CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2020

NOTES

1. GENERAL INFORMATION

Sumo Group plc (the 'Company') is registered in England and Wales as a public limited company limited by shares. 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 2020, and were approved by the Directors on 30 March 2021.

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 accounting standards in conformity with the requirements of the Companies Act 2006 as 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.

Directors' assessment of going concern:

The Group made a net profit before tax for the year of £0.9m, had Net Current Assets at the period end of £16.4m and a Net Cash Inflow from Operating Activities of £13.0m. The Group had gross cash balances of £15.0m at 30 March 2021, which includes an amount of £4.0m (USD $5.5m) drawn down on the Group's £30m bank facilities (£27m RCF; £3m overdraft), which are committed until November 2022 and require compliance with quarterly covenants.

Whilst the covid-19 situation is ongoing, the Group continues to maintain operational effectiveness and the Directors have considered the risks posed by the pandemic in the preparation of its financial forecasts. The Group did not take up any UK Government emergency funding or access related business assistance programmes (one VAT payment was deferred but paid in full before the end of the next VAT quarter). Primarily, the Group's day to day working capital requirements are expected to be met through existing cash resources and cash equivalents and receipts from its continuing business activities. The Group expects to have sufficient income and cash resources to fund operations at least until 30 September 2022. The Directors have reviewed the forecasts for this period and consider them to be achievable, given the high level of contracted and near contracted revenue visibility on its long term development contracts. The financial forecasts assess the impact on the Group's cash flow, banking 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. 

As well as the strong liquidity position of the Group, other key factors supporting this conclusion are:

·      The Group has strong revenue visibility, with 85% for Sumo Digital and 50% for Pipeworks of 2021 development revenue either contracted or near contracted.

·      The business development pipeline is very strong reflecting the strength of the underlying market served by the Group.

Sensitivities have been applied to the Group's projections to assess the Group's ability to continue operating as a going concern until 30 September 2022. This process included a reverse 'stress test', whereby forecast future revenues are sensitised downwards with no mitigating cost control measures, to identify the break points in the Group's liquidity or banking covenants compliance. The break points identified in this exercise are considered to be remote scenarios as they are triggered only by a severe reduction in forecast revenue below that which is expected from existing contracted and near contracted projects. Any mitigating cost control measures have not been considered in the 'stress test' but would provide additional headroom. The reverse 'stress tests' include an estimated cash payment in May 2022 in relation to contingent consideration on the acquisition of Pipeworks. Due to the severity of the break point scenarios modelled, it is assumed that Pipeworks' 2021 earnout performance criteria would not be met and contingent consideration relating to 2020 performance would be satisfied by the minimum amount of cash allowed under the Pipeworks acquisition agreement.

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.

New and amended standards and interpretations

There are no new or amended standards applicable in the year which have a material impact on the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

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 5-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.

Third party funded game development

There is generally one performance obligation with clients, 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 typically 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 clients 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 5-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.

At 31 December 2020 there are no (2019: one) contracts that contain 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.

Own-IP

The Group also creates its own concepts and IP. The accounting for Own-IP differs depending on whether the Group retains control over the IP or passes control over to clients.

Own-IP - Development revenues and royalties

Where the Group passes control of IP over to its client during development, fixed and variable revenues are recognised over time, consistent with third party-funded game development revenues.

Own-IP - Game revenues

Where the Group retains control of its own IP, during the development phase no revenue is recognised. Once the game is completed and launched the Group recognises the revenues as they are earned (at a point in time).

Intangible assets relating to Own-IP controlled by the Group are measured at cost and tested for impairment. Once the game is launched the intangible asset is amortised as the game generates revenues and is subject to review for impairment at all times.

The Group may opt to licence its Own-IP games 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.

At the point at which a contract is established with a publisher, the Own-IP intangible asset will be converted to a work in progress contract asset. In this scenario the asset would be derecognised at the point the game is handed over to the publisher.

EBITDA and Adjusted EBITDA

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, investment in co-funded games expensed, exceptional items, the fair value loss on contingent consideration less the operating lease costs capitalised under IFRS 16 and foreign currency derivative contracts.

