Unaudited Half Year Results 2021

29 September 2021

The person responsible for the disclosure of this announcement for the purposes of EU Regulation 596/2014 is David Wilton, Chief Financial Officer.

SUMO GROUP PLC

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

AIM: SUMO

UNAUDITED HALF YEAR RESULTS 2021

Sumo Group, the provider of acclaimed development, design and publishing services to the video games and entertainment industries, announces the unaudited half year results for the six months ended 30 June 2021 ("H1 21" or the "Period").

Sumo Group also provides an update on the recommended cash acquisition of the Group by Sixjoy Hong Kong Limited, an indirect subsidiary of Tencent Holdings Limited (the "Acquisition").

Update on the Acquisition

It was announced on 19 July 2021 that the boards of Tencent Holdings Limited ("Tencent") and Sumo Group had reached an agreement on the terms of a recommended all cash acquisition by Tencent, through its indirect wholly-owned subsidiary, Sixjoy Hong Kong Limited ("Tencent Bidco"), of the entire issued and to be issued ordinary share capital of Sumo Group which members of the Tencent Group do not already own. The Acquisition is to be implemented by way of a scheme of arrangement (the "Scheme"). Under the terms of the Acquisition, Sumo Group Shareholders will be entitled to receive 513 pence in cash for each Sumo Group share and the entire issued and to be issued share capital of Sumo Group is valued at approximately £919 million on a fully diluted basis.

On 10 September we announced that at the Court Meeting and General Meeting each held that day the requisite majority of shareholders voted in favour of the Scheme and to pass the Resolution in connection with Scheme. The Acquisition remains subject to the satisfaction or (if capable of waiver) waiver of the remaining conditions set out in the Scheme document, including the remaining Anti-trust and FDI conditions, the Court's sanction of the Scheme at the Scheme Sanction Hearing and the delivery of a copy of the Court Order to the Registrar of Companies. We continue to expect the Acquisition to complete towards the end of the fourth quarter of 2021.

Unaudited half year results 2021

Financial key points

Operational highlights

Current trading and outlook

Carl Cavers, Chief Executive Officer of Sumo Group, said:

"The extraordinary has become the norm at Sumo Group. The business has been going from strength to strength, expanding as demand increases in this large and fast-growing global market. Our great people continue to deliver great games, which, in turn, are generating strong financial results for the Group. Then, shortly after the half year end, we announced the recommended all cash acquisition of Sumo Group by Tencent, valuing the business at over £900 million and delivering a very positive outcome for all our stakeholders. This process is ongoing and is expected to complete towards the end of Q4 FY 21.

Since the start of 2021, we have increased the Group's capacity through the acquisition of PixelAnt and added an exciting new publishing element to the business, through the launch of Secret Mode in March. Timbre Games was launched by Pipeworks in Vancouver in July and, earlier this month, we added Auroch Digital to our growing portfolio of studios via acquisition. Auroch Digital supports our publishing ambition and brings further talent acquisition opportunities in the South West to provide further capacity in games development. We are also expanding with the opening of our second Sumo Digital studio in India next year.

As ever, our focus remains on delivering further strong growth organically and by acquisition and the pipeline of opportunities remains strong. We have an encouraging level of visibility on development fees for both 2021 and 2022 and, with our markets continuing to perform strongly, are very confident about the future of the business, which we expect to be under the ownership of Tencent."

About Sumo Group - www.sumogroupplc.com 

Sumo Group's businesses provide acclaimed development, design and publishing services to the video games and entertainment industries from studios in the UK, India, Canada, the US and Poland.

Sumo Digital, as the Group's primary business, is one of the UK's largest independent developers of AAA-rated video games, having studios in Sheffield, Newcastle, Nottingham, Leamington Spa, Warrington and Pune, India. The business has acquired four studios since IPO, which operate under their own names, BAFTA award-winning The Chinese Room in Brighton, Red Kite Games in Leeds, Lab42 in Leamington Spa and PixelAnt Games in Wroclaw, Poland. Sumo Digital provides turnkey and co-development solutions to a global blue-chip client base.

Pipeworks is an innovative, well-established, and respected US video games developer based in Eugene, Oregon with a recently opened second studio in Vancouver. It provides full development, co-development, and live operations to premier video game publishers and other partners.

Atomhawk is a multi-award-winning visual design company, with studios in Newcastle and in Vancouver (Canada), servicing the games, film, and visual effects industries.

