Zattikka PLC

Preliminary results

RNS Number : 4085G
Zattikka PLC
06 June 2013
 



For immediate release

6 June 2013

 

ZATTIKKA PLC

('Zattikka' or the 'Group')

Announces preliminary results for the year ended 31 December 2012

A tough year of integration, now behind us

Zattikka, the online games entertainment group, today publishes its preliminary results for the year ended 31 December 2012, in line with revised expectations in November 2012.  The Group is focused on developing and publishing games entertainment products for mobile and tablet devices, PC/Macs across open browsers and other internet connected devices, and providing art and design services for third party game developers.

 

The Group's parent company, Zattikka plc, was incorporated on 16 November 2011 and its shares were admitted to trading on AIM on 16 April 2012 ("Admission").  The majority of the net proceeds received from Admission were used to complete the acquisition of four companies - Hattrick Holdings Limited ("Hattrick"), Concept Art House Inc. ("Concept"), Sneaky Games Inc. ("Sneaky") and Expedite 5 Inc. ("E5").  The Group previously had no trading activities and therefore these acquisitions marked its effective operational debut.  The Board recognises that during this initial period Zattikka has performed below expectations; however, the Group remains committed to working even harder to achieve its objectives.

 

Financial Highlights

Pro-forma financials (non-IFRS) for the twelve months ended 31 December 2012*

·    Revenue bookings $10,200,000 (prior year n/a)

·    EBITDA (adjusted)** loss $2,200,000 (prior year n/a) 

 

Consolidated Financials for the twelve months ended 31 December 2012 including the acquisitions from 16 April 2012

·    Revenue bookings $6,927,000 (prior year n/a)

·    EBITDA (adjusted)** loss $2,471,000 (prior year n/a)

·    IFRS loss for the period (after exceptional items and acquisition costs of $9,059,000)*** $14,482,000 (prior year n/a)

·    Cash and cash equivalents $1,796,000 (prior year n/a)

 

 

Operating Highlights

·    Successful listing on AIM on 16 April 2012 simultaneously with the four complementary acquisitions of Hattrick, Concept, Sneaky and E5.

·    Improving momentum at Hattrick with H2 2012 revenue bookings more than 20 per cent. higher than in H1 2012.

·    Investment in new product development through H2 2012 for key games launches in 2013 including Legacy of a Thousand Suns and Arena of Heroes.

·    Strengthened management team at Concept Art House with key talent supporting North American and Chinese operations.

·    Implementation of disciplined cost controls, governance and project management systems.

·    Reduction of headcount and costs in shared functions in London.

·    New working capital facility with Barclays Bank plc for up to £1m to be put in place following restructuring of unsecured loan notes issued by Zattikka in connection with the acquisitions (as announced separately  this morning).

 

Board changes

 

We would like to thank Tim Chaney, who is stepping down from the board, effective today, to pursue other business opportunities and children's digital safety advisory work.  Tim, who had a 12 month notice period, is working a 3 month transition period on various commercial arrangements.  He has opted to receive further compensation in cash, the majority of which he will use to invest in stock in the future, following his resignation from the board, as well as to acquire from the Group certain redundant pre-acquisition "Gimme5Games" related flash games assets.  The Group will retain a two year revenue share in these assets.   Tim, as co-founder, played a pivotal part in the Group's formation and we wish him success in his new venture. 

 

Outlook

 

The Board is pleased with the encouraging start to 2013 and believes many of the challenges, particularly around integration, that were experienced post the Group's admission to AIM are under control.  The Group continues to make good strategic progress across all of its business divisions as it seeks to execute its long-term growth strategy.  While the Group's trading performance is expected to be weighted to the second half of 2013, reflecting the growth nature of the Group's assets, at the current time, the board anticipates that results for the full year will be broadly in line with market expectations.

 

As stated in its Admission Document, the Group is committed to pursuing an active acquisition policy and, since admission to AIM, the Group has seen a number of potential targets and continues to evaluate such opportunities. We look forward to updating the market on our progress in due course.

 

 

 

 

Mark Opzoomer, Group Chief Executive, commented:

 

"While I am pleased to announce our maiden preliminary results following the Company's admission to trading on AIM in April 2012, I am disappointed they are not as strong as we hoped.  This has not deterred us from our purpose and we will, together, strive even harder for better performances.   The challenges we faced at the Company's inception are now in the past. 

 

We have accomplished much in a very short time resulting in a fully integrated asset base now focused on driving organic revenue generating opportunities. We have made a promising start to 2013, particularly within our Hattrick franchise where after much research and testing we have implemented a new tiered pricing structure, while Concept Art House enjoyed its best quarter since its acquisition in Q1 2012.

 

The Group team is fully energised and focused on taking the business forward and we remain committed to our objectives over the coming years."

For further information, please contact:

Zattikka

 

Mark Opzoomer, Chief Executive Officer

+44 (0) 20 7491 6410

Rob Gorle, Chief Financial Officer

 

 

Canaccord Genuity Limited

Nominated Adviser and Broker

Simon Bridges

Peter Stewart

 

+44 (0) 20 7523 8000

 

Buchanan

Jeremy Garcia

Clare Akhurst

www.buchanan.uk.com

 

+44 (0) 20 7466 5000

 

About Zattikka:

 

Zattikka plc is a digital games entertainment group, developing games and providing publishing services in this sector of the rapidly evolving multi-billion dollar global digital entertainment market.  Zattikka is executing a clear vision to become a large scale, diverse games publisher through strategic acquisitions and by accelerating organic growth. Headquartered in the United Kingdom with shares listed on London's AIM (ZATT), Zattikka games studios include Sneaky Games (USA), Spellgun (USA and China) and Hattrick (Europe).  Business to business services include high quality game art and design services provided by Concept Art House (USA and China) and in-game analytics insights through its bespoke SNAP technology platform developed in London.