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, share-based payment charges, fair value movements on contingent consideration, the impact of IFRS 16 adoption and the investment in co-funded games expensed are excluded from EBITDA to calculate Adjusted EBITDA. For further explanation and details see Note 17 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 presentational 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.

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.

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.

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:

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 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 over the estimated useful lives of intangible assets and is presented within operating expenses. Intangible assets are amortised from the date they are available for use.

The estimated useful lives, are as follows:

Impairment

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

An impairment loss is recognised whenever the carrying amount of an asset 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.

Post-employment benefits

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.

Business combinations

When the Group completes a Business Combination, the consideration transferred for the acquisition and the identifiable assets and liabilities acquired are recognised at their fair values. The amount by which the consideration exceeds the net assets acquired is recognised as Goodwill. Where consideration is contingent on future events, an estimate is made of the most likely outcome in determining the fair value at the acquisition date. Contingent consideration classified as a liability is discounted to present value, and is remeasured to fair value at each reporting date and recognised in the P&L.

Leases

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 the end of the lease term.

If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.  In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liabilities.

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.  In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. 

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.

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 for assets with a value of less than £5,000. These lease payments are expensed on a straight-line basis over the lease term.
 

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 Game Tax Relief

Video Game 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. Where the Group benefits from the VGTR claimed, 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. 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.

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 and to restructuring within the group. Further information is provided in Note 7.

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 are shown as a deduction within shareholder's equity. The proceeds from the sale of own shares are recognised in shareholder's equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the income statement.

Shares to be issued

Deferred shares represent deferred consideration on the acquisition of a subsidiary and have been classified as equity instruments. The shares are measured at fair value at the acquisition date.  No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the equity instruments.

Retained earnings

Retained earnings includes all current and previous periods 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.

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 staff costs 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. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

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.

No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (further details are given in Note 9)

The group provides for National Insurance liabilities on the exercise of share based payments over time, using the best estimate of the liability at the balance sheet date.

3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Critical accounting estimates

Revenue recognition on development contracts

There are estimates made in respect of the recognition of revenue on customer contracts, including:

·      Development revenue recognised over time is determined based upon estimates on the overall contract margin and percentage of completion of the contract at each period end. These estimates are based on contract value, historical experience and forecasts of future outcomes. These include specific estimates 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. A reduction of 1% of the revenue recognised on contracts which were not complete at 31 December 2020 (and therefore subject to these estimates) would result in a £570,000reduction in revenue;

·      Certain development contracts include an element of variable consideration, such as royalty income, which is contingent on future game sales.  Such variable consideration is only recognised to the extent that it is highly probable that a significant reversal of cumulative revenue recognised will not occur once the certainty related to the variable consideration is subsequently resolved. 2020 revenue includes £0.3m of variable consideration not yet received and contingent on future sales.

Business combinations

When the Group completes a Business Combination, the consideration transferred for the acquisition and the identifiable assets and liabilities acquired are recognised at their fair values. The amount by which the consideration exceeds the net assets acquired is recognised as Goodwill.  The application of accounting policies to business combinations involves the use of estimates. During the year the Group made one significant business combination when it acquired Pipeworks, Inc. The aspects of the transactions that required significant judgement were the measurement of intangible assets acquired, and the measurement of the fair value of contingent consideration.

The Group engaged external experts to support the valuations of intangible assets acquired. Management concluded that the intangibles acquired separate from Goodwill were Customer Contracts, Customer Relationships, Trademarks and Game IP. The fair values of these assets were determined with reference to the forecast future cashflows. These valuations involved the use of a number of assumptions including revenue forecasts, customer attrition and the application of an appropriate discount rate to future cash flows. The total fair value of intangible assets recognised on the acquisition of Pipeworks Inc was £21,425,000. Full analysis of the consideration transferred, assets and liabilities acquired and Goodwill recognised in business combinations are set out in Note 15. Amounts recognised at 31 December 2020 are provisional due to the proximity of the acquisition date to the year end and will be finalised in the coming year.

The Directors review customer contracts and customer relationship assets on an annual basis which also involves an estimation of the length of the contract, an assessment of the relationship and an expected level of customer attrition. Details of the period end impairment review of Goodwill have been disclosed in Note 10 to the Financial statements.

