Digital Bros S p A : financial statements as of June 30th, 2023

Digital Bros S.p.A. financial statements

as of June 30th, 2023

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

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Digital Bros S.p.A.- Financial statements as of June 30th, 2023	2

Index
DIRECTORS' REPORT	5
2.	PERFORMANCE RATIOS	6
4.	PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED JUNE 30TH, 2023	9
5.	BALANCE SHEET AS OF JUNE 30TH, 2023	11
6.	FINANCIAL RATIOS	13

7. INTERCOMPANY AND RELATED PARTY TRANSACTIONS AND ATYPICAL/UNUSUAL

TRANSACTIONS	13
8.	TREASURY SHARES	14
10. OPERATIONAL RISKS, FINANCIAL RISKS AND FINANCIAL INSTRUMENTS	14
11.	CONTINGENT AQSSETS AND LIABILITIES	16
12.	SUBSEQUENT EVENTS	16
13.	BUSINESS OUTLOOK	17
14.	OTHER INFORMATION	18
EMPLOYEES	18
ENVIRONMENTAL ISSUE	18
Financial statements as of June 30th,2023	19
Balance sheet as of June 30th, 2023	21
Profit and loss statement for the period ended June 30th, 2023	22
Comprehensive income statement as of June 30th, 2022	23
Cash flow statement as of June 30th, 2023	24
Statement of changes in equity as of June 30th, 2023	25
Digital Bros S.p.A	27
Financial statements as of June 30th2023	27
Explanatory Notes	27
1.	CONTENT AND OTHER GENERAL INFORMATION	28
2.	ACCOUNTING POLICIES	31
3.	DISCRETIONARY ITEMS AND SIGNIFICANT ESTIMATES	46
4.	RELATIONSHIPS WITH STARBREEZE	49
5.	BALANCE SHEET AS OF JUNE 30TH, 2023	51
7.	PROFIT AND LOSS STATEMENT	72
8.	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (IFRS 7)	78
9.	NON-RECURRINGITEMS	86
10.	CONTINGENT ASSETS AND LIABILITIES	87
11.	RELATED PARTY TRANSACTIONS	87
Balance sheet statement according to Consob Resolution n. 15519 of July 27th,2006	90

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	3

12.	ATYPICAL OR UNUSUAL TRANSACTIONS	91
13.	OTHER INFORMATION	91
14.	SHARE OWNERSHIP STRUCTURE (pursuant to Art. 123 bis T.U.F.)	92
15.	ASSETS REVALUATION	92
16.	OANS GRANTED TO EXECUTIVES AND SUPERVISORY BODIES	93
17.	AUDIT FEES	93
18.	ALLOCATION OF NET PROFIT FOR THE YEAR	93
STATEMENT PURSUANT TO ART. 154- BIS (5) OF THE T.U.F	94

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	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. also distributes in Italy, video games acquired from international publishers under the Halifax brand. The games are marketed through a direct sales network of key accounts and through an indirect sales network of sales agents. The Company also distributes Yu-Gi-Oh! trading cards in Italy.

Revenues are generated mostly in Italya as highlighted in the Notes to Digital Bros S.p.A. 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 market is constantly evolving and growing, driven by the continuous technological upgrades. Gaming is no longer limited to personal computers and traditional consoles (Sony, Microsoft and Nintendo), but has expanded to mobile phones and tablet devices. High speed connectivity, fiber optic networks and smart phones have made video games increasingly diversified, sophisticated and interactive and have expanded the gaming population to adults and women. Streaming gaming is also becoming increasingly popular.

The video games market follows the continuous technological evolution of consoles. At the launch of a new console, as it happened in the reporting period, 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 a subscription fee. Revenues are recognized to publishers based on the utilization of their video games. More recently Apple has set up a similar platform, Apple Arcade, a platform for video games usable on mobile platforms.

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Digital distribution has extended the lifecycle of a single video game. The availability of a video game is no longer limited to its launch period as happened in the retail channel. The product remains available on the different marketplaces for a longer period, generating a continuous flow of sales 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).

The Group that Digital Bros controls is operating both on digital marketplaces and in the free to play, or Free to Play, games sector. Therefore, the parent company that was operating directly in the traditional physical retail distribution sector has seen its core revenues decline over time, while the subsidiaries' revenues have gradually grown.

The growth in revenues from digital distribution, but also the upstream integration that the Group has decided with the acquisition and establishment of development studios, has led to a growth in importance of the coordination activities that the Company carries out.

2. PERFORMANCE RATIOS

Since different fiscal years, the Group continuously utilizes some performance ratios to simplify the comprehension of the consolidated profit and loss statement and balance sheet.

The following ratios are directly 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 cost plus other income;
• EBIT, being the difference between EBITDA and total depreciation, amortization and impairment adjustments.