For more information visit www.zattikka.com

 

 

 

Operating and Financial Review

 

Introduction

We are pleased to report our maiden preliminary results for the year ended 31 December 2012.  It has been a period of tremendous change since the Group listed on AIM on 16 April 2012 and our team has achieved much during that time.  Our AIM flotation was clearly a pivotal point in Zattikka's history and we were pleased to attract support from a number of blue chip institutional shareholders.  Despite this progress the Group recognises that it has not yet reached the expected stage of development, but remains confident it has the strategy and team to deliver fully its vision. 

 

The principal activities of the Group are developing and publishing games entertainment products for mobile and tablet devices, PC/Macs across open browsers and other internet connected devices, and providing art and design services for third party game developers.  On our admission to AIM, the Company raised $20million (before costs) in a placing of new shares, and acquired four distinct and complementary businesses - Hattrick Holdings Limited ('Hattrick'), Concept Art House Inc ('CAH'), Sneaky Games Inc ('Sneaky'), and Expedite 5 Inc ('E5').  These transactions have provided the Group with products that can then be sold to end-customers in key European and US markets, either directly through its own websites, or through third-party digital distribution channels or other new digital platforms, and a work for hire consultancy business providing art and design services primarily to other digital games companies.

 

In this first period we consolidated a strong framework of governance and internal controls to provide visibility across each operating unit and the Group as a whole, and to facilitate effective decision making.  As part of this, we implemented new group reporting and approval processes, and the first stages of a new simplified legal entity and tax structure.  NetSuite, a cloud-based group accounting system is currently being rolled-out across all regions to allow scale and reduce costs in this area.   We believe the steps taken during 2012 will allow us to continue the tight management of the Group as it grows.

 

The broader games market continues to evolve creating new opportunities for our brands to exploit.  The evolution of the mobile space through smart phones and tablet devices, and the expansion of other gaming enabled devices, continues to expand the active gaming community worldwide. We believe our portfolio of businesses provides a good base from which we can address this exciting market opportunity. 

 

Consolidation Basis and Key Financial Metrics

This full year report is prepared on a consolidated basis and includes the results of Zattikka plc from 1 January 2012 to 31 December 2012, plus the results of the businesses acquired from 16 April 2012 to 31 December 2012.  Comparative figures are for the period 16 November 2011 to 31 December 2011.

 

We include Revenue Bookings (or "Bookings") and Adjusted EBITDA which we use to evaluate our business and measure our performance.  We believe they are better indicators of activity in a given period but should be considered along with the IFRS measures presented in this report.

 

Bookings are a non-IFRS financial measure that is equal to revenue recognised during the period plus change in deferred revenue during the period.  Bookings, as opposed to revenue, are the fundamental top-line metric we use to manage our business, as we believe it is a better indicator of the sales activity in a given period.

 

 

Operating and Financial Review (continued)

We believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.  Adjusted EBITDA is defined as: Earnings before interest, tax, depreciation, amortisation, changes in deferred revenue, share-based payments charge, exceptional items and acquisition costs.

 

Revenue Bookings

In this first period as a combined group we generated revenue bookings of $6.9million (IFRS Revenue: $6.9million), of which 63% was attributed to our Online Games group, and the remaining 37% to Publishing Services.  These revenues are diversified across different revenue types, games platforms and geographic regions.  We operate across the main gaming regions with the majority of Hattrick revenues being generated in Europe, and the majority of work for hire in US and Asia.  Had the Group been in place for the full calendar year, the unaudited pro-forma revenue bookings would have been $10.2million.  All figures below relate to the post acquisition period as reported in these financial statements.   

 

Online Games

Our Online Games group, responsible for developing and publishing intellectual property ("IP") owned by the Group, generated revenue bookings of $4.3million (63% of group total), including subscription revenues on the Hattrick football manager game, typically paid annually in advance and advertising and virtual goods revenues within our published games.  The operating divisions and products within Online Games are detailed below.

 

·     Hattrick.  During 2012 we focused on marketing campaigns and product improvements to increase the engagement and monetisation of the existing Hattrick user base which resulted in a stabilisation of the user base.  Over a pro forma 12 month period, after a disappointing first half, post-acquisition second half revenue bookings were more than 20% higher than in H1.  Hattrick currently operates in the open web browser and is therefore free from platform revenue share costs. 

 

Based on research carried out during 2012, the Hattrick team introduced a significant new tiered pricing tariff in March 2013.  The research indicates that the new tiered 'Silver', 'Gold' and 'Platinum' packages should encourage existing users to upgrade to higher priced subscriptions, and that new functionality to offer different packages and prices in different regions should allow more competitive pricing to encourage new users to start subscribing.  The two focus areas for Hattrick during 2013 remain product innovation, including changes to the front end of the game to engage players earlier and improve player retention, and geographic expansion which has already been evidenced in the first quarter of 2013 with new distribution agreements in Russia and Eastern Europe.  

 

·     Popmundo.  The Popmundo music role-playing game was split out from Hattrick during the year and has now been fully transitioned to a new version 2.0 which includes SNAP Analytics.  Implementation of key lessons from other products are in progress, including regional pricing and expanding the paid subscription options.