In determining the fair value of acquisition consideration which is contingent on future events, management is required to make estimates of earn out targets that will be achieved in the future. Estimates in respect of the achievement of earn outs are determined with reference to the budgets and forecasts of the acquired business. Management have prepared a number of scenarios and applied a weighting to these based on the expected likelihood of that scenario in determining the expected earn out. As some contingent consideration will be settled in shares, the fair value of the resulting liability is also measured with reference to the share price of the Group. The fair value of contingent consideration recognised on acquisition of Pipeworks was £28.5m.

Contingent consideration recognised as a liability is remeasured to fair value at each reporting date. During the period following acquisition, the Group recognised a loss due to an increase in the fair value of the liability of £4.2m driven by the increase in the market value of the Group's shares, offset by a foreign exchange gain as a result of the movement in exchange rates as the liability is denominated in US dollars. The Group also recognised £0.1m of interest on the unwinding of discounting on the liability.

Video Games Tax Relief

The process of claiming Video Game 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. In 2020, £3,910,000 of Video Game Tax Relief income has been recognised in respect of claims not yet reviewed and approved by HMRC, being £7,381,000 of Video Game Tax Relief receivable at the balance sheet date, of which £3,607,000 is reimbursable to clients on receipt.

Share-based payments

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. Options with both market and non-market conditions are most impacted by these estimates. An increase in the assumption of fair value at grant date of 10% for this category of options would result in an increase in the cumulative IFRS2 charge of £85,000.

The share options charge is subject to an assumption about the number of options that will vest as a result of the expected achievement of certain non-market conditions. A 1% reduction in the percentage of lapses assumed in each option category in respect of the achievement of performance conditions would result in an increase in the cumulative IFRS2 charge of £48,000.

Recognition of Deferred Tax assets

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.  A proportion of the deferred tax asset at 31 December 2020 is subject to a restricted period of overlapping profits. A reduction in future taxable profits of 10% would result in a reduction in the deferred tax asset recognised of £16,000.

Accounting judgements

Judgements in applying accounting policies and key sources of estimation uncertainty

The following are the areas requiring the use of judgement that may significantly impact the financial statements.

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, in most cases this results in the identification of a single 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; 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, the recognition of this revenue is an inherently difficult judgement, and may result in revenues being recognised in a later period than when the performance obligations were satisfied.

Video Game Tax Relief

It is in the Directors' judgement that presenting Video Game Tax Relief as a deduction from direct costs best reflects the substance and nature of these Credits. The Directors have considered the requirements and key accounting indicators of both IAS20 (Accounting for Government Grants) and IAS12 (Income Taxes) and have determined that Video Game Tax Relief is most appropriately accounted for under IAS20.

4. GROUP ANNUAL REPORT AND STATUTORY ACCOUNTS

 The financial information set out in the preliminary announcement does not constitute the Group's statutory accounts for the year ended 31 December 2020 and the year ended 31 December 2019. The statutory accounts for 2020 will be delivered to the Registrar of Companies following the Annual General Meeting. The auditors, Ernst & Young LLP, have reported on these accounts, their report is unmodified, does not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and does not constitute a statement under either Section 498(2) or (3) of the Companies Act 2006.

The Annual Report and full financial statements for the year ended 31 December 2020 will be available on the Company's website (www.sumogroupplc.com) in due course, at which time a notification will be sent to shareholders.

5. SEGMENTAL REPORTING

The trading operations of the Group are predominantly in video games development and are all continuing. This includes the activities of Sumo Digital Limited, Pipeworks Inc., 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, The Chinese Room Limited, Red Kite Games Limited and Lab42 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. The assets of the Group reside predominantly in the UK, with the exception of non-current and current assets with a net book value of £8.9m (2019: £0.4m) located in USA, India and Canada.

Major clients

In 2020 there were 2 major clients that individually accounted for at least 10 percent of total revenues (2019: four clients). The revenues relating to these clients in 2020 were £17.3m and £10.0m (2019: £12.8m, £10.9m, £7.5m and £5.2m).

