’000
Accrued
royalty not yet
received and
contingent on
future sales
£'000
Deferred
costs on
co-funded
contracts
£’000
Adjusted
year ended
31 December
2018
£’000
421
421
(250)
(250)
–
208
38,867
18,782
Customer
revenue
included within
finance
income
£’000
Accrued
royalty not yet
received and
contingent on
future sales
£'000
Deferred
costs on
co-funded
contracts
£’000
Adjusted
year ended
31 December
2017
£’000
–
–
–
–
–
–
28,591
13,252
Adjusted EBITDA
Group operating loss
Add back/(deduct):
Depreciation and amortisation charges
Share-based payments charge
Customer revenue included within finance income
Accrued royalty not yet received and contingent on future sales
Investment in co-funded games expensed
Exceptional items
Adjusted EBITDA
Year ended
31 December
2018
£’000
Year ended
31 December
2017
£’000
(695)
(22,595)
8,051
2,578
421
(250)
208
94
10,407
28,295
–
–
–
–
2,656
8,356
Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, share-based payments charge, customer revenue
included within finance income, accrued royalty not yet received and contingent on future sales, Sumo’s investment in co-funded games expensed
and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure.
83
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
29 ALTERNATIVE PERFORMANCE MEASURES CONTINUED
Reconciliation to unaudited underlying income statement
Revenue
Gross profit
Operating expenses excluding depreciation,
amortisation, share-based payment charge,
exceptional items, the impact of IFRS adoption
and investment in co-funded games expensed
Adjusted EBITDA
Depreciation
Net finance costs
Customer revenue included within finance income
Accrued royalty not yet received and contingent
on future sales
Investment in co-funded games expensed
Amortisation of software
Adjusted profit before tax, share-based payment
charge, exceptional items and amortisation of
customer contracts and customer relationships
Operating expenses – exceptional
Share-based payment charge
Amortisation of customer contracts and
customer relationships
Loss before taxation
Reported
2018
£’000
38,696
18,403
Revenue
margin
adjustments1 Adjustments
£’000
£’000
Unaudited
underlying
2018
£’000
171
171
–
38,867
208
18,782
Reported
2017
£’000
28,591
13,252
(7,996)
(171)
(208)
(8,375)
(4,896)
10,407
(1,104)
212
(421)
250
(208)
(163)
8,973
(94)
(2,578)
(6,784)
(483)
–
–
(309)
421
(250)
208
–
–
10,407
–
–
–
–
–
–
(1,104)
(97)
–
–
–
(163)
9,043
8,356
(669)
(5,378)
–
–
–
(162)
2,147
(2,656)
–
(27,464)
(27,973)
Adjustments
£’000
–
–
–
–
5,378
–
–
–
–
Unaudited
underlying
2017
£’000
28,591
13,252
(4,896)
8,356
(669)
–
–
–
–
(162)
7,525
1 The revenue margin adjustments are made up of customer revenue included within finance income, accrued royalty income not yet received and contingent on future sales, investment in co-funded games
expensed and net financing costs.
The adjustment in 2018 in respect of gross margin is in relation to Sumo’s investment in co-funded games, which for statutory purposes is expensed.
The adjustment in 2017 in respect of interest cost is to reflect the ungeared structure of the Group as it is following the IPO in December 2017.
30 IFRS 16
The new accounting standard IFRS 16 Leases is effective for years commencing on or after 1 January 2019.
A disclosure of the one potential impact of IFRS 16 is shown below.
The actual figures will be impacted by the discount rates used, as well as decisions on the use of expedients and exemptions, along with any additional
lease information that comes to light in the year.
We have used notional discount rates of 2.5% (properties) and 5% (non-property) to show the users of the financial statements the potential impact of
the transition to IFRS 16. The actual rates used may differ.
We have used the modified retrospective approach and valued the right of use asset retrospectively using the assumed transition discount rates.
Operating leases that were active at 1 January 2019 have been incorporated into the potential impact analysis below. Changes that occur in the year
will impact the actual figures that will appear in the 2019 accounts following the transition to IFRS 16. The figures do not include the impact of the Red
Kite acquisition.
Additionally, we have assumed that we will utilise, wherever possible, the low value item exemption for leased assets with a value of less than £4,000
and the short remaining term expedient for those with less than 12 months left.
The potential impact of the transition to IFRS 16 is:
• At 1 January 2019 (Assets of £5,150,944, Liabilities of £5,589,989 and estimated impact on EBITDA of £Nil).
