Huuuge Inc.

Audit Report / Information • Mar 14, 2024

PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp. k. , ul. Polna 11, 00-633 Warsaw, Poland, T: +48 (22) 746 4000, F:+48 (22) 742 4040 , www.pwc.pl PricewaterhouseCoopers Polska Spółka z ograniczoną odpowiedzialnością Audyt sp. k. is entered into the National Court Register maintained by the District Court for the Capital City of Warsaw, under KRS number 0000750050, NIP 526-021-02-28. The seat of the Company is in Warsaw at Polna 11 str. Independent Registered Auditor’s Report To the Shareholders and the Board of Directors of Huuuge, Inc. Report on the audit of consolidated financial statements Our opinion In our opinion, the accompanying annual consolidated financial statements: • give a true and fair view of the consolidated financial position of Huuuge, Inc. (the “Parent Company”) and its subsidiaries (together the “Group”) as at 31 December 2023 and the Group’s consolidated financial performance and the consolidated cash flows for the year then ended in accordance with the applicable International Financial Reporting Standards as adopted by the European Union and the adopted accounting policies; • comply in terms of form and content with the laws applicable to the Group and the Parent Company’s Certificate of Incorporation. What we have audited We have audited the annual consolidated financial statements of Huuuge, Inc. Group which comprise: • the consolidated statement of financial position as at 31 December 2023; and the following prepared for the financial year then ended : • the consolidated statement of comprehensive income; • the consolidated statement of changes in equity; • the consolidated statement of cash flows, and • the notes to the consolidated financial statements comprising material accounting policy information and other explanatory information. Basis for opinion We conducted our audit in accordance with the National Standards on Auditing as adopted by the resolution of the National Council of Statutory Auditors and the resolution of the Council of the Polish Audit Supervision Agency (“NSA”) and pursuant to the Law of 11 May 2017 on Registered Auditors, Registered Audit Companies and Public Oversight (the “Law on Registered Auditors”). Our responsibilities under NSA are further described in the Auditor’s responsibility for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) as adopted by resolution of the National Council of 2 Statutory Auditors and other ethical requirements that are relevant to our audit of the consolidated financial statements in Poland. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. During the audit, the key registered auditor and the registered audit firm remained independent of the Group in accordance with the independence requirements set out in the Law on Registered Auditors. Our audit approach Overview • The overall materiality threshold adopted for the purposes of our audit was set at USD 4.935 million, which represents 5% of the profit before tax. • We have audited the financial statements of the Parent Company and three subsidiaries. • The audit was conducted on the premise of Huuuge Games Sp. z o.o. where the majority of financial records for the Group are held. • The scope of our audit covered 99% of the Group’s revenue and 94% of the absolute value of profit or loss of all consolidated Group companies before consolidation adjustments. • Revenue recognition • Classification of pending litigations as contingent liabilities or provisions Materiality Group scoping Key audit matters 3 As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the Chief Executive Officer made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the consolidated financial statements as a whole, as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated financial statements as a whole. Overall Group materiality USD 4.935 million How we determined it 5% of profit before tax Rationale for the materiality benchmark applied We chose profit before tax as the benchmark because, in our view, profit before tax is the benchmark against which the performance of the Group i s most commonly measured by users, and is a generally accepted benchmark. We assumed the materiality at the level of 5% as, based on our professional judgement, it is within the acceptable quantitative materiality thresholds. We agreed with the Audit Committee of the Parent Company that we would report to them misstatements of the consolidated financial statements identified during our audit above USD 246 thousand, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. 4 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. They include the most significant identified risks of material misstatements, including the identified risks of material misstatement resulting from fraud. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon. We do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Revenue recognition In the year ended 31 December 2023, the Group generated revenue of USD 283.4 million from two streams: gaming applications (USD 279.9 million) and advertising (USD 3.5 million) (in the year ended 31 December 2022 the Group generated revenue of the total of USD 318.6 million which consisted of USD 308.8 million and of USD 9.8 million, respectively from gaming applications and advertising). This matter was the subject of our special attention since the application of appropriate financial reporting standards regarding the recognition and presentation of revenue is complex and requires the management to make accounting estimates and judgments, including: ● estimation of the progress towards complete satisfaction of the performance obligation in revenue from selling virtual items (coins) in gaming applications; ● consideration whether the Group operates as a principal or agent in selling the virtual coins and providing access to the games through distribution platforms. Accounting policies, key judgements and estimates and the additional information related to revenue recognition are disclosed in note 2.2), 2.3) (c) and 3 to the