Analysis of revenue

The amount of revenue from external clients can be disaggregated by location of the clients as shown below:

Revenue by IP origination

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

The above categories of revenue 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.

Client-IP includes concepts and IP commissioned or originated by clients for development by, or in partnership with, the Group and for which clients retain ownership of such IP after development is complete.

Own-IP includes concepts and IP originated by the Group. In some instances, the Group may transfer certain rights to such IP, originated by the Group, to the client for a finite period or in perpetuity, typically earning a combination of fixed consideration in the form of development revenues and variable consideration such as royalties or similar income.

Where the Group fully funds the development of its Own-IP and retains legal title to such IP, it will earn game revenues or similar income.  The Group may, at times, licence such IP to clients with a view to maximising game revenues.

Royalty revenue of £3.2m (2019: £1.3m) includes £0.3m (2019: £1.0m) of variable consideration identified as part of the transaction price for performance obligations already satisfied at the year-end date. The amount has been constrained to reflect uncertainty in the variable consideration which will be resolved in future periods. This uncertainty relates to circumstances outside of the group's control such as future success of video games which the group has developed. Royalties also include amounts recognised in revenue in 2020 relating to performance obligations satisfied in previous periods for which the outcome was uncertain totalling £0.9m (2019: £0.3m).

The following aggregated amounts of transaction prices relate to the performance obligations from existing contracts that are unsatisfied or partially unsatisfied at 31 December 2020.

Assets and liabilities relating to contracts with clients

The Group has recognised the following asset and liabilities relating to contracts with clients:

Contract assets - amounts recoverable on contracts represents contracts whereby the services rendered by the Group at the reporting date exceed the customer payments. Included within the above contract assets are amounts of variable consideration that are highly probable of not reversing of £0.3m (2019: £1.0m). In the event that this variable consideration is no longer considered probable, 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 - advances for game development represent customer payments received in advance of performance obligations that are expected to be recognised as revenue in 2021. These amounts recognised will generally be utilised within the next reporting period. 

6. DIRECT COSTS (NET)

7. EXPENSES BY NATURE

Exceptional items

Exceptional items include external costs in relation to:

These items are considered to be material and exceptional in nature as they are non-recurring and are significant in size respective to the ongoing expenses of the group.

Fair value loss on contingent consideration

Fair value loss on contingent consideration reflects the restatement to fair value of the liability recognised for consideration paid in 2022 which is contingent on future events. In 2020, this movement consists of an increase in the fair value of the liability of £4,205,000, offset by a gain on retranslation to year end foreign exchange rates of £1,499,000.

8.     TAXATION

The effective tax rate of the group for the period ended 31 December 2020 is (91)% (2019: (1.6)%)

Non-taxable income relates primarily to VGTR. Permanent differences relate primarily to exceptional items and fair value movements on contingent consideration.

Taxation on items taken directly to equity was a credit of £1,575,000 (2019: £272,000) and relates to deferred tax on share option schemes and transitional adjustments on the implementation of IFRS16.

Adjustments in respect of prior periods relate to the utilisation losses for which the deferred tax asset was unrecognised at 31 December 2019 due to uncertainty over recoverability.

Factors that may affect future tax charges

The standard rate of UK corporation tax is 19% and this took effect from 1 April 2017.  The 2016 Finance Act introduced a UK corporation tax rate of 17% from 1 April 2020.  However on 11 March 2020, the 2020 UK Budget reversed the reduction in the corporation tax rate from 19% to 17%.  This reversal was substantively enacted on the same date. 

Accordingly, these rates are applicable in the measurements of the deferred tax assets and liabilities at 31 December 2020. 

9. EARNINGS PER SHARE

Basic and diluted earnings per share are calculated by dividing the earnings attributable to equity shareholders by the weighted average number of ordinary shares in issue.

When calculating basic earnings per share, the weighted average number of shares has been adjusted to exclude shares held in the Employee Benefit Trust (4,618,735 at 31 December 2020 and 31 December 2019).

When calculating diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of 8,203,478 (2019: 689,726) of potentially dilutive options granted to employees and 460,175 of shares to be issued in respect of deferred and contingent consideration on acquisition of Red Kite Games Limited and Pipeworks Inc where conditions upon which the shares will be issued have been met.  