 

 

Operating and Financial Review (continued)

 

·     Sneaky Games.  During 2012, Sneaky continued to operate two mid-core fantasy role playing games, Fantasy Kingdoms (launched in 2010) and Syfy Monster Island (launched in 2011).  Fantasy Kingdoms Creator, an extension of the basic product, was launched in Germany in late 2012 to test new markets, and since year end Monster Island has been licensed for a Russian language version later in 2013.  At the end of the year, these products still attracted over 400,000 monthly active users on Facebook, however due to inadequate monetisation the Group has provided for impairment of these assets and is not planning to develop them further. 

In the second half of 2012, Sneaky Games development has been focused on 'Arena of Heroes' ("Arena"), a new game which leverages the Group's analytics, art and game design capabilities, and is due for full release in Q2 2013.  Distinguishing features of Arena are its ability to play both asynchronously, and seamlessly across tablets, mobile, PC and Mac.  The website is now live www.arenaofheroes.com, founders' pack sales have begun and an encouraging PC/Mac open beta weekend was held at the end of Q1 2013.The Group signed a new licence agreement with Games Workshop for to develop a game based on the Titans characters from their world renowned 'Warhammer 40,000' universe which is intended to leverage the Arena platform.

·    Spellgun.  Spellgun Studios was announced in November 2012, formed by a team separated out of CAH to provide greater identity and focus.  Spellgun is a mobile-oriented game studio focusing on titles for both iOS and Android platforms and leveraging CAH's high calibre art resources, Zattikka's core analytics engine, and a unique geographic position to build games for an ever-increasing mobile game player base.  Spellgun released its first product, the mobile and tablet versions of Legacy of a Thousand Suns in April 2013.

Publishing Services

The Publishing Services group generated revenues of $2.6million (37% of total) through work for hire art and design consultancy services for third party game developers.   As a result of the strengthened team structure put in place during 2012, we successfully increased the average contract size for the fourth year in a row.   CAH revenues in the fourth quarter of 2012 returned to growth, stimulated by the strengthened management and an increased penetration into selected international markets, especially Japan.    Management also plans to extend the existing art and game design services to include in-game analytics, via the Group's SNAP technology and cross promotional services via the newly created Zattikka Games Network ("ZGN") at some point in the future.  The different services are:

CAH produces 2D, 3D, vector art and design for leading games developers from its sales office in San Francisco and art development studio in Shanghai.   CAH has produced art and design for successful Facebook games, such as Nightclub City and Kingdoms of Camelot, and provides the Group with access to both Western and Eastern markets with a foothold in the Asian social and mobile gaming market.  During the year, new contracts were signed with NgMoco for Transformers Legends and Hellfire and contract extensions were agreed with DeNa for its game Ninja Royale.  CAH showcased a new sales programme at Game Developers Conference in San Francisco at the end of March.   

 

Operating and Financial Review (continued)

 

·     SNAP Analytics.  The Group has developed its own cloud based analytics and metrics platform, called "SNAP", capable of reporting on any game, regardless of the platform. During 2012 SNAP was successfully implemented into each game in the Group's product portfolio.  This platform allows the product development team to analyse the success of each individual feature in the game after it has gone live, and to determine from the user behaviour, which areas of the game need to be improved to enhance user engagement, retention, virality and monetisation.  This service may be suitable to be extended to other game developers or publishers at some point in the future.

·     ZGN is a new marketing focused initiative that will leverage our traffic and audience for new games, improving marketing efficiency, lowering cost per acquisition and improving ROI.  Initially intended just for Group products, this has the potential to be opened up to third party products at some point in the future.

 

Cost management

We manage our operating expenses tightly and as a result quarterly administrative costs excluding staff costs increased by only 11% between Q2 and Q4 despite the increased level of activity during the year.   We continue to review the cost base acquired in the Group and have already made reductions in a number of areas for 2013.

 

Costs of sales of $1.6million included $0.9million of staff costs relating to delivery of work for hire projects in Shanghai, server and hosting costs of $0.3million and payment processing and other outsourced charges of $0.3million.  This resulted in a gross profit margin of 77% for the Group.

 

All other operating expenses of $7.8million were included within Administrative expenses.  Staff related costs of $5.2million were the largest operating cost area for the Group, and have been subject to strict control since acquisition with focused investment in critical development areas.  Overall our headcount remained broadly stable over the period from April 2012 ending the year at 160 compared to the peak of 183.  We have invested in Hattrick with additional heads in the product development team for the core Hattrick product, and added a marketing director to lead the new marketing initiatives.   At CAH, we have reallocated resources to create three key new critical roles to scale and manage the business: a general manager in CAH China to provide local governance and operational management to the China art development team and build local sales pipeline, and in the USA a sales director to scale the sales operation, and a creative director to drive up quality and innovation. 

 

In addition we have maintained the Sneaky Games development team, reallocating some resources to the new ZGN function to provide market support for new launches across the Group.    The smaller Spellgun studio was established in San Francisco during the year as a split out of existing development skills at CAH.   We continue to review headcount costs across the Group to identify opportunities to reallocate resources to more profitable businesses.  Including the Shanghai work for hire staff included within cost of sales, staff costs represented 66% of total expenses.

 

 

 

 

 

 

Operating and Financial Review (continued)

 

During 2012, we held our external marketing spend low at $0.4million while we prepared for launches of new products and features during 2013.    The ZGN group in Austin was established to lead the marketing for the US social mobile and tablet game launches, and we have separate marketing resources in Europe to focus on Hattrick.  In this initial period of group implementation, we incurred $0.9million of professional expenses which included expenses relating to the public listing status and resulting governance including stock exchange fees, Nomad, audit, PR and IR.  Facilities and all other costs were $1.3million covering the six locations occupied by the Group in the US, Europe and China.

