Flexion Mobile files its delayed 2022 accounts

The 2022 accounts have been submitted for filing with Companies House with a disclaimed opinion from its auditors

• Disclaimed audit opinion due to corporate governance failings at Audiencly
• No material negative adjustments from the Q4-2022 report
• Following an in-depth investigation supported by independent legal, technical and accounting experts, the Board is confident that the financial statements give a true and fair view.
• Further details of the audit report and Board’s position can be found below and in the attached 2022 financial statements and on the website.  
• The company has started preparing the Group’s 2023 accounts

Words from our Chairman Carl Palmstierna

I am disappointed to have to report that during 2023, in response to audit inquiries raised by our external auditor, certain information was misrepresented to the auditors. The misrepresentation related exclusively to Audiencly, representing 12% of the Group when measured by the size of its revenue in 2022. For several years, Audiencly had conducted business with one of its principal customers, a related party, (“Key Customer”) on the basis of an oral agreement, supported by spreadsheets accessible to both parties. Although no written contract was in place, in June 2023 when the Key Customer went into administration, both management at Flexion and the external auditors were presented with a written contract which we were told by senior management at Audiencly had been signed several years earlier. Although this document fairly reflected the contractual terms between the two parties, the written contract had only been created and signed that month.

Once the misrepresentation was identified, I personally interviewed one of those involved at Audiencly to confirm what had happened. The background and circumstances were explained to me. I, consequently, reported my findings to the board and management who investigated the matter, any potential impact on the financial statements and took necessary action including the appointment of an external investigation team.

Following discussions with our external auditors, Grant Thornton UK LLP (“Grant Thornton”), we undertook an in-depth legal and accounting investigation to confirm what had happened and answer the following questions:

a. What had happened and who was involved.

b. Whether the Company has suffered any losses from the misrepresentation including whether the revenue between Audiencly and Key Customer was genuine.

c. Whether Flexion had committed any breaches of law or regulation in the UK or in Germany as a result of the misrepresentation; and

d. Whether the misrepresentation might potentially compromise the reliability of the Company’s financial records and these financial statements.     

The investigation was exceptionally thorough and has lasted several months.  The Board was able to confirm its own findings and draw various positive and clear conclusions from the results:

a. In Audiencly’s sector, it is common practice for relationships to be administered through oral agreements backed up by carefully controlled joint spreadsheets.

b. All but an immaterial amount of the revenue recorded by Audiencly in relation to Key Customer was substantiated and there is no evidence that Flexion has suffered any loss.

c. Flexion has not breached any laws or regulations either in the UK or in Germany; and

d. The Board is confident that these financial statements present a true and fair view.

Further details are set out in note 1 to the financial statements. Nevertheless, the Board has also concluded that this episode highlighted the presence of control and governance weaknesses.  As a result, the Board has commenced a control and governance improvement programme, which is in progress.  I expect to be able to say more about these improvements in my next Chairman’s statement.

This whole episode has been painful for Flexion.  However, the improvements we are putting in place in control and governance will put us in a stronger position for the future.

The conclusions reached by our external auditors

The Board has noted that our external auditors, Grant Thornton, hold the view that a disclaimer of opinion is appropriate. Although, we disagree with Grant Thornton’s audit opinion and consider that no qualification is necessary, we respect and share its position that the misrepresentation could have led to a heightened risk of misstatement from an audit perspective. This is precisely the reason the Board undertook the thorough investigation I described above, to rule out that any misstatements had arisen. The results of the Board’s investigations are clear; there was no misstatement of revenue, cost of sales or receivables arising from the misrepresentation referred to above. Alongside the significant cost of this exercise which will be reflected in the company’s financial statements for 2022-2024, the investigations necessarily took time to complete. That has led to a considerable delay before the point could be reached that the Board was comfortable with approving these financial statements.

Having reached their conclusion that a disclaimed opinion was required on the financial statements of the group, Grant Thornton then notified us that they wished to extend their audit procedures to assess whether it was possible that they might be able to not apply a disclaimed opinion to Flexion Mobile’s own financial statements. Grant Thornton indicated that these further audit inquiries would take several weeks to perform and might not result in any different conclusion from that drawn in respect of the consolidated financial statements. In other words, these further extended inquiries might result in the same disclaimed opinion and therefore might not be of any benefit but would add yet more delay to the finalisation of these financial statements.

It is therefore the Board’s opinion, that there is no doubt that it is overwhelmingly in the public interest that these financial statements, already more than ten months overdue, should be finalised without further delay.

Accordingly, the Board instructed the auditors to draw the conclusions they felt to be appropriate based on the audit evidence that they had compiled over the elongated period of eighteen months since the audit began, and not perform additional procedures that would have led to yet more delay. As we put this painful episode behind us and look forward to our continued exciting growth journey. I can only take some consolation in knowing that we have done absolutely everything asked of us to support our auditors in this lengthy process. It is of course very disappointing that Grant Thornton have disclaimed their opinion, but we accept that it is a matter for them. We will come out stronger and for that I thank all our dedicated teams at Flexion.

On behalf of the Board, I would like to thank all our staff, board members, partners and shareholders for their unwavering support.

