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Sumo Group a strong and resilient business

Sumo Group plc (LON:SUMO), the award-winning provider of creative and development services to the video games and entertainment industries, confirms that it will comply with the FCA’s request that all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks and postpone the announcement of the Group’s final results for the year ended 31 December 2019, which was scheduled for 1 April 2020.

As previously announced on 22 January 2020, FY19 results are expected to be at least in line with market expectations. The Group is today providing an update on its unaudited results in FY19, the effects of COVID-19 and current trading in the year ending 31 December 2020.

Key financials (unaudited):

· Revenue increased to £49.0m (FY18: £38.7m) – up 26.6%

· Adjusted gross margin excluding royalties1 was 50.2% (FY18: 47.1%) – up 310 bps

· Adjusted EBITDA2 was slightly ahead of expectations at £14.1m (FY18: £10.2m) – up 37.5%

· Net cash at 31 December 2019 £12.9m (FY18: £3.7m)

The Group’s liquidity position remains robust with cash balances of £23.6m at 24 March 2020, which includes an amount of £10m drawn down on the Company’s £13m committed revolving credit facility.

Current trading and COVID-19

The Group has enjoyed a positive start to the new financial year ending 31 December 2020 and already has a high degree of earnings visibility on contracted or near contracted revenue of approximately 71%.

Our teams are currently working on 21 projects with 12 different clients, of which seven games or publisher partnerships have been announced. In February, Curve Digital announced Hotshot Racing, the arcade-style racing game, and Sega launched console versions of Two Point Hospital. It was particularly pleasing to see Apple Arcade launch our co-funded Own-IP game, Spyder, last week, the idea for which was generated during one of our Game Jams.

We are now facing the unprecedented challenge of dealing with the COVID-19 pandemic, the scale and nature of which is constantly changing and, as yet, we have no clear visibility of its likely duration. Sumo Group is a people business and our absolute priority is to safeguard, where possible, the well-being of our people, their families and our other stakeholders. Accordingly, we are following UK, Indian and Canadian Governments’ advice and communicating regularly with all our people. Over the last few weeks and in close co-operation with our clients and with their consent, we have moved to working from home across the Group. Whilst there has been some disruption and loss of efficiency, as project teams were migrated away from our ten studios to remote Cloud based working from home, early indications are encouraging. We expect a manageable level of disruption and loss of efficiency to continue, as we re-calibrate our project management controls and internal management systems.

Paradoxically, the COVID-19 pandemic is expected to increase global video games software revenues, as people staying at home play more games. As such, it is reasonable to expect some improvement in royalty income on games already published and which have increased sales or usage with the current restrictions on movement in many countries. The quantum of such improvement is not yet clear.

A number of major industry trade events have been cancelled or postponed across the globe, most notably GDC and E3, and increasingly severe restrictions are being placed on travel to protect people worldwide. We are managing to mitigate the loss of face time through increased use of telephone and video conferencing. Our efforts are beginning to bear fruit and the Group is continuing to generate business development opportunities on major new projects from both existing and potential new clients.

Prior to COVID-19 being classified as a pandemic and with strong visibility on development fees, we were confidently on track to deliver further double-digit growth in 2020. While the Group is liquid and our relatively low risk business model provides a good foundation to withstand the challenges presented by the pandemic, it is too early to quantify the likely financial impact with any degree of certainty. Our exposure is primarily on the supply side with some potential loss of efficiency during the unprecedented restrictions delaying milestone payments, although the Group is taking all steps possible to mitigate and limit this risk. We are also seeing a slow-down in our new talent recruitment rate, which we expect to continue for the foreseeable future. This is likely to be partially offset by lower attrition rates.

We look forward to announcing our audited FY19 results in due course and will provide further updates on trading, as the situation develops, in a timely manner.

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

“Our people are adapting well to home working and we have a strong and resilient business with £23.6m cash and a relatively low risk business model. Demand for great video games content is forecast to grow and may even strengthen as a result of the “stay at home” measures taken to protect our health through the COVID-19 pandemic. As such, we are confident in our strategy and ability to continue generating strong returns for our stakeholders in the longer term. We are grateful to our team for their resilience, our clients for their support and our investors for their forbearance.”

1 Adjusted gross margin excluding royalties is stated after the exclusion of royalties and the investment in co-funded games expensed and is a non-GAAP metric used by management and is not an IFRS disclosure.

2 Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, exceptional items, share based payment charge, the investment in co-funded games expensed and, in 2019, the impact of IFRS 16, is a non-GAAP metric used by management and is not an IFRS disclosure.

In the FY 18 results adjusted gross profit and adjusted EBITDA were both stated after adjusting for customer revenue included within finance income (FY 18: £0.4m) and accrued royalty not yet received and contingent on future sales (FY 18: (£0.2m)). When we announced our half year results on 26 September 2019 we stated that we would not in future be making any adjustments to gross profit or EBITDA for the effect of IFRS 15.

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