Secret Mode is a video games publisher, focused on delivering fresh and new gaming experiences to players and building expansive and fulfilling communities around those games. It publishes titles developed within Sumo Group and also by independent developers.

Auroch Digital is a video game developer and publisher based in Bristol, with a focus on original IP creation.

CHIEF EXECUTIVE'S REPORT

Introduction

We are pleased with the strong performance of the Group in the first half, which includes the first full six-month contribution from Pipeworks.

Our market continues to experience strong growth, with increasing demand for high quality services, interactive content, driven by advancing technology and new platforms all boosted by a material increase in the numbers of video gamers globally accelerated by the pandemic. Our very strong pipeline of business development opportunities on major new projects, with both existing and new clients, reflects confidence in our capabilities and we continue to execute significant contracts.

In January 2021, we acquired PixelAnt Games, in Poland and, in July, we announced the opening of Timbre Games, a second Pipeworks studio focusing on action-adventure and simulation games for the PC and consoles, in Vancouver. Earlier this month, we announced the acquisition of Auroch Digital, a Bristol-based videogame developer and publisher with a focus on original IP creation, taking us to 15 studios in five countries. We have also just announced plans for a new studio in Bangalore, our second location in India, which is scheduled to open in H1 22.

Group headcount increased by 160 from 31 December 2020 to 1,203 at 30 June 2021, including 13 people who joined through the acquisition of PixelAnt Games.

We continue to develop great games, both Client-IP and Own-IP, and successfully recruit talent, which lies at the heart of our growth ambitions. All areas of the business performed well in the Period and the Board is delighted with the achievements of our people.

Cash Acquisition by Tencent

After the Period end, we announced the recommended all cash acquisition by Tencent, through Tencent Bidco, of the entire issued and to be issued ordinary share capital of Sumo Group which members of the Tencent Group do not already own. Under the terms of the Acquisition, Sumo Group Shareholders will be entitled to receive 513 pence in cash for each Sumo Group share and the entire issued and to be issued share capital of Sumo Group is valued at approximately £919 million on a fully diluted basis.

Our strategy and Own-IP

Our stated strategic objectives are to expand; to win new clients; to develop complementary new revenue streams; and to develop our own IP - both self-funded and co-funded. We achieve this by making and acquiring more great games both Client-IP and Own-IP; through acquisitions that add services, new geographies, and clients and through continued organic growth, adding people and studios.

I am pleased to report that the Group continued to deliver on all areas of its strategy in the Period.

We remain firmly committed to our relatively low risk, high visibility business model, which generates both cash and sustainable profit margins with royalty opportunities. Our creative talent continues to make great content and our work is respected globally.

Our primary focus remains developing Client-IP. However, as the Group expands, we expect to work increasingly on Own-IP, without taking undue risk, to generate greater financial returns and to provide a creative outlet for our highly talented people. Our plan is to accelerate the Group's growth, through the development of Own-IP games, either self-funded, co-funded or fully-funded, and through acquisition. We are building a catalogue of valuable Own-IP titles and, during the Period, we announced the launch of Secret Mode.

The market

In June 2021, Newzoo projected the 2021 global games market to be $175.8bn, made up of $90.7bn for mobile, $49.2bn console and $35.9bn PC. Newzoo also predicted that the games market would grow with a CAGR of 8.7% to reach $218.7bn in 2024. According to their research 2.8bn of the 3.0bn gamers will play on a mobile device, 1.4bn on PC and 0.9bn on console. They expect further player growth following on from the more than five percent growth from 2020 to 2021 and believe that the metaverse trend, accelerated by the pandemic, is strong enough to persist beyond the pandemic.

We expect the strong underlying growth in the video games market to be sustained in the long term.

Visibility

Our pipeline of business development opportunities at the end of August 2021 comprised a total contract value of over £540m.

One of the great strengths of Sumo continues to be the high visibility of our development fees from our long-term contracted business model. Sumo Digital and Pipeworks are now working on more than 40 projects with 28 clients, of which nine games or publisher partnerships have been announced. It is also worth noting that Sumo Digital and Pipeworks are collaborating on projects.

These figures bear testament to the strength of the underlying market for high quality creative content and underpin the Board's confidence in the out turn for 2021.