• At 31 December 2019 (Assets of £4,283,711, Liabilities of £4,729,927 and estimated impact on EBITDA of £1,000,772).
84
Sumo Group plc Annual Report 2018
PARENT COMPANY BALANCE SHEET
as at 31 December 2018
Fixed assets
Investments – shares in subsidiary undertakings
Current assets
Trade and other receivables
Cash and cash equivalents
Current liabilities
Trade and other payables
Corporation tax payable
Net current assets
Total assets less current liabilities
Net assets
Capital and reserves
Called up share capital
Share premium
Merger relief reserve
Retained earnings
Total shareholders’ funds
Note
3
4
5
6
6
2018
£’000
92,511
92,511
40,482
87
40,569
337
33
370
2017
£’000
89,932
89,932
29,806
7,117
36,923
2,267
–
2,267
40,199
34,656
132,710
124,588
1,501
40,994
590
89,625
1,450
36,121
–
87,017
132,710
124,588
The Company profit for the year was £30,000 (2017: £1,850,000 loss).
The Company financial statements on pages 85 to 90 were approved by the Board of Directors on 8 April 2019 and were signed on its behalf by:
Carl Cavers
Director
David Wilton
Director
The notes on pages 87 to 90 form part of these Company financial statements.
85
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
Share
capital
£’000
Share
premium
£’000
Merger relief
reserve
£’000
On incorporation on 20 November 2017
Loss for the period
Total comprehensive expense for the period
Transactions with owners:
Issue of shares
Capital reduction
Issue of shares on IPO
Share issue expenses
Balance at 31 December 2017
Profit for the year
Total comprehensive income for the year
Transactions with owners:
Issue of shares
Reserve on issue of shares during acquisition of subsidiary
Share-based payments transactions
SIP share issue and SIP reserve
–
–
–
1,065
–
385
–
1,450
1,450
–
–
50
–
–
1
–
–
–
88,867
(88,867)
38,061
(1,940)
36,121
36,121
–
–
4,873
–
–
–
Balance at 31 December 2018
1,501
40,994
The notes on pages 87 to 90 form part of these Company financial statements.
–
–
–
–
–
–
–
–
–
–
–
–
590
–
–
590
Retained
earnings
£’000
–
(1,850)
(1,850)
–
88,867
–
–
88,867
87,017
30
30
–
–
2,579
(1)
Total
equity
£’000
–
(1,850)
(1,850)
89,932
–
38,446
(1,940)
126,438
124,588
30
30
4,923
590
2,579
–
89,625
132,710
86
Sumo Group plc Annual Report 2018
NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2018
1 BASIS OF PREPARATION AND ACCOUNTING POLICIES
Basis of preparation
Sumo Group plc (the “Company”) is registered in England and Wales as a public limited company. The address of its registered office is
32 Jessops Riverside, Brightside Lane, Sheffield S9 2RX.
The principal activity of Sumo Group plc and its subsidiaries (together the ‘Group’) is that of video games development. The principal activity of the
Company is that of a holding company.
The separate financial statements of the Company have been prepared in accordance with Financial Reporting Standard 101 “Reduced Disclosure
Framework” (FRS 101), on the going concern basis under the historical cost convention, and in accordance with the Companies Act 2006 and
applicable Accounting Standards in the UK. The principal accounting policies, which have been applied consistently to all the years presented,
are set out below.
The following exemptions from the requirements in IFRS have been applied in the preparation of these financial statements, in accordance with
FRS 101:
• The following paragraphs of IAS 1 “Presentation of Financial Statements”
– 10(d) (statement of cash flows);
– 16 (statement of compliance with all IFRS);
– 11 (cash flow statement information); and
– 134-136 (capital management disclosures)
• IFRS 9 “Financial Instruments: Disclosures”;
• IAS 7 “Statement of Cash Flows”;
• IAS 24 (paragraphs 17 and 18a) “Related Party Disclosures” (key management compensation); and
• IAS 24 “Related Party Disclosures” – the requirement to disclose related party transactions between two or more members of a group.
As the Group financial statements include the equivalent disclosures, the Company has taken the exemptions available under FRS 101 in respect
of the following disclosures:
• IFRS 2 “Share-Based Payments” in respect of Group equity settled share-based payments; and
• Certain disclosures required by IFRS 13 “Fair Value Measurement” and disclosures required by IFRS 7 “Financial Instruments: Disclosures”
Company profit and loss account
The Company has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006. The Company’s profit
for the year was £30,000 (2017: £1,850,000 loss). There are no material differences between the profit after taxation in the current and prior year
and its historical cost equivalent. Accordingly, no note of historical cost profits and losses has been presented.