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

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The customer contracts represent contracted revenues acquired as part of business combinations, and customer relationships represent the expected future cash flows from revenues with existing customers that are uncontracted at the acquisition date. Where the impact of discounting is significant, the valuation used the discounted cash flow method, based on estimated operating business profit margins. The discount rate applied at the time to the future cash flows was 12.1%

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 two cash generating units - UK and US operating businesses. Goodwill and other intangible assets of the UK cash generating unit 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 10% and 15%. 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% (2019: 11%).

As a result of these tests no impairment was considered necessary. Due to the proximity of the acquisition to the reporting date, no impairment test has been performed on Goodwill arising on the acquisition of the US cash generating unit.

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

11. PROPERTY, PLANT AND EQUIPMENT

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

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

12. LEASES

IFRS 16 Lease liability

The leases held by the Group relate to leased land and buildings, plant and machinery and motor vehicles, as set out below. There are no variable lease payments, extension or termination options or residual value guarantees and there are no leases not yet commenced to which the Group is committed.

Amounts recognised in the Consolidated Statement of Financial Position

The balance sheet shows the following amounts relating to leases:

These are included within "Property, plant and equipment" in the Consolidated Statement of Financial Position.

Amounts recognised in the Consolidated Income Statement

The Consolidated Income Statement shows the following amounts relating to leases:

13. SHARE-BASED PAYMENTS

In the year ended 31 December 2020 the Group operated two equity-settled share-based payment plans as described below.

The Group recognised total expenses of £4,977,000 (2019: £2,684,000) in respect of equity-settled share-based payment transactions in the year ended 31 December 2020 of which £1,597,000 related to accrued national insurance costs (2019: £531,000).

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 some of these awards is subject to the Group achieving certain performance targets under the LTIP, as set out in the Directors' Remuneration Report and are based on the Group meeting the adjusted earnings per share (AEPS) and (in some cases) total shareholder return (TSR) conditions in the following weightings.

2018 and early 2019 awards:

December 2019 and 2020 awards:

Details of the maximum total number of ordinary shares, which may be issued in future periods in respect of awards outstanding at 31 December 2020 is shown below.

Options over 3,060,342 shares are subject to TSR performance conditions, options over 5,525,226 shares are subject to AEPS performance conditions, and the remaining shares are subject only to continued employment by the Group (2019: Options over 3,708,435 shares are subject to both the AEPS and TSR performance conditions and the remainder were 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 Black Scholes or Monte Carlo model. The aggregate of the estimated fair values of the awards at 31 December 2020 shown above is £1.01 (2019: £0.95). The fair value of the TSR award takes into account the likelihood of achieving the performance conditions.

The weighted average remaining contractual life for the share options outstanding as at 31 December 2020 was 0.4 years (2019: 1.3 years).

The weighted average fair value of options granted during the year was £1.56 (2019: £1.39).

All options have an exercise price of £nil.

For awards granted in the current year, the inputs into the Monte Carlo models are as follows:

Expected volatility was determined using the Group's own share price volatility. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

Share Incentive Plan (SIP)

The Group operates an all-employee share ownership plan. Under the SIP, the Group has made awards of matching shares to certain employees which are conditional on length of service.

Details of the maximum total number of ordinary shares subject to conditional share awards outstanding at 31 December 2020 is shown below.

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 2020 shown above is £2.05 (2019: £1.69), before taking into account the likelihood of achieving non-market-based performance conditions.

For awards granted in the 2020 year, the inputs into the Black Scholes model are as follows:

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.

14. DEFERRED TAX              

The deferred tax liability relates to intangible assets arising on acquisition of a subsidiary.

The Group has unrecognised deferred tax assets on losses of £1,132,000 (2019: £977,000)

15. BUSINESS COMBINATIONS

Acquisition of Pipeworks Inc

On 30 September 2020 the Group announced its conditional acquisition of Pipeworks, Inc (Pipeworks). The acquisition was completed on 16 October 2020. Consideration agreed was $35.0m cash on completion subject to normal cash, net debt and working capital adjustments and $24.5m in Sumo shares on completion, with additional consideration of up to $40m payable based on the performance of Pipeworks in the years to 31 December 2020 and 31 December 2021.  The fair value of the consideration was assessed as £80.2m ($103.7m), comprising cash of £26.2m ($33.9m) (£25.0m net of cash acquired), Ordinary shares issued £25.5m ($33.0m) and additional earnout consideration contingent on future performance with an estimated fair value at the acquisition date of £28.5m ($36.8m).

