Digital Bros S p A : Financial Statements as of June 30, 2024

About this update from Digital Bros S.p.a.

Digital Bros S.p.A. financial statements as of June 30 th , 2024 Digital Bros S.p.A. Via Tortona, 37 - 20144 Milan, Italy VAT number IT095 Share capital: Euro 6,024,334.80 of which Euro 5,706,014.80 subscribed Milan Companies House No. 290680-Vol. 7394 Chamber of Commerce number 1302132 This report is available in the Investor Relations section of the Company's website at www.digitalbros.com Please consider that this is an Italian to English translation and that the Italian version shall always prevail in case of any discrepancy or inconsistency (this page was intentionally left blank) Digital Bros S.p.A. financial statements as of June 30 th , 2024 2 Index DIRECTORS' REPORT 5 2. PERFORMANCE RATIOS 6 4. PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED JUNE 30 TH , 2024 10 5. BALANCE SHEET AS OF JUNE 30 TH , 2024 12 6. FINANCIAL RATIOS 14 7. INTERCOMPANY AND RELATED PARTY TRANSACTIONS AND ATYPICAL/UNUSUAL TRANSACTIONS 14 8. TREASURY SHARES 15 9. RESEARCH AND DEVELOPMENT ACTIVITIES 15 10. OPERATIONAL RISKS, FINANCIAL RISKS AND FINANCIAL INSTRUMENTS 15 11. CONTINGENT AQSSETS AND LIABILITIES 17 12. SUBSEQUENT EVENTS 17 13. BUSINESS OUTLOOK 18 14. OTHER INFORMATION 18 Financial statements as of June 30 th ,2024 21 Balance sheet as of June 30 th , 2024 23 Profit and loss statement for the period ended June 30 th , 2024 24 Comprehensive income statement as of June 30th, 2024 25 Cash flow statement as of June 30 th , 2024 26 Statement of changes in equity as of June 30 th , 2024 27 Digital Bros S.p.A. Financial statements as of June 30 th 2024 Explanatory Notes 29 1. CONTENT AND OTHER GENERAL INFORMATION 30 2. ACCOUNTING STANDARDS 33 3. DISCRETIONARY ITEMS AND SIGNIFICANT ESTIMATES 46 4. RELATIONSHIPS WITH STARBREEZE 48 5. BALANCE SHEET AS OF JUNE 30 TH , 2023 50 6. PROFIT AND LOSS STATEMENT 69 7. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (IFRS 7) 74 8. NON-RECURRING ITEMS 82 9. CONTINGENT ASSETS AND LIABILITIES 83 10. RELATED PARTY TRANSACTIONS 83 11. ATYPICAL OR UNUSUAL TRANSACTIONS 87 12. OTHER INFORMATION 87 13. OWNERSHIP STRUCTURE (pursuant to Art. 123 bis T.U.F.) 88 14. ASSETS REVALUATION 89 15. LOANS GRANTED TO EXECUTIVES AND SUPERVISORY BODIES 89 16. AUDIT FEES 89 17. ALLOCATION OF NET PROFIT FOR THE YEAR 89 STATEMENT PURSUANT TO ART. 154- BIS (5) OF THE T.U.F 90 Digital Bros S.p.A. financial statements as of June 30 th , 2024 3 (this page was intentionally left blank) Digital Bros S.p.A. financial statements as of June 30 th , 2024 4 DIRECTORS' REPORT The Company performs management and coordination activities in its capacity as Parent Company of the Digital Bros Group. Digital Bros S.p.A., under the Halifax brand, is also in charge of the distribution of video games acquired from international publishers in Italy. The games are marketed through a direct sales network of key accounts and through an indirect sales network of sales agents. It is also the licensed distributor for Yu-Gi-Oh! trading cards in Italy. Revenues are generated for the most part in Italy, as described in the explanatory notes to Digital Bros S.p. A's. financial statements. 1. THE VIDEOGAMES MARKET The video games market represents one of the most important segments of the entertainment industry. Movies, books and magazines, video games and toys are part of the industry and share the same characteristics, brands, features and intellectual properties. The growth achieved by the video game industry during the pandemic generated widespread optimism, prompting many competitors to initiate new productions and significantly increase the average investment per game. In 2023, a record 50,000 new video games were launched within a very competitive marketplace, making it harder to meet the expected volume and revenue targets. As a result, many companies were forced to reassess their strategies regarding portfolio investments and marketing expenditures to adapt to this competitive scenario. Consequently, starting in the second half of 2023 the market has seen waves of layoffs, studio closures, and project cancellations. This situation remains unresolved as of today. The video games market for console follows their continuous technological evolution, as it is for all technological markets, with cyclical trends depending on the hardware lifecycle. At the launch of a new console, the prices of the hardware and the related video games are high and relatively low quantities are