Financial review

Overview

Revenue in the Period was £50.4m. This figure includes £10.1m of revenue generated by Pipeworks which was acquired in October 2020. Lab42 was acquired in mid-May 2020 and so on a like for like basis the revenue for H1 21 excluding Pipeworks and Lab42 increased by 48.4% from H1 20. Adjusted EBITDA for H1 21 was £11.4m (H1 20: £6.0m). The statutory profit before taxation of £3.7m (H1 20: £2.8m) is stated after charging an amount of £4.0m arising on the acquisition of Pipeworks and after charging exceptional items of £0.4m (H1 20: £0.7m), and the share based payments charge of £1.8m (H1 20: £1.1m) and an unrealised loss on foreign currency derivative contracts of £0.2m (H1 20: gain of £0.5m).

Revenue

The Group's reported revenue was £50.4m (H1 20: £26.3m).

The analysis of revenue for H1 21, together with the H1 20 comparative figures, is as follows:

In H1 21, 13.9% of revenue was generated from Own-IP (H1 20: 17.8%), reflecting the changes in project mix and status year on year and the timing of game releases. Our strategy remains to move towards more Own-IP projects on a relatively low risk basis, where we see longer term opportunities to earn higher returns, but we retain a strong focus on quality Client-IP projects, including both turnkey and co-development work, for which we have a longstanding strong reputation.

Royalty income in the year includes an amount of £0.1m (H1 20: £0.2m) in recognition of variable consideration under IFRS 15, which is future royalty income expected to be received.

Gross profit and margin

Statutory gross profit for the Period was £21.9m (H1 20: £10.8m)

Statutory gross margin was 43.5% (H1 20: 41.2%).

As reported when we announced our 2020 Final Results we now consider the appropriate alternative performance measure for gross profit and gross margin to be the statutory figures adjusted for the net investment in co-funded games and, for Sumo Digital, amounts in respect of Video Games Tax Relief ("VGTR") and with no adjustment in respect of royalty income. We adjust for VGTR because whether Sumo retains the VGTR or not has an impact on the level of development fees that we charge on a project, and hence it is something of a proxy for revenue. There is no equivalent of VGTR for Pipeworks in the state of Oregon in the US.

For the Period the Adjusted Gross Profit and Adjusted Gross Margin for the Group were £21.6m (H1 20: £11.5m) and 40.2% (H1 20: 38.7%). Pipeworks was acquired in mid-October 2020 and accordingly is included in the Period but not in H1 20. As previously reported the gross margin for Pipeworks is lower than that at Sumo Digital principally because Pipeworks has higher employment costs and uses more external contractors. The underlying gross profit per direct head is comparable with Sumo Digital.

Operating expenses

Operating expenses were £16.1m (H1 20: £7.2m). Included within operating expenses were amortisation and depreciation of £2.6m and £2.2m respectively (H1 20: £0.2m and £1.6m). The depreciation charge of £2.2m (H1 20: £1.6m) includes £0.8m (H1 20: £0.6m), relating to the right of use asset relating to property leases under IFRS 16.

There was a charge of £1.8m (H1 20: £1.1m) to reflect the cost of the Sumo Group plc Long Term Incentive Plan ("LTIP") and the Sumo Group plc Share Incentive Plan (the "SIP").

Adjusted EBITDA and margin

Adjusted EBITDA is a non-GAAP metric used by management and is not an IFRS disclosure. It is defined as statutory operating profit adding back amortisation, depreciation, share based payments charge, foreign currency derivative contracts, exceptional items and the fair value loss on contingent consideration less the investment in co-funded games expensed and operating lease costs capitalised under IFRS 16. It should be noted that in the Period the adjustment in respect of investment in co-funded games expensed was a net deduction following amounts added back in previous accounting periods.

Adjusted EBITDA margin was 22.6% (H1 20: 22.8%).

Profit before taxation

The statutory profit before taxation was £3.7m (H1 20: £2.8m).

Earnings per share

The basic and diluted earnings per share for H1 21 were 2.20p and 2.09p respectively (H1 20: 2.11p and 2.04p respectively).

The adjusted basic earnings per share was 4.65p (H1 20: 2.84p) and the adjusted diluted earnings per share was 4.21p (H1 20: 2.69p). Further details, including the basis of calculating the number of shares which is different to the statutory basis, are set out in Note 16.

Client concentration

During the Period, one major client individually accounted for at least 10% of total revenues (FY 20: two clients). This client accounted for 21% of total revenue in H1 21, compared to the two clients in FY 20 accounting for 40% of total revenue in aggregate.