Consideration transferred

Completion consideration

On 16 October 2020 the acquisition of Pipeworks, Inc was settled in cash of $33.9m (£26.2m) after adjustments for cash, debt and normalised working capital, and in 9,893,940 shares with a fair value of £25.5m ($33.0m) on the completion date based on the Group's share price on 16 October of £2.58 per share. The number of shares issued was determined as a value of $24.5m based on the 'reference share price' (the average share price on the 30 trading days preceding 28 September 2020) determined on completion to be $2.48/ £1.90. 

Contingent consideration

In addition to the consideration payable on completion, additional consideration may be payable based on earnout targets for Pipeworks, Inc. for the financial years ending 31 December 2020 and 31 December 2021. The maximum earnout consideration is $8m in respect of 2020 and $32m in respect of 2021 based on the reference share price of $2.48/£1.90. The total earnout consideration will be settled in one instalment following the signing of the audited accounts of the Group for the year ending 31 December 2021. At least 30% of the earnout consideration will be settled in cash, and at least 30% settled in Sumo shares, with the final split of cash and shares at the Group's discretion. 35% of the total earnout consideration is variable based on movements in the Group's share price in comparison to the reference share price.

Management determined that the fair value of contingent consideration on acquisition was $36.8m (£28.5m). In determining the fair value of the contingent consideration on acquisition, management have made a number of assumptions:

Financial targets - management have made an assessment of the likelihood of earnout targets being met. The earnout for the year ended December 2020 has been determined based on the actual trading results for the period. The earnout for the year ended December 2021 has been calculated using a risk weighted average forecast. This assumption will be reassessed at each reporting date and any movements in the fair value of the consideration amount recognised in the income statement.

Fair value of shares - a proportion of the earn out consideration results in a fixed number of shares (or cash equivalent value) using the earn out amount divided by the 'reference share price' of £1.90. The fair value of this proportion of the consideration was determined with reference to the Group's market share price on completion. The fair value will be reassessed at each reporting date, and at 31 December 2020 this has resulted in an increase in the fair value of the consideration of £4,205,000 which has been recognised as an expense in the income statement. This expense is offset by a foreign exchange gain on retranslation of the liability of £1,499,000.

Discount rate - the liability for contingent consideration has been discounted to present value using a rate of 2.5%. Interest costs of £146,000 have been recognised in the income statement. The undiscounted value of the contingent consideration at acquisition was $38.2m (£29.5m).

Goodwill and intangible assets

Goodwill of £61,841,000 is primarily related to growth, technical knowledge and market diversification, as well as the acquisition of an assembled and trained workforce. Other intangible assets had a fair value of £21,425,000 and include Customer Contracts, Customer relationships, Trademarks and Intellectual property.

Contribution to the Group results

Pipeworks, Inc generated a profit before tax of £1.2m for the 2.5 months from acquisition. Revenue for the period was £6.1m. If Pipeworks had been part of the Group for the full year, profit would have been £3.7m.

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

Acquisition of Lab42 Limited

On 14 May 2020, the Group acquired Lab42 Limited (Lab42) for consideration of $600,000 (£493,000). Net consideration was £197,000, as Lab42 had £296,000 of cash on the balance sheet at the date of acquisition. The Company will continue to operate under the Lab42 name, as a wholly owned subsidiary of Sumo Digital Limited.

Contribution to the Group results

Lab 42 Limited generated a profit before tax of £0.5m for the 7.5 months from acquisition. Revenue for the period was £2.6m, including £0.4m of intercompany revenue. If Lab42 had been part of the Group for the full year, profit would have been £0.6m.

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

Acquisition of Red Kite Games Limited

In the year ended 31 December 2019 the Group acquired Red Kite Games Limited. During the year ended December 2020, the Group paid £134,000 of deferred cash consideration and issued 1,162,791 shares as deferred consideration.