sold. Across their lifecycle, console and video game prices gradually decline, while the volumes and the video games quality increase. Video games are sold through digital marketplaces, however highly popular and high-quality video games are also distributed through the traditional sales channel. In this case, the value chain is as follows: The COVID-19 pandemic further accelerated the decline of the video games retail distribution being replaced by digital distribution. The digitalization of the market has led both Microsoft (with Microsoft Xbox Game Pass) and Sony (with Sony PlayStation Now) to create digital platforms on which players can access the full library of video games by paying Digital Bros S.p.A. financial statements as of June 30 th , 2024 5 a subscription fee valid for a predefined period. Revenues are directly or indirectly recognized to publishers based on the utilization of their video games by the consumers. Digital distribution has extended the lifecycle of a single video game. Differently from the traditional retail channel, where the game is only available once it has been launched on the market and while it is distributed by retailers, video games are now available on the different marketplaces for longer, generating a continuous flow of sales that can be significantly influenced by promotional campaigns. A video game life cycle can also be extended through the release of additional episodes and functions (the so-called DLC, or Downloadable Contents) that consumers can either buy or download for free on digital marketplaces. Free to Play video games are available to the public in digital format only. The marketplaces where these games are available are: the App Store for iPhone and iPad, the PlayStore for Android for Western markets and a number of different marketplaces for Far Eastern markets. Some Free to Play video games are also available on Sony PlayStation Store, Microsoft's Xbox Live for console, Steam and Epic Store for PC. Digital Bros S.p.A. controls a Group that is active on both on digital marketplaces and in the Free to Play segments. Because of this transition, the Parent company, which was operating directly on the traditional retail channel, has progressively experienced a decline in its core revenue, while the subsidiaries have gradually increased their revenue streams. Such growth in digital revenues, together with the upstream integration pursued by the Group through the acquisition and establishment of development studios, led to a growing significance of the coordination activities performed by the Parent company. 2. PERFORMANCE RATIOS The Company relies on largely used key performance ratios to simplify the comprehension of its profit and loss statement and balance sheet. The following ratios are reported in the profit and loss statement: Gross profit, being the difference between net revenue and total cost of sales; EBITDA, being the difference between gross profit, other income and total operating costs plus other income; EBIT, being the difference between EBITDA and total depreciation, amortization and impairment adjustments. With regards to the balance sheet ratios, the same is valid for the net financial position, as detailed in Section 4 of the Explanatory Notes. The ratios used by the Group could misalign with those adopted by other companies, as they are not defined by any accounting standard. Because of this, the ratios used by the Group could not be comparable with others. A reconciliation between the Directors' Report and the financial statements is not needed, as the Company uses indicators that are directly represented in its financial statements. Digital Bros S.p.A. financial statements as of June 30 th , 2024 6 3. SIGNIFICANT EVENTS DURING THE REPORTING PERIOD The significant events occurred during the reporting period are listed below: The Shareholders' Meeting held on October 27th, 2023 appointed the Board of Directors and the Board of Statutory Auditors. The terms of the Directors and the Statutory Auditors will expire on the Shareholders' Meeting which will approve the financial statements as of June 30th, 2026; On November 14th, 2023, having reconsidered the number of projects under development to adapt to the new competitive scenario, the Group announced an organizational review, which resulted in the reduction of approximately 30% of its global workforce. Such reduction was predominantly concentrated within its development studios and, to a lesser extent, across its publishing units, both Premium and Free to Play. The reorganization costs amounted to Euro 1.4 million. The process was finalized during the reporting period; On February 28th, 2024, the subsidiary 505 Games S.p.A. entered into an agreement with Remedy Entertainment to revert all publishing, distribution, and marketing rights related to the Control franchise to the Finnish developer, for a total repayment of minimum Euro 15.7 million, with a potential small premium. This corresponded to the investment made at that date by 505 Games for the development of the video games Condor and Control 2. 