The Group worked on five major projects for the top three clients who collectively accounted for 36% of total revenue (FY 20: 11 major projects and 57% of total revenue). It is worth noting that these figures for H1 21 include Pipeworks whereas those for H1 20 do not.

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 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 H1 21 and H1 20 are £3.3m and £3.5m respectively.

Treatment of acquisition costs and exceptional items

The total consideration for the acquisition of PixelAnt was up to £2.0m of which £0.3m was paid in cash on completion. Acquisition related costs amounting to £0.1m were recognised as expenses.

The exceptional items charged in H1 21 of £0.4m consist of professional adviser and other transaction costs, including those incurred on the acquisition of PixelAnt.

Alternative performance measures

The Board believes that it is helpful to include alternative performance measures, which exclude certain non-cash charges and are adjusted for the matters referred to above to present the underlying results of the Group. These measures are reconciled to the income statement in Note 16.

Cash flow

The net cash generated from operating activities for the Period was £5.7m (H1 20: £4.9m). The net cash balances at 30 June 2021 were £4.4m (31 December 2020: £6.8m, and 30 June 2020: £15.2m).

On 31 March 2021, the Group spent £5.5m funding the purchase of approximately 1.55m Sumo Group shares through the Employee Benefit Trust (the "Trust"), following the exercise of options under the Company's Long-Term Incentive Plan. These shares are to be held on the terms of the Trust to satisfy the vesting of options under the LTIP in the future.

Capital expenditure on tangible assets in the Period was £1.4m (H1 20: £1.8m), of which £1.1m was on IT hardware. A further £0.7m was spent on the purchase of intangible assets (H1 20: £0.4m), of which £0.2m related to software and £0.5m was on intellectual property on Own-IP games.

The cash cost, net of cash acquired and excluding transaction costs, of the acquisition of PixelAnt was £0.2m.

The net finance charge for the Period was £0.6m (H1 20: £0.2m). The finance cost consists of IFRS 16 lease interest of £0.1m (H1 20: £0.1m), bank and other interest of £0.1m (H1 20: £0.1m) and the unwind of interest on contingent consideration £0.4m.

Bank facility

The Group presently has a £30m revolving credit facility 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. The agreement runs to 30 November 2022. As previously announced the Company is currently in discussions with Clydesdale Bank with a view to extending this facility beyond a delisting.

At 30 June 2021, the facility was drawn US$5.5m.

Balance sheet

Goodwill and other intangibles at 30 June 2021 were £101.5m (31 December 2020: £102.2m).

Current assets were £47.1m (31 December 2020: £41.8m). Trade and other receivables were £38.8m an increase of £7.8m from the figure of £31.0m at 31 December 2020 reflecting primarily the timing of milestone receipts on two projects. Trade and other payables were £22.9m (31 December 2020: £21.0m).

As at 30 June 2021 the net working capital position (excluding the IFRS 16 lease liability due within one year of £1.4m) was £17.3m, up from £11.4m at 31 December 2020.

Foreign currency

During the Period, the Group generated US dollar denominated revenue of $19.0m including $14.1m of revenue for Pipeworks.

Post balance sheet event

On 19 July 2021 it was announced that the boards of Tencent and Sumo had reached an agreement on the terms of the Acquisition valuing the entire issued and to be issued share capital of Sumo at approximately £919 million on a fully diluted basis. This process is ongoing and is expected to complete towards the end of the fourth quarter of 2021.

On 14 September we announced the acquisition of Auroch Digital. Initial consideration of £6m has been paid in cash from Sumo Group's existing resources. Deferred consideration may be payable in cash contingent upon financial performance in the 12 months ending 31 March 2024.

Operational review

Sumo Digital - representing 75% of Group revenue

Sumo Digital now has 10 studios, eight in the UK, one in India and, following the acquisition of PixelAnt Games, one in Poland. PixelAnt Games has performed well in the short time it has been part of Sumo Group and the team has increased from 13 at the time of the acquisition to 32 at 30 June 2021. Earlier in September we announced the planned opening of our second India studio in Bangalore. 

As usual, we are constrained in disclosing all of our clients or projects, but we are able to say that we worked with 2K, Apple, Codemasters, Curve Digital, Dovetail, Focus Home Interactive, Paradox, Rare, SEGA, Sony, and Sports Interactive (also part of SEGA) in the Period and we signed four new development contracts and 13 contract extensions with 14 partners.