 

The Group continues to manage all costs tightly whilst continuing to invest where we see particularly strong opportunities. The central shared functions, including Engineering, Product and Finance, have been reduced by almost 40% to seven core roles.

 

EBITDA and loss for the period

The Group recorded an EBITDA loss before exceptional items, acquisition costs and share-based payments charge, of $2.5million, reflecting the initial period of integration and restructuring combined with the pre-launch investment in the Spellgun and Sneaky studios.  Being the first year of the new Group these results include some parent company shared function costs in the period to 16 April prior to completion of the acquisitions.   Adjusting for the movement in deferred revenue, the adjusted EBITDA loss was $2.5million. 

 

The Group recognised a share-based payments charge of $1.0million arising from the Long Term Incentive Plan for management and staff which was implemented at the same time as the acquisitions.  The Group had amortisation of $3.0million relating to the intangible assets acquired with the acquisitions. 

 

Operating loss includes exceptional items and therefore we do not believe this is representative of the underlying business.  During the year the Group recorded exceptional items and acquisition costs of $9.1million including $7.0million of impairment on the Sneaky Studio acquisition due to lower than expected performance of some of the pre-acquisition titles, $0.2million of reorganisation and integration costs, and $1.8million of acquisition transaction and IPO costs. 

 

Finance costs of $0.4million arose due to accrued interest on the vendor loans arising on three of the acquisitions.  The Group recognised a tax credit of $1.5million relating to current year losses, and the release of a deferred tax liability upon the transfer of the business and assets of Hattrick Holdings Limited to the UK.

 

Balance sheet and cash flow

On 16 April 2012 the Group raised $20.0million (before costs) and simultaneously completed the acquisition of four companies for aggregate consideration of $43.5million, including cash of $14.8million, loan notes of $12.0million, shares in Zattikka plc of $15.1million and contingent consideration of $1.6million.  As required by IFRS3 we carried out a fair value exercise to allocate the purchase price of the acquisitions, which resulted in an allocation of $13.8million to specific intangible assets, net of current year amortisation, and goodwill at year end of $24.7million. During finalisation of the purchase price allocation management reassessed contingent consideration payable in respect of the Hattrick acquisition, based on information available, but outstanding, at the acquisition date. As a result, goodwill and contingent consideration payable were reduced by $8.3million from that reflected in the 30 June 2012 financial statements.

Operating and Financial Review (continued)

 

Trade receivables amounted to $0.8million, and other receivables $0.5million including prepayments and accrued income.  We have a good record of collection on trade receivables, with average debtor days of 39 days.

 

We ended the year with a cash balance of $1.8million.  During the period the Group used $2.4million of net cash in operations, and incurred $0.3million to fund internally generated intangible and tangible assets.  $14.8million was used to acquire businesses, and $1.3million of net cash was acquired on acquisition.  The net proceeds from the issue of ordinary share capital were $18.4   million after deduction of costs of $1.6million.  Post year-end we have successfully arranged a $1.6million (£1million) working capital finance facility with Barclays Bank which we intend to use  while the Group launches a number of products during 2013.

 

Trade and other payables of $5.7million included contingent consideration on the Hattrick acquisition of $1.6million, and advisor payments relating to the acquisitions and listing transaction of $1.8million on much of which we have agreed extended payment terms.  Deferred revenue of $2.4million relates to Hattrick subscriptions and durable virtual goods.

 

At 31 December we had $11.9million of loan notes outstanding arising from the acquisitions in April 2012. 

 

Liquidity

As set out in our subsequent events note, the Group has reached agreement with the unsecured vendor loan note holders to restructure the existing loan notes which had certain consent rights.  The original notes were due 16 April 2013 with a one year extension at the option of the Group, which has been exercised.  The loan note holders have agreed to extend the notes to 16 October 2014, permit the establishment of a secured working capital facility and consent to the completion of further acquisitions and placings. In addition the note holders have agreed, in return for repayment of 50% (Sneaky: 20%) of the current notes, to convert 25% (Sneaky: 80%) of the notes to equity and convert 25% (Sneaky: nil%) to a new three year convertible consent-free note with a 10% annual interest rate (which the Group would intend to refinance over the three year period on a less dilutive basis).

 

The Group had cash and cash equivalents at 31 March 2013 in excess of $1.0million.  Consistent with the above the Group has entered into a new secured working capital facility with Barclays Bank plc in the amount of £1million ($1.6million) to provide additional liquidity.

 

The consolidated financial statements have been prepared on the assumption that we will continue as a going concern and the audit opinion relating to the financials has been issued in an unmodified form.  The ability of the Company to continue as a going concern is dependent on further implementing its business plans, continuing access to its on-demand working capital loan facility, raising capital against planned further acquisitions, and the continuing support of its creditors. The Board intends to raise additional working capital at the same time as a next acquisition in order to remove the reliance on the working capital facility, and provide additional headroom in the forecast in the event that any of our products do not perform as expected. 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2012


Note


Year ended

Period ended




31 December 2012

31 December 2011




$'000

$'000






Revenue

2


6,927

-






Cost of sales



(1,604)

-






Gross profit



5,323

-






Administrative expenses



(7,782)

-






EBITDA before exceptional items, acquisition costs and share-based payments charge

 

(2,459)

-

Exceptional items and acquisition costs



(9,059)

-

Amortisation and depreciation



(3,133)

-

Share-based payments charge



(968)

-






Operating loss



(15,619)

-






Finance costs



(411)

-






Loss before tax



(16,030)