consolidated financial statements. Our audit procedures included, in particular: ● understanding and evaluating the internal controls environment relating to the recognition, measurement and presentation of each stream of revenue; ● assessment of compliance of accounting policies relating to revenue recognition with relevant financial reporting standards; ● assessment performed over identification of performance obligations within the gaming applications’ contracts and determination of how the performance obligation is satisfied including where relevant discussion with our internal IFRS experts; ● analysis of reports used by the management to estimate the average consumption period of coins to assess the i) the adequacy of the assumptions and ii) the estimates used and related to the recognition of revenues, mainly in terms of: ○ appropriateness of the method used to measure the satisfaction of the performance obligation, i.e. to measure it by coins consumption in a gaming applications stream; ○ appropriateness of the measure chosen to estimate the time of average coins consumption; ● analysis of significant contracts concluded by the Group; ● evaluating management’s assessment of conditions and factors used in determining the Group to be principal in selling virtual coins, providing access to the games, including where relevant discussion with our 5 internal IFRS experts; ● performing, for the selected sample, detailed tests involving, inter alia, a reconciliation of issued sales invoices, relevant contracts with customers, revenue reports and received payments; ● determination of the adequacy of disclosures in respect of revenues. Classification of pending litigations as contingent liabilities or provisions As at 31 December 2023 the Parent Company had become involved in a number of pending litigations, related primarily to the alleged illegality of the Parent Company’s social casino games under the laws of several US states. The nature and status of respective litigations are disclosed in note 17 to the consolidated financial statements, and the relevant accounting policies are disclosed in note 2.3) (m). In management’s assessment none of the pending litigations was e xpected to have a material impact on the Group’s operations, financial conditions or cash flows. These litigations were classified as contingent liabilities and their details were disclosed in the consolidated financial statements based on management’s assessment that the material outflow of the economic benefits is not probable. In arriving at its conclusion the management analysed the nature of underlying claims related to its business model and took into consideration advice of both internal and external legal experts. We consider classification of these legal cases as contingent liabilities to be a key audit matter as significant judgements and estimates are made by management in applying definition of a contingent liability as defined by IAS 37 and in determining the magnitude of the potential impact on the consolidated financial statements. The judgments related to classification of claims and litigations as contingent liabilities or provisions are subject to inherent risk and may change in future as individual cases progress, legal strategies are amended and settlement scenarios are considered. The final conclusion of the contingent liability and the final liability, if any, is subject to significant judgments and estimates and the interpretation. Our audit procedures over the classification of pending litigations as contingent liabilities included, among others: ● assessment of management’s process for the identification of open pending litigations; ● assessment of management’s process for consideration of the nature and expected outcome of pending litigations; ● reading the underlying claims and demands for arbitration received by the Parent Company; ● discussion of the nature of these claims and assessments of the expected outcome of these cases with management and internal legal experts; ● analysis of the significant legal cases and sending letters to external legal counsel requesting i) their explanations of the nature of the case and their assessment of the probability of the Parent Company being successful in defending its position, and ii) their assessment, if possible, of the range or estimated amount of potential costs; ● considering the adequacy and completeness of disclosures. 6 Responsibility of the Chief Executive Officer, the Treasurer and the Board of Directors of the Parent Company for the consolidated financial statements The Chief Executive Officer and the Treasurer of the Parent Company under supervision of the Board of Directors are responsible for the preparation of the annual consolidated financial statements that give a true and fair view of the Group’s financial position and results of operations, in accordance with International Financial Reporting Standards as adopted by the European Union, the adopted accounting policies, the applicable laws and the Parent Company’s Certificate of Incorporation, and for such internal control as they determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Chief Executive Officer and the Treasurer of the Parent Company under supervision of the Board of Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. The Board of Directors together with the Chief Executive Officer and the Treasurer of the Parent Company are responsible for overseeing the financial reporting process of the Group. The Audit Committee is responsible for the supervision over the adequacy of the internal control system and over monitoring its effectiveness in the preparation of the consolidated financial statements. Auditor’s responsibility for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the NSA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence economic decisions of users taken on the basis of these consolidated financial statements. The scope of the audit does not include an assurance on the Group’s future profitability nor the efficiency and effectiveness of the Chief Executive Officer of the Parent Company conducting its affairs, now or in future. As part of an audit in accordance with NSA, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Chief Executive Officer and the Treasurer of the Parent Company. 