In May we launched Hood our Own-IP title shared with Focus Home Interactive. This game was developed in our Sumo Digital Newcastle studio and is published by Focus Home Interactive. We continue to be pleased with the reception the game has received since launch and we are now delivering the post launch plan including new content.

Most of our team continue to work remotely. We are considering how and when we return to working from our studios and we expect to operate with a combination of studio and remote working, subject to client consent.

The utilisation rate across the UK studios in the Period was 97.2% (H1 20: 95.1%). In Pune, the rate was 85.7% (H1 20: 79.0%). The utilisation for Sumo Digital overall was 95.3% (H1 20: 92.2%).

In March 2021 Sackboy A Big Adventure won BAFTAs for Best British Game and Best Family Game. Sumo Digital has earned a TIGA STAR. The TIGA STAR Award scheme recognises the very best employers, both small and large, in the UK video games industry. The system was developed to benchmark the way companies are run to encourage best practice, with a particular focus on the way employees contribute to success. Sumo Digital was judged in four areas: Strategy, Teams, Advancement and Recognition, and a rigorous evaluation revealed that we are an excellent place to work and have a strong vision for future success. Earning a TIGA STAR was one of Sumo Group's ESG targets. Little Orpheus, developed by The Chinese Room, has been awarded the Apple Design Award for "Delight and fun" for its platforming, storytelling, music and for bringing console-like experience to an accessible game.

Pipeworks - representing 20% of Group revenue

Pipeworks was acquired in October 2020 at which time it had a single studio in Eugene, Oregon. This studio is about to undergo the previously announced significant renovation programme to create a collaborative destination for staff, partners and clients.

In July this year, Pipeworks announced the launch of Timbre Games with a studio in Vancouver, Canada.

Pipeworks has performed well since it was acquired. Notably Rival Peak, the first "M.I.L.E." or Massively Interactive Live Event, commenced its run with over 200 million engagements and Madden NFL 22 was launched in August. Pipeworks is able to confirm that during the Period it worked with, among others, EA Sports, Genvid, Metateq and Wizards of the Coast and signed 11 new contracts and nine contract extensions with six partners.

Recruitment performance in the year to date has been strong with 46 hires in the first half of the year.

Atomhawk - representing 5% of Group revenue

Both Atomhawk studios have moved to new larger locations in Gateshead, near Newcastle, and Vancouver respectively, using these new offices as a base for ongoing headcount expansion.

Atomhawk performed well in the Period posting its highest H1 revenue since it was founded in 2009. During the Period Atomhawk worked on more than 40 projects, most of which are as yet unannounced AAA titles and franchises. We are able to report, however, that Atomhawk provided visual development for announced titles including Suicide Squad: Kill the Justice League (Rocksteady), Redfall (Arkane Austin), Halo Infinite (343 Industries), PlayerUnknown's Battlegrounds (PUBG Corp.) and Call of Duty: Vanguard (Sledgehammer). Atomhawk has maintained a strong AAA client base including studios from major publishers 2K, Amazon, Activision, EA, Microsoft and WB Interactive Entertainment. Atomhawk has worked on multiple collaborations with Sumo Digital in 2021 and will continue to collaborate closely with other studios in the Group in the future.

Atomhawk has recruited the management team to lead a new studio focused on technical art. Initially operating remotely, this new team will provide complementary services to Atomhawk's existing business model and clients.

In early 2021 Atomhawk published Art of Atomhawk Volume 3 following a successful crowdfunding campaign, demonstrating a retrospective of Atomhawk's work. In June 2021 Atomhawk launched its annual art competition in collaboration with ArtStation, receiving a record number of entries from across the digital art community.

Secret Mode

Secret Mode, our publishing division, was announced on 11 March 2021 and we are encouraged by the performance in the short period to date. The team is reviewing a large number of both internally and externally sourced titles. The former includes Sumo's back catalogue of Own-IP titles. Snake Pass, Sumo's first Own-IP game, is a launch title on Amazon Prime's new streaming service. In July 2021, Secret Mode launched its first trailer for Little Orpheus, which will be released later this year or early next. Zool Redimensioned, the Ninja platform game originally produced by Gremlin Graphics, was released in August 2021. Prominence Poker, the poker simulation game acquired with Pipeworks, moved to Secret Mode in August.