-






Tax credit

5


1,548

-






Loss for the year/period



(14,482)

-






Other comprehensive income, net of tax




Exchange translation differences on foreign operations

445

-

Total comprehensive loss for the year/period

(14,037)

-




Basic and diluted loss per share ($)                           10 

(0.92)

-




 

 

 

Consolidated Statement of Financial Position

as at 31 December 2012




31 December 2012

31 December 2011





$'000

$'000

Assets



Note









Non-current assets    






Goodwill



6

24,736

-

Other intangible assets



7

13,846

-

Property, plant and equipment

 


271

-











38,853

-

Current assets






Inventory




3

-

Trade and other receivables




1,316

-

Cash and cash equivalents




1,796

-











3,115

-







Total assets




41,968

-







Liabilities

 






Current liabilities






Taxation




(119)

-

Trade and other payables





(4,445)

-

Deferred revenue




(2,337)

-





 

(8,065)

 

-





(6,901)

-













Net current liabilities




(3,786)

-







Total assets less current liabilities



35,067

-







Non-current liabilities

 






Loan notes



8

(11,860)

-

Trade and other payables




(1,272)

-

Deferred revenue




(43)

-

Deferred taxation




(1,310)

-











(14,485)

-







Total liabilities




(21,386)

-







Net assets




20,582

-

Shareholders' equity






Called up share capital



9

3,520

-

Share premium account




30,131

-

Share-based payments reserve




968

-

Translation reserve




445

-

Retained deficit




(14,482)

-







Equity attributable to the owners of the parent company


20,582

-






 

Consolidated Statement of Changes in Equity

 


Share capital

Share premium account

Share-based payments reserve

Translation reserve

Retained deficit

Total


$'000

$'000

$'000

$'000

$'000

$'000

Balance at 16 November 2011

-

-

-

-

-

-

Profit for the period

-

-

-

-

-

-

Total comprehensive income for the period

-

-

-

-

-

-

Shares issued

-

-

-

-

-

-

Balance at 31 December 2011

-

-

-

-

-

-

Loss for the year

-

-

-

-

(14,482)

(14,482)

Other comprehensive income for the year

-

-

-

445

-

445

Total comprehensive income/(loss) for the year

-

-

-

445

(14,482)

(14,037)

Warrants issued

-

197

-

-

-

197

Fair value adjustments loan notes

-

51

-

-

-

51

Share-based payments charge

-

-

968

-

-

968

Shares issued

3,520

29,883

-

-

-

33,403

Balance at 31 December 2012

3,520

30,131

968

445

(14,482)

20,582

 



 

 

 

Consolidated cash flow statement

For the year ended 31 December 2012

 


Note

Year ended    31 December

 

Period ended    31 December

2011



2012

2011



$'000

$'000

Cash flows from operating activities




Cash flows from operations

               

(2,339)

-

Tax paid


(96)

-

Net cash used in operating activities


(2,435)

-





Cash flows from investing activities




Purchase of intangible assets


(154)

-

Purchase of property, plant and equipment


(164)

-

Acquisition of subsidiaries

3

(14,825)

-

Net cash acquired on acquisition of subsidiaries

3

1,318

-

Net cash used in investing activities


(13,825)

-





Cash flows from financing activities




Net proceeds from issue of ordinary share capital

9

18,390

-

Finance costs


(411)

-

Net cash generated from financing activities


17,979

-





Net increase in cash and cash equivalents


1,719

-

Cash and cash equivalents at the beginning of year/period

-

-

Effect of changes in foreign exchange rates


77

-

Cash and cash equivalents at end of year/period

1,796

-





 


1.     Going Concern

The consolidated financial statements have been prepared on the assumption that we will continue as a going concern and the audit opinion relating to these financials has been issued in an unmodified form. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of operations. The ability of the Company to continue as a going concern is dependent on further implementing its business plans, continuing access to an existing on-demand working capital loan facility, raising capital against planned further acquisitions, and the continuing support of its creditors. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Our cash balance as of 31 December 2012 was $1.8million. Our total current assets as of the reporting date amounted to $3.1million and total current liabilities were $6.9million resulting in net current liabilities of $3.8million. We incurred a loss and revenues for the year ended 31 December 2012 of $14.5million and $6.9million, respectively.

 

As described in note 12, subsequent to 31 December 2012, the Company has agreed the extension of the maturity of the Loan Notes to October 2014 and has received consent from the Loan Note Holders to enter into a working capital loan facility. 

 

The Loan Note Holders also consented to a making further acquisitions and the raising of related additional capital.  The Board intends to raise additional working capital at the same time as or before any subsequent acquisition in order to remove the reliance on the working capital facility, and provide additional headroom in the forecast in the event that any of our products do not perform as expected.

 

The Board of Directors has approved a forecast scenario for the period to June 2014, which has been prepared on a standalone basis without assuming completion of any future financing or acquisitions, and which demonstrates that the Company has sufficient cash resources for the next twelve months, subject to the underlying assumptions on revenue and product growth.   

 

Whilst there can be no assurance that the above efforts will be successful, the Board of Directors believes that the steps taken above, and the likelihood of continuing support for the working capital loan, are reasonably capable of removing the threat to the continuation of the business during the twelve-month period following the issuance of these financial statements .

 

After considering the uncertainties above, Board of Directors have decided to continue to adopt the going concern basis in preparing the financial statements.