Dividend distribution
The distribution of a dividend to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which
it is approved by the Company’s shareholders.
Investment in subsidiary undertakings
Investments in Group undertakings are stated at cost, unless their value has been impaired in which case they are valued at the lower of their
realisable value or value in use.
Taxation
Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in profit or loss except to the extent that it relates to items
recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or in equity, respectively.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet
date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes, except to the extent that it arises on:
• the initial recognition of goodwill where the initial recognition exemption applies;
• the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination;
• differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities,
using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset in respect of tax losses is recognised only to the extent that it is probable that future taxable profits will be available against
which the asset can be utilised.
87
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
1 BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
Provisions
Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future
operating losses.
Share-based payments
The parent company has granted rights to its equity instruments to the employees of its subsidiaries. The share-based payment charge is recorded
in profit or loss of the subsidiary company in respect of these arrangements. The parent company has recorded these transactions within cost of
investment with the credit recorded within equity.
Share capital
Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction,
net of tax, from the proceeds of issue.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less.
Trade and other receivables
Trade and other receivables are initially recorded at fair value and thereafter are measured at amortised cost using the effective interest rate.
A loss allowance for expected credit losses is recognised based upon the lifetime expected credit losses in cases where the credit risk on trade
and other receivables has increased significantly since initial recognition. In cases where the credit risk has not increased significantly, the Group
measures the loss allowance at an amount equal to the 12-month expected credit loss. This assessment is performed on a collective basis
considering forward-looking information.
Trade and other payables
Trade payables are initially recorded at fair value and thereafter at amortised cost using the effective interest rate method.
Critical accounting estimates and judgements
The critical accounting estimates set out in the Group accounts also apply to the Company.
2 REMUNERATION OF DIRECTORS AND AUDITORS
Details of Directors’ remuneration are shown in the Directors’ Remuneration Report of the Group financial statements. Details of auditor
remuneration are shown in note 10 of the Group financial statements.
3 INVESTMENTS IN SUBSIDIARY UNDERTAKINGS
Cost and carrying amount
On incorporation
Additions
At 31 December 2017
Share options granted to subsidiary employees
At 31 December 2018
£’000
–
89,932
89,932
2,579
92,511
88
Sumo Group plc Annual Report 2018
3 INVESTMENTS IN SUBSIDIARY UNDERTAKINGS CONTINUED
Details of the investments in which the Group holds 20% or more of the nominal value of any class of share capital are as follows:
Class of share capital held
By Parent Company
By the Group
Nature of business
Proportion held
Project Republica Topco Limited
Project Republica Bidco Limited
Sumo Digital Holdings Limited
Sumo Digital Group Limited
Sumo Digital Entertainment Limited
Sumo Digital Limited
Sumo Digital (Genus) Limited
Sumo Digital (Atlantis) Limited
Cirrus Development Limited
Aghoco 1337 Limited
Mistral Entertainment Limited
Sumo Video Games Private Limited
Sumo Games Development Limited
(formerly Riverside Games Limited)
Atomhawk Design Limited
Atomhawk Canada Limited
The Chinese Room Limited
Riverside Games Limited (formerly Aghoco 1788 Limited)1
Aghoco 1789 Limited1
Aghoco 1790 Limited1
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
83%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Holding company
83%
Holding company
83%
Holding company
83%
Holding company
83%
Holding company
83%
Video game development
83%
Video game development
83%
Video game development
83%
83%
Video game development
83% Employee benefit trust trustee
Video game development
83%
Video game development
83%
83%
83%
83%
83%
83%
83%
83%
Dormant
Visual design
Visual design
Video game development
Dormant
Dormant
Dormant
All the companies listed above are incorporated in England and Wales, and have a registered address of 32 Jessops Riverside, Brightside Lane,
Sheffield, S9 2RX, with the following exceptions:
Company
Country of incorporation
Address
Sumo Video Games Private Limited
Atomhawk Canada Limited
India
Canada
1 Towards the end of 2018, the Group acquired three new shelf companies which at the 2018 year end remained dormant.
MCCIA Trade Tower, B Building, 205-206,
Senapati Bapat Rd, Chattushringi,
Gokhalenagar, Pune, Maharashtra 411016
Suite 678, 999 Canada Place,
Vancouver, British Columbia, V6C 3E1
17% of the share of Project Republica Topco Limited is owned by the Group’s founder shareholders. These shares are subject to put and call options
to be satisfied by shares in Sumo Group plc, held by an employee benefit trust, the Sumo Group plc Employee Benefit Trust, which was set up on
13 December 2017. As such, beneficial control of all entities listed above is considered to remain with the Group. On this basis there has been no
accounting for non-controlling interest.