Secret Mode is now an official partner of Steam, Epic, Nintendo, Amazon, Microsoft, and Sony. The team has green-lit nine externally sourced titles from the more than 350 titles pitched to Secret Mode. A further six internally sourced projects are in progress.

Secret Mode has also partnered with the indie developer Ice Beam Studios on a yet to be announced title, which will bring a new twist to the racing genre, and with Ghostbutter, publishing its debut Steam title Wunderdoktor and a much-expanded Penko Park.

Many more partnerships are expected to be announced in the coming months and further expansion of the team, which is now 10-strong, is planned for 2022.

People

Sumo is a people business. Our growth is entirely dependent on our ability to attract and retain talented people and our values and unique culture are fundamental to our success.

Total Group headcount increased from 1,043 at 31 December 2020 to 1,203 at 30 June 2021. Direct headcount at 30 June 2021 was 989 (31 December 2020: 869).

Staff attrition rates in the UK, India and US ran at 4.8%, 3.5% and 5.2% respectively (H1 20: 4.9% and 3.9% for the UK and India respectively). We continue to work with valued and proven contractor colleagues alongside our own people.

Earlier in September it was announced that Sumo Digital studios Lab42 and Red Kite Games were awarded GamesIndustry.biz Best Places to Work, Sumo Digital also won the Education award and Harinder Sangha the Best Boss award.

The Group has continued to enjoy considerable success throughout the pandemic and we recognise the incredible commitment of our people. I reiterate my profound thanks to everyone at Sumo.

Environmental, Social and Governance ("ESG")

ESG really matters to us and our stakeholders. We are pleased to report significant progress towards the targets we set at the beginning of the year. We have implemented an industry-leading flexible benefits programme for our people and have obtained TIGA Star accreditation, adding to our inclusion in the Best Companies Top 100 Places to work. We continue to work to improve gender diversity in recruitment and promotion. Within the COVID-19 constraints we delivered our schools outreach programme virtually.

Sumo Digital Academy, which recently celebrated its' first anniversary, released the "Playbuffer" programming framework to provide an accessible first step in video game programming. In August this year Secret Mode published Zool Redimensioned developed by the first intake at Sumo Digital Academy.

Sumo Group has partnered with Every Child Online to donate its pre-loved computers to children across the UK who do not currently have access to online learning at home. The computers donated by Sumo will go directly to children and young people around the UK, both to schools with outdated tech and to children who don't have access to a computer at home.

The IT security ISO 27001 accreditation process is progressing well and we have completed the first stage audit.

We have issued our first Streamlined Energy and Carbon Report which forms a baseline for our carbon reduction targets and was included in our Annual Report & Accounts 2020.

Outlook

With the strong underlying growth in the video games market expected to be sustained in the long term, there continue to be many opportunities for Sumo Group. As ever the strength of our business is our people. We are successfully growing our team in a very competitive market for talent. Our business development pipeline is extremely strong. We have good acquisition opportunities and continue to evaluate these in line with our strategic priorities and growth strategy. The Board is very pleased with the progress that the Group is making. Trading since the half-year is in line with expectations and the Board views the prospects for the Group for the current year and beyond with confidence.

Carl Cavers

Chief Executive Officer

29 September 2021

Consolidated interim income statement (unaudited)

for the period ended 30 June 2021

Note 1: Adjusted EBITDA is a non-GAAP metric used by management and is not an IFRS disclosure. It is defined as statutory operating profit adding back amortisation, depreciation, share-based payment charge, exceptional items, the fair value loss on contingent consideration, foreign currency derivative contracts less the investment in co-funded games expensed and operating lease costs capitalised under IFRS 16.

Note 2: The H1 2020 comparatives have been restated following a reassessment of the Group's accounting policy for the presentation of gains or losses on foreign currency derivative contracts. During the year ended 31 December 2020, the Directors reassessed this accounting policy and concluded that it would be more appropriate for this gain to be recognised in operating profit. The change in presentation reduced finance income for H1 2020 by £0.5m and reduced operating expenses by £0.5m, with no impact on Adjusted EBITDA, earnings or financial position.

Consolidated interim statement of comprehensive income/(expense) (unaudited)

for the period ended 30 June 2021

Items in the statement above are disclosed net of tax.