7 • Conclude on the appropriateness of the Chief Executive Officer and of the Treasurer of the Parent Company's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Other information, including the report on the operations Other information Other information comprises the Annual Report which includes: • information on pages from 5 to 38 that relates to the management’s analysis of the Parent Company’s and the Group’s operations for the financial year ended 31 December 2023 (the “Report on activities”), • information on pages from 39 to 70 that relates to corporate governance (the “Corporate governance statement”), • other documents comprising the Annual Report for the financial year ended 31 December 2023, (together “Other Information”). Other information does not include the consolidated financial statements and the separate financial statements and our auditor’s reports thereon. 8 Responsibility of the Board of Directors The Board of Directors of the Parent Company is responsible for the preparation of the Other Information in accordance with the law. The members of the Board of Directors are obliged to ensure that the Report on activities and the Corporate governance statement comply with the requirements of the Regulation of the Minister of Finance dated 29 March 2018 on current and periodical information submitted by issuers of securities and conditions for considering as equivalent the information required under the legislation of a non- Member State (the “Regulation on current information”). Registered auditor’s responsibility Our opinion on the consolidated financial statements does not cover the Other Information. In connection with our audit of the consolidated financial statements and the separate financial statements of the Parent Company, our responsibility under NSA is to read the Other Information and, in doing so, consider whether the Other Information is materially inconsistent with the information in the consolidated financial statements and the separate financial statements, our knowledge obtained in our audit, or otherwise appears to be materially misstated. If, based on the work performed, we identified a material misstatement in the Other Information, we are obliged to inform about it in our audit report. In accordance with the requirements of the Law on the Registered Auditors, we are also obliged to issue an opinion on whether the Report on activities has been prepared in accordance with the law and is consistent with information included in annual consolidated financial statements and the annual separate financial statements of the Parent Company. Moreover, we are obliged to issue an opinion on whether the Parent Company and the Group provided required information in its Corporate governance statement. Statement on the Other information We declare, based on the knowledge of the Parent Company and the Group and their environment obtained during our audit, that we have not identified any material misstatements in the Report on activities of the Parent Company and the Group and the remaining elements of Other information. Opinion on the Report on activities Based on the work we carried out during our audit, in our opinion, the Report on activities of the Parent Company and the Group: • has been prepared in accordance with the requirements of para. 70 and 71 of the Regulation on current information; • is consistent with the information in the consolidated financial statements and the separate financial statements of the Parent Company. Opinion on the Corporate governance statement In our opinion, in its Corporate governance statement, the Parent Company and the Group included information set out in para. 70.6 (5) of the Regulation on current information. In addition, in our opinion, information specified in paragraph 70.6 (5)(c)–(f), (h) and (i) of the said Regulation included in the Corporate governance statement is consistent with the applicable provisions of the law and with information included in the consolidated financial statements and the separate financial statements of the Parent Company. 9 Report on other legal and regulatory requirements Report on the compliance of the marking up of consolidated financial statements with the requirements of the European Single Electronic Format (“ESEF”) In connection with the audit of consolidated financial statements we have been engaged by the Chief Executive Officer and the Treasurer of the Parent Company as part of our audit engagement letter to conduct a reasonable assurance engagement to express an opinion whether the consolidated financial statements of the Group as at and for the year ended 31 December 2023 prepared in the single electronic format contained in the file name d 254900U4ZTZOIOBB4181-2023-12-31-en.zip (the “consolidated financial statements in the ESEF fo rmat”) was marked up in accordance with the requirements in the article 4 of the Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (the “ESEF Regulation”). Description of a subject matter and applicable criteria The consolidated financial statements in the ESEF format were prepared by the Chief Executive Officer and the Treasurer under supervision of the Board of Directors of the Parent Company to comply with the technical requirements regarding the specification of a single electronic reporting format and marking up, which are set out in the ESEF Regulation. The subject matter of our assurance engagement is the compliance of the consolidated financial statements in the ESEF format with the requirements of the ESEF Regulation and the requirements of this regulation, in our view, constitute appropriate criteria to form a reasonable assurance conclusion. Responsibility of the Chief Executive Officer, the Treasurer and the Board of Directors of the Parent Company The Chief Executive Officer and the