 

 

 

2.     Segmental information

 

The Group operates in one business, the development and publishing of interactive games entertainment products across internet connected platforms, through various media channels. The Board considers the business from a product and service viewpoint. It monitors performance by the following segments - on line games and publishing services. The cash collection agencies which the Group uses to collect some of its revenue, do not keep sufficiently detailed records to enable Zattikka to report on a geographical basis. Selling products through the internet, the Group has found that no one location is material to the business and the recording accurate and reliable geographical data to be difficult to record and produce.

 


Online games

Publishing services

Eliminations

Total


$'000

$'000

$'000

$'000






Revenue

4,336

2,591

-

6,927

Inter-segment revenue

-

105

(105)

-

Change in deferred revenue

(12)



(12)

Bookings

4,324

2,696

(105)

6,915






Segment results





EBITDA adjusted

(2,968)

497

-

(2,471)

Change in deferred revenue

12

-

-

12

Share-based payments charge

(843)

(125)

-

(968)

Exceptional items (note 4)

(8,501)

(558)

-

(9,059)

EBITDA

(12,300)

(186)

-

(12,486)






Depreciation and amortisation

(1,539)

(1,594)

-

(3,133)

Segment result: operating loss

(13,839)

(1,780)


(15,619)

Finance costs




(411)

Tax credit




1,548






Loss for the year




(14,482)






Other segment items





Capital expenditure on property, plant and equipment

41

123


164

Expenditure on intangible assets

154

-


154






Statement of Financial Position





Segment assets

1,928

1,458


3,386

Goodwill

10,744

13,992


24,736

Intangible assets

9,134

4,712


13,846

Total assets

21,806

20,162


41,968

 

No one customer accounted for more than 10% of the total revenue in the year.

There was no trade between 16th November 2011 and 31 December 2011.

 

  

3.   Acquisitions

 

Concept Art House Inc.

 

On 16 April 2012, Zattikka plc acquired the entire share capital of Concept Art House Inc. CAH is a work for hire art and design company based in San Francisco, USA and Shanghai, China. This acquisition brings to the Group a presence and experience in the growing Asian market and provides high quality creative art and design work. The book and fair values of those assets and liabilities as at 16 April 2012 are set out below.

 

 

Recognised amounts of identifiable assets acquired and liabilities assumed

 



Carrying amounts

Fair value adjustments

Fair

 value



 $'000

 

$'000

$'000

Net assets acquired





Intangible assets





-       Brand


-

603

603

-       Customer relationships


-

2,175

2,175

-       Commercial agreements


-

1,934

1,934

Property, plant and equipment


137

-

137

Trade and other receivables


811

-

811

Cash and cash equivalents


896

-

896

Trade and other payables


(181)

-

(181)

Deferred tax


-

(1,837)

(1,837)






Net identifiable assets


1,663

2,875

4,538











Goodwill recognised on acquisition




9,307






Consideration




13,845






Satisfied by:





Cash




4,445

Loan notes




2,400

Zattikka plc  4,423,102 £0.10 Ordinary shares


7,000






Total amount payable in respect of the acquisition


13,845











Cash consideration




4,445

Less cash and cash equivalents acquired


(896)

Net cash outflow arising on acquisition




3,549






  

 

3.     Acquisitions (continued)

 

Expedite 5 Inc

 

On 16 April 2012, Zattikka plc acquired the entire share capital of Expedite 5 Inc. This company has developed SNAP, a cloud based analytics service to work across all distribution platforms to collect and analyse user behaviour. This technology is in the process of being implemented throughout the Group. The book and fair values of those assets and liabilities as at 16 April 2012 are set out below.

 

Recognised amounts of identifiable assets acquired and liabilities assumed

 



Carrying

amounts

$'000

Fair value adjustments

$'000

Fair

value

$'000

Net assets acquired





Intangible assets





-       Software


64

87

151

Property, plant and equipment


11

-

11

Trade and other receivables


205

-

205

Cash and cash equivalents


22

-

22

Trade and other payables


(3,887)

-

(3,887)






Net identifiable liabilities


(3,585)

87

(3,498)






Goodwill recognised on acquisition




5,998











Consideration




2,500






Satisfied by:





Zattikka plc 1,579,679 £0.10 Ordinary shares




2,500






Total amount payable in respect of the acquisition


2,500











Cash consideration




-

Less: cash and cash equivalents acquired


(22)

Net cash inflow arising on acquisition




(22)






 

 

  

 

The trade of Expedite 5 Inc was transferred to Zattikka UK Limited on 16 April 2012 and Expedite 5 Inc was subsequently dissolved on 3 May 2012.

 

 

3.     Acquisitions (continued)

 

Hattrick Holdings Limited

 

On 16 April 2012, Zattikka plc acquired the entire share capital of Hattrick Holdings Limited. Hattrick provides an online football manager game and a music lifestyle role playing game. Hattrick will provide the Group with an entry into the sports gaming market and in the long term lead to opportunities in other team sports. The book and fair values of those assets and liabilities as at 16 April 2012 are set out below.

 

Recognised amounts of identifiable assets acquired and liabilities assumed






 



Carrying

amounts

Fair value

Adjustments

Fair

value

 



$'000

$'000

$'000

 

Net assets acquired





 

Intangible assets





 

-       Brand


-

3,173

3,173

 

-       Customer relationships


-

2,485

2,485

 

-       Software


376

5,673

6,049

 

Property, plant and equipment


47

-

47

 

Inventory


125

(118)

7

 

Trade and other receivables


2,746

-

2,746

 

Cash and cash equivalents


304

-

304

 

Trade and other payables


(520)

-

(520)

 

Deferred revenue


(2,303)

-

(2,303)

 

Corporation tax


(57)

-

(57)

 

Deferred tax


-

(1,171)

(1,171)

 





 

Net identifiable assets


718

10,042

10,760

 





 







Goodwill recognised on acquisition


10,744

 

Consideration




21,504

 






 

Satisfied by:





 

Cash




8,706

 

Loan notes




8,512

 

Zattikka plc 1,650,828 £0.10 Ordinary shares


2,660

 

Contingent consideration


1,626

 

Total amount payable in respect of the acquisition


21,504

 






 

Cash consideration





 

Less: cash and cash equivalents acquired


8,706

 





(304)

 

Net cash outflow arising on acquisition


8,402

 







 

The trade of Hattrick Holdings Limited was transferred to Hattrick Europe Limited with effect from 31 December 2012.