The balance sheet ratio net financial position is detailed in section 4 of the Notes.

The definitions of the ratios used by the Group, as they are not defined by any accounting standard, may not be homogeneous with those adopted by other companies and therefore comparable with them. A reconciliation between the Director's Report and the profit and loss statement is not needed, because they are used on a consistent base.

3. SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

Relations with Starbreeze AB and Starbreeze AB shareholders

In recent years, Digital Bros Group and Starbreeze AB Group have entered multiple different transactions, summarized below:

• in May 2016, the Group sold back the PAYDAY2 co-publishing rights to Starbreeze AB 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. The earn-out at the end of the period was not accounted, not having

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	6

met the requirements for recognition under international accounting standards, the amount and timing of accrual being currently undetermined;

• since November 2018, Digital Bros S.p.A. has acquired 6,369,061 Starbreeze AB 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 AB, enforcing the company and five subsidiaries to demand 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 3rd, 2019. On December 6th, 2019, Starbreeze AB successfully completed the corporate restructuring process, proposing a payment plan to its creditors.

In January and February 2020, the Group carried out the following transactions:

• on January 15th, 2020, Digital Bros S.p.A. acquired 18,969,395 Starbreeze AB A shares held by Swedish company Varvtre AB for a consideration of around SEK 25.8 million, 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 26th, 2020, Digital Bros S.p.A. completed the acquisition of all of the assets held by Smilegate Holdings in Starbreeze AB for a price of Euro 19.2 million. The assets acquired have a nominal value of Euro 35.3 million, as detailed below:
• 1. a convertible bond of SEK 215 million (around Euro 20 million as of June 30th, 2022) issued by Starbreeze AB for a total of Euro 16.9 million. The full conversion of the bond would lead to the issue of 131,933,742 new Starbreeze AB B shares. The original conversion price of SEK 2.25 per share was recalculated at SEK 1.63 per share due to the dilution effect of the share capital increase successfully carried out by Starbreeze AB in September 2020. Should it not be fully or even partially converted, the bond will be repaid based on the terms of payment approved by the Swedish District Court and not later than December 2024;
  2. a receivable of around USD 20 million for a consideration of Euro 100 thousand. This credit falls under the Starbreeze AB corporate restructuring process and will be repaid based on the terms of payment approved by the Swedish District Court and not later than December 2024;
  3. 3,601,083 Starbreeze AB A shares and 6,018,948 Starbreeze AB B shares for a total amount of Euro 2.2 million.

On April 28th, 2023, Starbreeze announced a rights issue of approximately Swedish Kronor ("SEK") 450 million, Digital Bros Group has committed to:

1. underwrite the pro-rata share of the rights issue, corresponding to approximately SEK 54 million;
2. underwrite an incremental commitment for a maximum of SEK 100 million of unsubscribed rights, following the capital increase process;

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	7

3. 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).

As of June 30th, 2023, the company holds 113.2 million Starbreeze A shares and 48.6 million Starbreeze B shares as a result of the pro quota subscription outlined in point 1) and a negligible use of the commitment mentioned in point 2) above. This number of shares represents 11.96% of the capital and 29.16% of the voting rights.

The Group assesses to have no significant influence over Starbreeze, considering its governance structure, and despite the ongoing contractual relationships and the stake held in the Swedish company. Consequently, it has classified the shares as other investments, as it has in previous periods. Adjustments to this classification and valuation would be performed if any substantial changes in the relationship between the two groups will occur.

After the end of the fiscal year, on July 3rd, 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 10th, 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 19th, 2023, the Company requested the full conversion of the convertible bond, into 148.3 million Starbreeze B shares.

As of September 27th, 2023, after additional conversions of multiple-vote shares into single-vote shares by different shareholders, the Group now holds 87 million Starbreeze A shares and 223.4 million Starbreeze B shares. This accounts for 21% of the total capital and 38.8% of voting rights.

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	8

4. PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED JUNE 30TH, 2023

The following table sets out the Company's results as of June 30th, 2023 together with comparative figures as of June 30th, 2022:

Euro thousand	June 30th, 2023		June 30th, 2022	Change
1	Gross revenue	7,877			100.9%		9,235	100.0%	(1,358)	-14.7%
2	Revenue adjustments	(68)			-0.9%		0	0.0%	(68)	n.m.
3	Net revenue	7,809			100.0%		9,235	100.0%	(1,436)	-15.4%
4	Purchase of products for resale	(1,760)			-22.5%		(4,340)	-47.0%	2,580	-59.4%
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
products	(464)			-5.9%		1,399	15.1%	(1,861)	n.m.
8	Total cost of sales	(2,224)			-28.5%		(2,941)	-31.8%	717	-24.4%
9	Gross profit (3+8)	5,585			71.5%		6,294	68.2%	(709)	-11.3%
10	Other income	178			2.3%		168	1.8%	10	6.0%
11	Costs for services	(2,286)			-29.3%		(2,170)	-23.5%	(116)	5.4%
12	Rent and leasing	(228)			-2.9%		(155)	-1.7%	(73)	47.3%
13	Payroll costs	(4,287)			-54.9%		(5,763)	-62.4%	1,476	-25.6%
14	Other operating costs	(553)			-7.1%		(500)	-5.4%	(53)	10.6%
15	Total operating costs	(7,354)			-94.2%		(8,588)	-93.0%	1,234	-14.4%
16	Gross operating margin (EBITDA)
(9+10+15)	(1,591)			-20.4%		(2,126)	-23.0%	535	-25.2%
17	Depreciation and amortization	(927)			-11.9%		(908)	-9.8%	(19)	2.1%
18	Provisions	0			0.0%		0	0.0%	0	0.0%
19	Asset impairment charge	(299)			-3.8%		(615)	-6.7%	316	n.m.
20	Impairment reversal	0			0.0%		87	0.9%	(87)	n.m.
21	Total depreciation, amortization
and impairment adjustments	(1,226)			-15.7%		(1,436)	-15.6%	210	-14.7%
22	Operating margin (EBIT) (16+21)	(2,817)			-36.1%		(3,562)	-38.6%	745	-20.9%
23	Interest and financial income	15,665			200.6%		13,520	146.4%	2,145	15.9%
24	Interest and financial expanses	(8,928)			-114.3%		(1,984)	-21.5%	(6,944)	n.m.
25	Net interest income/(expenses)	6,737			86.3%		11,536	124.9%	(4,799)	-41.6%
26	Profit/ (loss) before tax (22+25)	3,920			50.2%		7,974	86.4%	(4,054)	-50.8%
27	Current tax	1,216			15.6%		(818)	-8.9%	2,034	n.m.
28	Deferred tax	(203)			-2.6%		169	1.8%	(372)	n.m.
29	Total taxes	1,013			13.0%		(649)	-7.0%	1,662	n.m.
30	Net profit/loss (26+29)	4,933			63.2%		7,325	79.3%	(2,392)	-32.7%

Digital Bros S.p.A.- Financial statements as of June 30th, 2023	9

Total gross revenue decreased by 14.7% at Euro 7,877 thousand compared to Euro 9,235 thousand as of June 30th, 2022 confirming the contraction already shown in recent years.

Gross revenue is analyzed as follows:

Euro thousand	June 30th,		June 30th,	Change	Change
2023		2022	€	%
Revenue from video games for consoles	711		1,338	(627)	-46.9%
Revenue from trading cards	1,998		2,543	(545)	-21.4%
Revenue from other products and services	5,168		5,354	(186)	-3.5%
Total gross revenue	7,877		9,235	(1.358)	-14.7%

Revenue from other products and services are generated under the Company's contract with other Group companies for the provision of administration, management control, human resources management and business development services.

The costs for the purchase of products destinated for resale have decreased by 59.4%, to Euro 2,580 thousand. Inventories decreased by Euro 464 thousand, in line with the decline in product sales revenues.

Operating costs amounted to Euro 7,354 thousand, decreasing by Euro 1,476 thousand due to lower payroll costs, partially offset by higher costs for services for Euro 116 thousand. Payroll costs reduction was driven by the fact that variable compensation components were not disbursed and because the overall wages were not increased based on the 2021-2027Medium-Long Term Monetary Incentives Plan, since the consolidated net operating profitability was lower than expected.

The increase in service costs amounts to Euro 116 thousand and is related to the following: DPO and GDPR compliance, an higher number of brokers, expenses related to the implementation of ESG measures, costs related to the formulation of two inquiries to the Revenue Agency, expenses incurred for activities linked to the capital increase of Starbreeze AB, and expenditures for the drafting of the financial statements in ESEF format.

The operating margin (EBIT) was negative for Euro 1,591 thousand compared to a negative Euro 2,126 thousand as of June 30th, 2022, but improving by Euro 535 thousand.

Net financial result was positive for Euro 6,737 thousand compared to Euro 11,536 thousand in the prior fiscal year. This balance includes:

• Financial liabilities from the adjustment to fair value of the bond loan amounting to Euro 6,462 thousand,. held by the Company from Starbreeze and converted in July 2023.
• Financial income resulting from dividends received from 505 Games S.p.a. and Kunos Simulazioni S.r.l.
• The adjustment to the present value of the financial credit purchased from Starbreeze and subsequently cashed on July 3, 2023, totaling Euro 3,979 thousand.

Profit before tax decreased to Euro 3,920 thousand against Euro 7,974 thousand as of June 30th, 2022. Net profit amounted to Euro 4,933 thousand against a Euro 7,325 thousand net profit in the prior fiscal year

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