Treasurer under supervision of the Board of Directors of the Parent Company are responsible for the preparation of the consolidated financial statements in the ESEF format in accordance with the technical requirements regarding the specification of a single electronic reporting format which are set out in the ESEF Regulation. This responsibility includes the selection and application of appropriate markups in iXBRL using taxonomy specified in the ESEF Regulation. The responsibility of the Chief Executive Officer includes designing, implementing and maintaining internal controls relevant for the preparation of the consolidated financial statements in the ESEF format which are free from material non-compliance with the requirements of the ESEF Regulation and their marking- up in compliance with these requirements . The Board of Directors together with the Chief Executive Officer and the Treasurer of the Parent Company are responsible for overseeing the financial reporting process, which also includes the preparation of the consolidated financial statements in accordance with the format that is compliant with legal requirements. Our responsibility Our objective was to express an opinion , based on the conducted reasonable assurance engagement, whether the consolidated financial statements prepared in the ESEF format were marked up, in all material respects, with the requirements of the ESEF Regulation. 10 We conducted our engagement in accordance with the National Standard on Assurance Engagements other than Audit and Review 3001pl - audit of financial statements prepared in the single electronic reporting format (“KSUA 3001pl”) and where relevant with the National Standard on Assurance Engagements 3000 (R) in the wording of the International Standard on Assurance Services 3000 (Revised) - ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ as issued by the National Council of Statutory Auditors (“KSUA 3000(R)”). These standards require that we comply with ethical requirements, plan and perform procedures to obtain reasonable assurance whether the consolidated financial statements in the ESEF format were marked up, in all material respects, in compliance with the specified criteria. Reasonable assurance is a high level of assurance, but it does not guarantee that the engagement performed in accordance with KSUA 3001pl and KSUA 3000 (R) will always detect the material misstatement (significant non-compliance with the requirements). The selection of the procedures depends on the auditor's judgement, including the auditor's assessment of the risk of material misstatements, whether due to fraud or error. In performing the assessments of this risk, the auditor shall consider the internal control related to the preparation of the consolidated financial statements in the ESEF format and its marking-up in order to plan appropriate procedures to provide the auditor with sufficient evidence appropriate to the circumstances. The assessment of the functioning of the internal control system was not carried out in order to express an opinion on the effectiveness of its operation. Quality management and ethical requirements We apply the provisions of the National Standard on Quality Control 1 in the wording of the International Standard on Quality Management (PL) 1 – “Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements” as issued by the International Auditing and Assurance Standards Board and adopted by the resolution of the Council of the Polish Audit Supervision Agency. This standard requires the firm to design, implement and operate a system of quality management including policies or procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. We comply with the independence and other ethical requirements of the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants as adopted by resolution of the National Council of Statutory Auditors, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Summary of the work performed Our planned and performed procedures were aimed at obtaining reasonable assurance whether the consolidated financial statements in the ESEF format were marked-up, in all material respects , in compliance with the applicable requirements. Our procedures included in particular: ● obtaining an understanding of the process of preparation of the consolidated financial statements in the ESEF format, including the process of selection and application by the Group of the XBRL tags and ensuring the compliance with the ESEF Regulation, including understanding the mechanism of the internal control system related to this process; ● reconciliation, on a selected sample of the marked-up information contained in the consolidated financial statements in the ESEF format to the audited consolidated financial statements; 11 ● evaluating of compliance with the technical standards regarding the specification of a single electronic reporting format, including the use of XHTML, using a specialised IT tool and with the support of an IT expert assessment; ● evaluating the completeness of marking up the consolidated financial statements in the ESEF format using the iXBRL tags; ● evaluating the appropriateness of the use of XBRL tags selected from the taxonomy defined in the ESEF Regulation and whether the extension markups were used appropriately where no suitable element in taxonomy defined in the ESEF Regulation has been identified; ● evaluating the appropriateness of anchoring of the extension elements to the ESEF taxonomy from the ESEF regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion In our opinion, based on the procedures performed, the consolidated financial statements in the ESEF format were marked-up, in all material respects, in compliance with the requirements of the ESEF Regulation. The Key Registered Auditor responsible for the audit on behalf of PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp.k., a company entered on the list of Registered Audit Companies with the number 144, is Paweł Wesołowski. Paweł Wesołowski Key Registered Auditor No. 12150 Warsaw, 14 March 2024