505 Games will continue as the exclusive publisher of Control until December 31st, 2024, executing the existing sublicensing deals under their original terms. Relations with Starbreeze and Starbreeze shareholders In recent years, Digital Bros Group and Starbreeze Group have entered multiple different transactions, summarized below: in May 2016, the Group sold back the PAYDAY2 co-publishing rights to Starbreeze against a payment of USD 30 million and an earn-out of USD 40 million as 33% of the net revenues from the future video game PAYDAY3. As of June 30 th , 2024 the earn-out was not accounted for and has been considered as a contingent asset, since neither the amount nor the timing of the earn-out have been defined yet, pursuant to the international accounting standards; since November 2018, Digital Bros S.p.A. has acquired 6,369,061 Starbreeze STAR A shares, as traded on Nasdaq Stockholm, at an average price of SEK 1.79 per share. The OVERKILL's The Walking Dead unsuccess created financial problems to Starbreeze, enforcing the company and five subsidiaries to petition the Swedish District Court for admission to a restructuring plan. The Swedish Court approved the restructuring request which was later extended several times until December 3 rd , 2019. On December 6 th , 2019, Starbreeze successfully completed the restructuring process and presented a payment plan to its creditors. In January and February 2020, the Group conducted the following transactions: on January 15 th , 2020, Digital Bros S.p.A. acquired 18,969,395 Starbreeze STAR A shares held by Swedish company Varvtre AB for a consideration of around 25.8 million Swedish Kronor ("SEK"), Digital Bros S.p.A. financial statements as of June 30 th , 2024 7 at a price of SEK 1.36 per share, plus a potential earn-out in case of a gain on disposal realized in the 60 months after the acquisition; on February 26 th , 2020, Digital Bros S.p.A. completed the acquisition of all of the assets held by Smilegate Holdings in Starbreeze for a price of Euro 19.2 million. The assets acquired have a nominal value of Euro 35.3 million, as detailed below: a convertible bond of approximately SEK 215 million issued by Starbreeze for a total of Euro 16.9 million; a receivable of around SEK 165 million for a consideration of Euro 100 thousand. This credit fell under the Starbreeze restructuring process and provided for repayment based on the terms of payment approved by the Swedish District Court and no later than December 2024; 3,601,083 Starbreeze STAR A shares and 6,018,948 Starbreeze STAR B shares for a total amount of Euro 2.2 million. On April 28 th , 2023, Starbreeze announced a rights issue of approximately SEK 450 million. Digital Bros Group committed to: underwrite the pro-rata share of the rights issue, corresponding to approximately SEK 54 million; underwrite an incremental commitment for a maximum of SEK 100 million of unsubscribed rights, following the capital increase process; convert the total outstanding convertible loan of approximately SEK 215 million held by Digital Bros in Starbreeze B shares within 30 days from the closing of the capital increase process and after having received the recalculation of the revised conversion price. As part of the overall agreement, Starbreeze has committed to using the proceeds from the capital increase primarily for the payment of the credit of SEK 150 million to Digital Bros, originally amounting to SEK 165 million, and net of the effective use of the commitment described at point 2). On July 3 rd , 2023, the Group successfully received its credit of 150 million SEK. On the same date, 3.3 million multiple-vote Starbreeze A shares were subscribed (equivalent to approximately 2.5 million Swedish Kronor) as a result of the guarantee provided for the unsubscribed options. On July 10 th , 2023, the Company requested the conversion of approximately 29.5 million multiple-vote Starbreeze A shares into single-vote Starbreeze