Consolidated interim balance sheet (unaudited)

as at 30 June 2021

Consolidated interim statement of changes in equity (unaudited)

for the period ended 30 June 2021

Consolidated interim cash flow statement (unaudited)

for the period ended 30 June 2021

Notes to the condensed interim financial statements (unaudited)

for the period ended 30 June 2021

1. GENERAL INFORMATION

Sumo Group plc ("the Company") is a public limited company incorporated in England with the registered number 11071913. The address of its registered office is 32 Jessops Riverside, Brightside Lane, Sheffield S9 2RX.

The Company's shares are quoted on the Alternative Investment Market.

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

The condensed consolidated interim financial information was approved and authorised for issue by a duly appointed and authorised committee of the Board of Directors on 28 September 2021.

This condensed interim financial information has not been audited or reviewed by the Company's auditors.

Forward looking statements

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

2. BASIS OF PREPARATION

This condensed consolidated interim financial information for the six months ended 30 June 2021 has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2020, which 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 condensed consolidated interim financial statements have been prepared on the going concern basis and on the historical cost convention modified for the revaluation of certain financial instruments.

This condensed consolidated interim financial information does not constitute the Group's statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparatives for the full year ended 31 December 2020 are not the Company's full statutory accounts for that year. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors, Ernst & Young LLP, have reported on these accounts, their report is unqualified, does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and does not constitute a statement under either Section 498(2) or (3) of the Companies Act 2006.

3. ACCOUNTING POLICIES

There are no new standards that have become effective in the period that have had a material effect on the Group's financial statements.

The accounting policies applied by the Group in these unaudited half year results are consistent with those applied in the annual financial statements for the year ended 31 December 2020 as described in the Group's Annual Report and full financial statements for that year and as available on the Company's website www.sumogroupplc.com.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

Leases

The Group has applied IFRS 16 from 1 January 2019. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liabilities.

The lease liability is initially measured at the present value of lease payments that were not paid at the commencement date, discounted using the Group's incremental borrowing rate.

The lease liability is measured at amortised cost using the effective interest method. If there is a remeasurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded directly in profit or loss if the carrying amount of the right of use asset is zero.

The Group presents right-of-use assets within property, plant and equipment.

Short term leases and low value assets

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less or leases of low value assets. These lease payments are expensed on a straight-line basis over the lease term.

4. SEGMENTAL REPORTING - UNAUDITED

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 (Chili) Limited, Sumo Digital (Locus) Limited, Sumo Games Development Limited, Atomhawk Design Limited, Atomhawk Canada Limited, Red Kite Games Limited, Red Kite Software Development Limited, Lab42 Limited, Pipeworks Inc., PixelAnt Games sp. z.o.o., The Chinese Room Limited and Secret Mode Limited. The central activities, comprising services and assets provided to Group companies, are considered incidental to the activities of the Group and have therefore not been shown as a separate operating segment but have been subsumed within video games development. All assets of the Group reside in the UK, with the exception of non-current and current assets with a net book value of £11.4m (30 June 2020: £0.5m, 31 December 2020: £8.9m) which were located in India, Canada, North America and Poland.

Major clients

In the half year ended 30 June 2021 there was one major client which individually accounted for at least 10 per cent of total revenues (year ended 31 December 2020: 2 clients). The revenue relating to this client in the half year ended 30 June 2021 was £10.6m (year ended 31 December 2020: £17.3m and £10.0m).

Analysis of revenue

Revenue by IP origination

The Group's revenue can be disaggregated by considering the source of created intellectual property (IP) as shown below:

5. FINANCE COSTS - UNAUDITED

6. FINANCE INCOME - UNAUDITED

7. TAXATION - UNAUDITED

The taxation charge is recognised based on management's best estimate of the weighted average annual tax rate expected for the full financial year.

The tax charge for the period has been calculated at an effective rate of 0.5% (half year ended 30 June 2020: tax charge at an effective rate of -11.4%; year ended 31 December 2020 tax credit at an effective rate of -91.3%). The differences to the standard rate of 19% in the period are due predominantly to the effects of non-taxable income and the exercise of share based payments, offset by non-deductible exceptional costs.

8. EARNINGS PER SHARE - UNAUDITED

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 Trusts (4,009,005 on a weighted basis at 30 June 2021, and 4,618,735 at both 30 June 2020 and 31 December 2020).

When calculating diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of 7,180,769 (June 2020: 2,743,623, December 2020: 8,203,478) of dilutive options granted to employees.