4 TRADE AND OTHER RECEIVABLES
Amounts owed by Group undertakings
Prepayments and accrued income
All of the amounts owed by Group undertakings shown above are repayable on demand.
5 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade payables
Amounts owed to Group & related entities
Accruals and deferred income
2018
£’000
40,463
19
40,482
2018
£’000
36
262
39
337
2017
£’000
29,756
50
29,806
2017
£’000
815
633
819
2,267
89
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT
NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
for the year ended 31 December 2018
6 SHARE CAPITAL
Details of movements in shares are set out in note 23 to the Group financial statements.
7 RELATED PARTY TRANSACTIONS
The Company has taken advantage of the exemption included in IAS 24 “Related Party Disclosures” to not disclose details of transactions with Group
undertakings, on the grounds that it is the parent company of a Group whose accounts are publicly available.
Directors’ transactions
Details of the Directors’ interests in the Ordinary Share capital of the Company are provided in the Directors’ Report.
8 CONTINGENT LIABILITIES
The Company is party to a Group Overdraft Facility of £3,000,000 and a Revolving Credit Facility with Clydesdale Bank plc of up to £10,000,000,
together with certain subsidiary companies. The amounts drawn down at 31 December 2018 were £nil.
9 POST BALANCE SHEET EVENTS
On 31 January 2019, the Group acquired Red Kite Games Limited for a total consideration of circa £2.0 million. The net consideration is circa
£1.5 million, as Red Kite had circa £0.5 million of cash on the balance sheet at the date of acquisition. The company will continue to operate
under the Red Kite name, as a wholly owned subsidiary of Sumo Digital Limited.
The book and fair values of the assets and liabilities acquired are set out below:
Book value
recognised at
acquisition
£’000
Fair value
adjustments
£’000
Fair value
£’000
Assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Liabilities
Corporation tax payable
Trade and other payables
Deferred tax
Goodwill
Summary of net cash inflow from acquisition
Cash paid
Cash acquired
Cash consideration transferred
Purchase consideration
Cash paid
Ordinary shares issued
Total purchase consideration
Acquisition costs charged to expenses
90
39
202
547
788
(23)
(27)
(2)
(52)
(13)
–
(5)
(18)
–
(97)
–
(97)
26
202
542
770
(23)
(124)
(2)
(149)
621
1,384
2,005
505
(542)
(37)
505
1,500
2,005
–
Sumo Group plc Annual Report 2018
FINANCIAL CALENDAR
Financial year end
Preliminary announcement of full-year results
Publication of Annual Report and Accounts
Annual General Meeting
Preliminary announcement of half-year results
Publication of Interim Report
Financial year end
Preliminary announcement of full-year results
Publication of Annual Report and Accounts
31 December 2018
9 April 2019
May 2019
26 June 2019
Late September 2019
Mid October 2019
31 December 2019
April 2020
May 2020
91
Sumo Group plc Annual Report 2018FINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT COMPANY INFORMATION
Registrars
Link Market Services Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Independent auditor
Grant Thornton UK LLP
No.1 Whitehall Riverside
Leeds
LS1 4BN
Principal bankers
Clydesdale Bank PLC
94-96 Briggate
Leeds
LS1 6NP
Nominated adviser and broker
Zeus Capital Limited
82 King Street
Manchester
M2 4WQ
Solicitors
Addleshaw Goddard LLP
One St Peter’s Square
Manchester
M2 3DE
Sheridans
76 Wardour Street
London
W1F 0UR
Financial PR
Belvedere Communications Limited
25 Finsbury Circus
London
EC2M 7EE
Registered office
Sumo Group plc
Unit 32
Jessops Riverside
Brightside Lane
Sheffield
S9 2RX
Registered number: 11071913
92
Sumo Group plc Annual Report 2018 Design and Production
www.carrkamasa.co.uk
Registered Office
Unit 32 Jessops Riverside
Brightside Lane
Sheffield S9 2RX
www.sumogroupplc.com