Cash flows on acquisition of subsidiaries - net of cash acquired:

16. POST BALANCE SHEET EVENTS

Following the year end, on 27 January 2021, The Group's joint brokers and NOMAD, Zeus Capital, exercised warrants to subscribe for 1,450,000 shares for £1 each, generating proceeds of £1,450,000 for the Group.

On 31 January 2021, the Group acquired PixelAnt Games sp. z o. o. ("PixelAnt"), based in Wroclaw, Poland for a total consideration of £250,000. A further amount may be payable, in Sumo Group shares, depending on the EBITDA achieved in the two years to 31 March 2023. The company will continue to operate under the PixelAnt name, as a wholly owned subsidiary of Sumo Digital Limited.

17. ALTERNATIVE PERFORMANCE MEASURES

The Group reports certain alternative performance measures (APMs) that management believes provide valuable additional information for the users of this report to understand the underlying trading performance of the business. In particular, Adjusted EBITDA is used to provide the users of the accounts a clear understanding of the underlying profitability of the business over time. These APMs, described below, are not GAAP measures as defined by IFRS. A reconciliation of statutory profit to underlying profit is provided below.

Adjusted EBITDA

Adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA) also excludes:

·      Share based payments charges of £4,977,000 (2019: 2,684,000).

·      Foreign currency derivative contracts gain of £966,000 (2019: nil). This adjustment represents net gains or losses on economic foreign currency hedges, recognised at fair value within statutory operating profit, but which are not yet realised through actual currency receipts. These gains or losses are excluded from Adjusted EBITDA, which recognises profit on economic foreign currency hedges at a constant currency hedged rate and includes only gains and losses on realised currency receipts.

·      Exceptional costs of £4,115,000 (2019: £523,000) for professional advisor fees associated with acquisitions.

·      Fair value movements on contingent consideration of £2,706,000 (2019: £nil) associated with acquisitions.

·      Investment in co-funded games expensed of £245,000 (2019: £1,292,000), being the Group's contribution to the cost of developing games which are co-funded with clients and which are required to be expensed under IFRS, offset by the unwind of any such costs adjusted in previous periods on games which have subsequently launched.

Adjusted EBITDA also includes:

·      Operating lease costs capitalised under IFRS16 of £1,548,000 (2019: £986,000) which represents the rental costs payable on leases applied on a straight line basis over the life of the lease.

Adjusted profit before tax

Adjusted profit before tax excludes share based payment charges, exceptional costs, fair value movements on contingent consideration and investment in co-funded games expensed, and includes operating lease costs, as described above.

Adjusted profit before tax also excludes:

·      Depreciation of £1,355,000 (2019: £905,000) associated with IFRS16.

·      Finance costs of £342,000, being interest charges associated with IFRS16 of £196,000 (2019: £149,000) and the unwind of interest on the Group's liability for contingent consideration of £146,000 (2019: £nil).

·      Amortisation of £1,742,000 (2019: 621,000) on intangible assets recognised on acquisition.

Adjusted Earnings Per Share

Basic adjusted earnings per share is calculated by dividing the adjusted profit attributable to equity shareholders by the adjusted weighted average number of ordinary shares in issue at the reporting date.

Adjusted profit attributable to equity shareholders is calculated as adjusted profit before tax after applying a pro-forma rate of tax of 19%.

Adjusted weighted average number of shares differs from the statutory measure (Note 9) as it includes 950,000 nil cost options issued on IPO which have no outstanding performance conditions as part of share capital. Only 540,000 were exercised as at 2020 (2019: 500,000). Adjusted weighted average number of shares in 2020 also assumes 7,588,500 of share placing shares issued on 21 July 2020 were tied to the Pipeworks acquisition on 16 October and are included in the weighted average only from that date.

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

When calculating adjusted diluted earnings per share, the number of shares is adjusted to assume conversion of 9,603,033 (2018: 9,640,194) of potentially dilutive options granted to employees, 8,715,519 (2019: 1,162,791) shares to be issued in respect of deferred consideration on acquisition and 1,450,000 (2019: 1,450,000) of warrants.