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

9. GOODWILL AND OTHER INTANGIBLE ASSETS - UNAUDITED

Note 1: the comparative amounts have not been restated for this adjustment as, in the directors' opinion, it is immaterial to the Financial Statements 

10. PROPERTY, PLANT AND EQUIPMENT - UNAUDITED

Depreciation charges are allocated to direct costs and operating expenses in the income statement.

11.TRADE AND OTHER RECEIVABLES - UNAUDITED

 12. CURRENT AND NON-CURRENT LIABILITIES - UNAUDITED

13. SHARE-BASED PAYMENTS - UNAUDITED

During the period awards were made over the Company's ordinary shares of £0.01 each under The Sumo Group plc Long Term Incentive Plan (the "LTIP"). The fair value of the awards has been calculated and a charge of £1,273,000 has been recognised in the income statement with a corresponding credit to retained earnings. A further cost of £520,000 has been recognised in the half year ended 30 June 2021 in respect of national insurance on share based payments.

During the period to 30 June 2021, a total of 3,313,573 LTIP awards and 205,000 nil cost options were exercised by participants. Of these, 2,813,649 were settled from shares already issued and held in the Employee Benefit Trust.

Immediately following the exercise of some options on 31 March 2021, the Group repurchased 1,554,077 shares from participants via a second Employee Benefit Trust. These options will be held by the trust and used to satisfy future awards.

The maximum number of Ordinary Shares which may be issued in future periods in respect of awards outstanding at 30 June 2021 are 7,493,226 of LTIP awards and 205,000 of nil cost options, of which 3,349,675 are already issued and held in the Employee Benefit Trusts.

14. BUSINESS COMBINATIONS - UNAUDITED

On 31 January 2021, the Group acquired PixelAnt Games sp. z.o.o.("PixelAnt"), based in Wroclaw, Poland for a total maximum consideration of £1,917,000. £250,000 of this consideration was paid in cash on completion. The net consideration on completion was £208,000, as PixelAnt had £42,000 of cash on the balance sheet at the date of acquisition.

Further consideration of up to £1,750,000 may be payable in Sumo Group shares, on the achievement of certain earn out targets up to March 2023. This consideration is payable in two installments: the first installment of up to £500,000 is payable around April 2022 and the remainder one year later. Management determined that the fair value of contingent consideration on acquisition was £1,667,000. The company will continue to operate under the PixelAnt name, as a wholly owned subsidiary of Sumo Digital Limited.

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

15. POST BALANCE SHEET EVENTS - UNAUDITED

On 19 July 2021, Sumo Group Plc ("Sumo") announced that the boards of Tencent Holdings Limited ("Tencent") and Sumo have reached an agreement on the terms of a recommended all cash acquisition by Tencent, through its indirect wholly-owned subsidiary, Sixjoy Hong Kong Limited ("Tencent Bidco"), of the entire issued and to be issued ordinary share capital of Sumo which members of the Tencent Group do not already own.

On 14 September 2021, Sumo announced the acquisition of Auroch Digital. Initial consideration of £6m has been paid in cash from Sumo Group's existing resources. Deferred consideration may be payable in cash contingent upon financial performance in the 12 months ending 31 March 2024. 

16. ALTERNATIVE PERFORMANCE MEASURES - UNAUDITED

A reconciliation of unaudited IFRS reported results to the unaudited underlying income statement is shown below.

Adjusted Earnings Per Share

Basic adjusted earnings per share is calculated by dividing the adjusted earnings attributable to equity shareholders by the adjusted weighted average number of ordinary shares in issue at the reporting date. The adjusted weighted average number of shares differs from the statutory measure as it includes 950,000 nil cost options issued on IPO, of which only 745,000 were exercised as at 30 June 2021 (30 June and 31 December 2020: 500,000). The calculation of Adjusted earnings per share is based on Adjusted profit before tax presented below, after a pro-forma rate of tax of 19%.

Diluted adjusted earnings per share is calculated by dividing adjusted earnings by the total number of potential future shares, including all those granted in respect of Share Option schemes where performance conditions have not yet been met.

When calculating diluted earnings per share, the number of shares is adjusted to assume conversion of 7,493,226 (June 2020: 10,739,975, December 2020: 9,603,033) of potentially dilutive options granted to employees, 8,904,290 (June 2020: nil and December 2020: 8,715,519) shares to be issued in respect of deferred consideration on acquisition and nil (June and December 2020: 1,450,000) of warrants.