B shares. This process was carried out to reduce its voting stake, in order to comply with EU regulations on mandatory takeover bids and in response to conversion requests from other Starbreeze shareholders and to comply with EU regulations, while also weighing in the effects of subsequent conversion of convertible bonds. On July 19 th , 2023, the Company requested the full conversion of the convertible bond, into 148.3 million Starbreeze B shares. As of September 26 th , 2024, after additional conversions of multiple-vote shares into single-vote shares carried out by various shareholders, the Group now holds no. 87 million Starbreeze A shares and no. 223.4 million Starbreeze B shares. This accounts for 21% of the total capital and 39.67% of voting rights. Digital Bros S.p.A. financial statements as of June 30 th , 2024 8 As of June 30 th , 2024, the Group reassessed its analysis on: Starbreeze AB's governance structure and Digital Bros' representation in its corporate bodies; Digital Bros' involvement in Starbreeze AB's decision making process; the existing business relationships between Digital Bros and Starbreeze AB; the interchange of professionals and the exchange of technical information between the two companies. As a result of the analysis and in line with the past fiscal years, Digital Bros assessed not to have any significant influence over Starbreeze, despite holding a significant share of the voting capital. During the last months of the reporting period different interpretations emerged between the Group and Starbreeze AB about the calculation of the earn out from the transfer of PAYDAY 2 rights to the Swedish developer and different understandings about some items related to previous agreements between the two groups. Considering the inability to reach a mutually agreed interpretation, as of June 30 th , 2024, the Company has allocated Euro 1.2 million as provisions ("Provision for Starbreeze arbitration costs") to reflect the estimated arbitration costs that may arise should the matter remain unsolved. As of June 30th, 2024, the portion of the Provision for Starbreeze arbitration costs recognized in Digital Bros S.p.A.'s financial statements amounted to Euro 414 thousand. Digital Bros S.p.A. financial statements as of June 30 th , 2024 9 4. PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED JUNE 30 TH , 2024 The following table details the Company's results as of June 30 th , 2024 together with comparative figures as of June 30th, 2023: Euro thousand June 30th, 2024 June 30th, 2023 Change 1 Gross revenue 6,896 100.4% 7,877 100.9% (981) -12.4% 2 Revenue adjustments (29) -0.4% (68) -0.9% 39 -56.9% 3 Net revenue 6,867 100.0% 7,809 100.0% (942) -12.1% 4 Purchase of products for resale (977) -14.2% (1,760) -22.5% 783 -44.5% 5 Purchase of services for resale 0 0.0% 0 0.0% 0 0.0% 6 Royalties 0 0.0% 0 0.0% 0 0.0% 7 Changes in inventories of finished (480) -7.0% (464) -5.9% (16) 3.6% products 8 Total cost of sales (1,457) -21.2% (2,224) -28.5% 767 -34.5% 9 Gross profit (3+8) 5,410 78.8% 5,585 71.5% (175) -3.1% 10 Other income 123 1.8% 178 2.3% (55) -31.2% 11 Costs for services (2,074) -30.2% (2,286) -29.3% 212 -9.3% 12 Rent and leasing (230) -3.4% (228) -2.9% (2) 1.1% 13 Payroll costs (4,468) -65.1% (4,287) -54.9% (181) 4.2% 14 Other operating costs (425) -6.2% (553) -7.1% 128 -23.2% 15 Total operating costs (7,197) -104.8% (7,354) -94.2% 157 -2.1% 16 Gross operating margin (EBITDA) (1,664) -24.2% (1,591) -20.4% (73) 4.5% (9+10+15) 17 Depreciation and amortization (872) -12.7% (927) -11.9% 55 -5.9% 18 Provisions (414) -6.0% 0 0.0% (414) 0.0% 19 Asset impairment charge (3,819) -55.6% (299) -3.8% (3,520) n.m. 20 Impairment reversal 16 0.2% 0 0.0% 16 n.m. 21 Total depreciation, amortization and (5,089) -74.1% (1,226) -15.7% (3,863) n.m. impairment adjustments 22 Operating margin (EBIT) (16+21) (6,753) -98.3% (2,817) -36.1% (3,936) n.m. 23 Interest and financial income 11,594 168.8% 15,665 200.6% (4,071) -26.0% 24 Interest and financial expanses (1,332) -19.4% (8,928) -114.3% 7,596 -85.1% 25 Net interest income/(expenses) 10,262 149.4% 6,737 86.3% 3,525 52.3% 26 Profit/ (loss) before tax (22+25) 3,509 51.1% 3,920 50.2% (411) -10.5% 27 Current tax 501 7.3% 1,216 15.6% (715) -58.8% 28 Deferred tax 70 1.0% (203) -2.6% 273 n.m. 29 Total taxes 571 8.3% 1,013 13.0% (442) -43.6% 30 Net profit/loss (26+29) 4,080 59.4% 4,933 63.2% (853) -17.3% Digital Bros S.p.A. financial statements as of June 30 th , 2024 10

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