 

 

 

 

3.     Acquisitions (continued)

 

Sneaky Games Inc

 

On 16 April 2012, Zattikka plc acquired the entire share capital of Sneaky Games Inc. Sneaky has developed a portfolio of games in the mid-core fantasy role playing genre. This acquisition brings social game development and direct marketing expertise to the Group. The book and fair values of those assets and liabilities as at 16 April 2012 are set out below.

 

Recognised amounts of identifiable assets acquired and liabilities assumed


 

Carrying

 amounts

 $'000

 

Fair value adjustments

$'000

 

Fair

 value

$'000

Net assets acquired







-       Brand

-

133

133

-       Software

-

239

239

-       Commercial agreements

23

-

23

14

-

14

149

(149)

-

42

-

42

96

-

96

(296)

-

(296)

Deferred revenue

(106)

-

(106)

(7)

-

(7)









Net identifiable assets

(85)

223

138









Goodwill recognised on acquisition


5,522

Consideration



5,660





Satisfied by:






1,674



1,061



2,925





Total amount payable in respect of the acquisition


5,660











1,674

Less: cash and cash equivalents acquired


(96)

Net cash outflow arising on acquisition


1,578

 

 

 

3.     Acquisitions (continued)

Had a full period's trading been recorded for the four acquisitions for the period between 1 January 2012 and 31 December 2012, the unaudited pro-forma revenue (IFRS) would have been $10.4million (Revenue bookings $10.2 million) and adjusted EBITDA loss would have been $2.2million.

 

Acquisition related costs (included in acquisition costs in the Consolidated Statement of Comprehensive Income for the period ended 31 December 2012) amounted to $1.8million.

 

Adjusted EBITDA is defined as: Earnings before finance charges, taxes, depreciation, amortisation, changes in deferred revenue, exceptional items and acquisition costs and share-based payments charges.

 

 

4.     Exceptional items and acquisition costs

 

Exceptional items incurred during the period ended 31 December 2012 relate to

 


2012

2011

$'000

$'000

200

-

36

-

6,835

-

196

-

1,792

-

 

 

9,059

-

 

5.     Tax



2012

2011



$'000

$'000





-       UK tax



-

-

-       Overseas tax



150

-







150

-

Deferred tax credit

(1,698)

-







(1,548)

-









Factors affecting tax credit for the year

Loss before taxation

(16,030)

-

(3,927)

-

2,563

-

936

-

(2)

-

(1,026)

-

 

(92)


Tax credit for the year

(1,548)

-




 

6.     Goodwill - Group

 



2012

2011



$'000

$'000

Cost





-

-


39,920

-

Contingent consideration reduction


(8,349)

-


(6,835)

-




At 31 December


24,736

-





 

 

 

Goodwill acquired on a business combination is allocated to the Cash-Generating Units (CGU's) that are expected to benefit from that business combination. Goodwill has been allocated as follows:

 


CAH

Hattrick

E5

Sneaky

Total


$'000

$'000

$'000

$'000

$'000







On acquisition

9,307

19,093

5,998

5,522

39,920

Reallocation of E5 goodwill

4,685


(5,998)

1,313

-


13,992

19,093

-

6,835

39,920

Reduction in contingent consideration

-

(8,349)

-

-

(8,349)

Goodwill impairment

-

-

-

(6,835)

(6,835)

Total

13,992

10,744

-

-

24,736

 

The recoverable amount of the cash generating unit is determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the forecast period. The Group prepares pre-tax cash flow forecasts derived from the most recent financial budgets approved by management for the next two years and extrapolates the cash flows for the following three years based on an estimated growth rate of: 3% for Sneaky, 3% for Hattrick and 7% for CAH due to higher performance growth in the past. This rate does not exceed the average long term growth rate for the relevant geography. The forecast period is considered appropriate based on the life of technology acquired. The pre-tax discount rate used to discount the forecast cash flows differs by CGU:

 

-Sneaky

 18%

-CAH

 16%

-Hattrick

 15%

 

The impairment test performed shows that the fair value of the goodwill is in excess of its book value for CAH and Hattrick, but impairment for Sneaky follows a slower performance on some of its titles.

 

Goodwill allocated to Sneaky has been written off through recognition of an impairment loss against goodwill of $6.8million.

 

During finalisation of the purchase price allocation to the net identifiable assets acquired, management reassessed contingent consideration payable in respect of the Hattrick Holdings Limited acquisition, based on information available, but outstanding, at the acquisition date. As a result, contingent consideration payable was reduced by $8.3million from that reflected in the 30 June 2012 financial statements.

 

 

 

7.     Intangible assets - Group


Brand

Customer

Commercial

Software

Capitalised

Total



relationships

agreements


development



$'000

$'000

$'000

$'000

$'000

$'000

Cost







At 16 November 2011 and

-

-

-

-

-

-

At 31 December 2011

-

-

-

-

-

-

Additions

-

-

-

11

143

154

On acquisition

3,909

4,660

1,957

6,439

-

16,965








At 31 December 2012

3,909

4,660

1,957

6,450

143

17,119















Amortisation







At 16 November 2011 and

-

-

-

-

-

-

At 31 December 2011

-

-

-

-

-

-

Charge for the year

437

870

696

993

75

3,071

Exchange movement

1

1

-

4

-

6

Impairment

70

-

-

126

-

196








At 31 December 2012

508

871

696

1,123

75

3,273















Net book value







At 31 December 2012

3,401

3,789

1,261

5,327

68

13,846








At 31 December 2011

-

-

-

-

-

-

 

 

 

8.     Loan Notes

 

On 16 April 2012 Zattikka plc issued $12.0million of unsecured loan notes to the vendors of Hattrick, CAH and Sneaky ("Loan Note Vendors") to satisfy part of the purchase consideration on the acquisition of subsidiaries. 

These notes had an initial period of one year to 16 April 2013, with a one year extension at the option of the Group to 16 April 2014, which was exercised in March 2013.  The Loan Note Vendors had an option to convert into Ordinary Shares at any time.

 

The loan notes attract Interest of 5% interest accruing during the initial term, increasing to 10% in the second year if the Company serves the extension notice and 5% if the loan note vendors serve the extension notice.  Interest is payable upon redemption or maturity of the note.

 

In June 2013 the Loan Note Vendors agreed to amendment agreements with further extension of maturity to 16 October 2014, and to permit the establishment of a secured working capital facility and consent to the completion of further acquisitions and placings as described in note 12.

 

 

9.     Called up share capital


2012

2011


No.

No.

Allotted, called up and fully paid



Shares issued in year

22,218,251

1








$'000

$'000

At 31 December 2012 (22,218,251 ordinary shares of 10p each, 2011  1  ordinary share of 1p each)

3,520

-




 

The Company was incorporated with share capital represented by an unlimited number of ordinary shares of £0.01 value. On 11 April 2012 the issued share capital was converted into 10 pence shares.

Share capital as at 31 December 2012 amounted to $3,520,037 (31 December 2011 $0.02). During the period the Group issued the following shares:

 


No of shares

Nominal Value

Share premium



$'000

$'000

Consideration for the acquisition Concept Art House Inc

4,423,102

701

6,299

Consideration for the acquisition Expedite 5 Inc

1,579,679

250

2,250

Consideration for the acquisition Hattrick Holdings Limited

1,650,828

262

2,398

Consideration for the acquisition Sneaky Games Inc

1,848,224

293

2,632

Issue of shares to non-executive Directors

78,985

12

113

Issued for cash

12,637,433

2,002

17,988


22,218,251

3,520

31,680

 

The net proceeds from the issue of ordinary share capital was $18.4million after deduction of issue costs of $1.6million.

 

The non-executive Directors were issued 78,985 shares for a non-cash consideration of $125,000 in recognition of the work they completed leading up to Zattikka plc being listed on the London Stock exchange.

 

 

10. Basic loss per share and diluted loss per share




2012




$'000

Basic and diluted loss per share








Loss attributable to shareholders



14,482





Weighted average number of shares



15,783,457

 





 

Basic and diluted loss per share                                                                                                                                   $0.92

 

 

 

11. Related parties

 

The Company conducts numerous transactions each year with its subsidiaries. Amounts recognised in income for the year to 31 December 2012 comprised management recharges amounting to $888,000 which were eliminated in the Group accounts. Amounts owing to or from subsidiaries are disclosed in the balance sheet and related notes. Investments in subsidiaries during the year are disclosed in note 3.

 

During the period, Bond Capital Partners, in which H H Ludwig and M W Opzoomer are shareholders, provided corporate finance services and office facilities to Zattikka plc. Charges for these services amounted to $176,824 during the period and the amount owing to Bond Capital was $32,306 as at 31 December 2012.

 

Expedite 5 Inc was acquired on 16 April 2012, for total consideration of $2.5million. H H Ludwig, M W Opzoomer, T M Chaney and R J T Gorle who are Directors of Zattikka plc were Directors of Expedite 5 Inc. The trade of Expedite 5 Inc was transferred to Zattikka UK Limited on 16 April 2012 and Expedite 5 Inc was subsequently dissolved on 3 May 2012.

 

12. Subsequent events

 

In March 2013 the Company extended the maturity date of the Loan Notes from 16 April 2013 to 16 April 2014 as permitted in the terms of the Loan Notes. In June 2013 the Company agreed a further extension of the maturity of the Loan Notes to October 2014.

 

It was agreed in respect of the Hattrick and CAH Loan Notes that in return for repayment of 50% of the Loan Notes, 25% will be converted into ordinary shares in Zattikka plc, and a further 25% into New Loan Notes maturing in April 2016.  In respect of the Sneaky Loan Notes, in return for repayment of 20% of the Loan Notes, 80%  would be converted into ordinary shares in Zattikka plc.

 

These agreements also included all necessary consents for the Company to raise working capital finance, enter into acquisitions, and raise equity capital required to complete any such acquisitions. 

 

Related to this, the Group subsidiary Hattrick Europe Limited entered into an agreement with Barclays Capital ('the Bank') for £1.0million of working capital finance.  At the same time Zattikka plc provided a guarantee for any liabilities of Hattrick Europe Limited to the Bank, and provided security over its shareholding in Hattrick Europe Limited in favour of the Bank.  The facility is an on-demand facility which allows for setting of a fixed interest rate over periods of up to one year at a margin of 5% above the percentage rate per annum determined by the bank to be its cost of funds.

 

 


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