Carl Palmstierna

Non-Executive Chairman

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Extract of Independent auditor’s report

Basis for disclaimer of opinion

Corporate governance failings

As referred to in the Chairman’s Statement and Note 1 to the Financial Statements, in the course of performing our audit, we identified that a contract between Audiencly and the Key Customer referred to in the Chairman’s statement (the ‘Key Customer’), purporting to be originally signed in 2021, was in fact created and signed in June 2023.  This misrepresentation and the circumstances surrounding it were the subject of a legal investigation conducted by the Board, which found that the agreement between Audiencly and the Key Customer was signed by two members of the Group’s key management personnel; one member of the senior management team at Audiencly, and an executive of the Key Customer, who was also a director of Flexion Mobile plc during 2022, and who held joint control of one of the two parties that sold Audiencly to Flexion during 2022 (the ‘Selling Party’).

This conclusion leads to a significantly heightened risk of material misstatement due to fraud in respect of the activities of Audiencly and brings into question the authenticity of books and records within that subsidiary and the reliability of information emanating from it, given the apparent management override of controls over the activities within that business.

Given the position of authority that the relevant individuals held during the year under audit, this matter brings into question the reliability of audit evidence obtained in respect of Audiencly, including that obtained in respect of revenues earned from the Key Customer. Further, we conclude that assertions made to us in respect of Audiencly cannot be relied upon, and that given the seniority of the relevant individuals, this has a pervasive effect on our audit of the consolidated financial statements.  We have been unable to reduce the risk of material misstatement to an acceptable level by performing alternative procedures in these circumstances.       

We consider that the effects of the aforementioned inability to obtain sufficient appropriate audit evidence on which to base our opinion are material and pervasive to the consolidated financial statements of the Group.  Audiencly is a significant component for the purposes of the group audit of the consolidated financial statements, and subject to a group significant risk of material misstatement due to fraud in respect of revenue. The majority of the Group’s profits for the year were derived from this component.  As such, we have concluded that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of the activities of Audiencly included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Equity and notes to the consolidated financial statements.

As we have identified an issue that is so pervasive and is therefore unable to conclude on the financial statements as a whole, it is not appropriate for us to conclude on whether the use of the going concern basis of accounting is appropriate.

Management-imposed limitation of scope

In determining the impact of the above matters on the parent company financial statements and the associated audit opinions, we sought to perform further audit procedures to determine whether the governance failings identified were isolated to the activities of Audiencly, and whether sufficient appropriate audit evidence could be obtained over the parent company financial statements, alongside concluding other audit procedures in support of the group and parent company audit opinion. Management directed us to cease further procedures after concluding that the interests of the Group and parent company’s stakeholders were best served by the immediate approval and publication of the Annual Report, rather than a further delay to allow for the completion of the audit.  This constituted a management-imposed limitation in our scope.  In accordance with the requirements of Auditing Standards, we requested that the Board remove management’s limitation, which they did not.  We were therefore unable to reduce the risk of material fraud or error to an acceptable level and obtain sufficient and appropriate audit evidence over the parent company’s financial statements.

In performing our audit procedures prior to the imposition of a limitation in our scope by management, the following matters were identified:

Trade Receivables due from the Key Customer 

Trade receivables in relation to a number of invoices due from the Key Customer were held by Audiencly as at 31 December 2022. Of these, two invoices totalling €455,000 remained unpaid prior to the Key Customer entering into insolvency in June 2023.  The overdue status of the majority of outstanding receivables due from the Key Customer as at 31 December 2022, which we understand to reflect underlying commercial pressures in the Key Customer’s business in late 2022, and the subsequent insolvency proceedings of the business in 2023, indicate that the Key Customer was credit-impaired at 31 December 2022. 

For the reasons stated above in the basis for our disclaimer, we are unable to obtain sufficient appropriate audit evidence over the activities of Audiencly, and by extension, over these trade receivables.  However, if it were the case that these receivables are accurately reflected in the financial statements we consider that a provision of at least €455,000 should be recorded against them at 31 December 2022. 

Management have not made any such provision in the financial statements against these trade receivables.  Had we not disclaimed our audit opinion, this matter would have required a modification to the opinion.

Impact on earn-out liability

As disclosed in note 25 to the consolidated financial statements, the two invoices that were unpaid at the point of the Key Customer’s insolvency were assigned, just prior to the Key Customer entering insolvency proceedings in June 2023, to the Selling Party. The Selling Party is a related party of Flexion Mobile plc, by virtue of being jointly controlled by an individual who was a director of Flexion Mobile plc during 2022.  The consideration for this assignment was a commensurate reduction in the earn-out liability due to the Selling Party in respect of the sale of Audiencly, at the full unprovided value of the invoices.  Management consider the assignment of the receivables in June 2023 to be reflective of a lack of impairment in the aforementioned trade receivables at 31 December 2022.  We consider the assignment of the receivables to be a non-adjusting post balance sheet event, to be accounted for in 2023. 

Management have recognised a liability of £1.2m in respect of the 2022 element of the earn-out. For the reasons stated above in the basis for our disclaimer, we are unable to obtain sufficient appropriate audit evidence over the earnings of Audiencly, and by extension, over the accuracy of the provision for earn-out payments based on Audiencly’s earnings.  However, had management provided against these receivables at 31 December 2022, the relevant earnings for Audiencly would fall below the threshold that triggers a liability for the 2022 element of the Audiencly earn-out, and no such liability would be incurred at 31 December 2022.

Had we not disclaimed our audit opinion, this matter would have required a modification to the opinion.

Recognition of earn-out in goodwill

As disclosed in Notes 2 and 24 to the Financial Statements, management have recognised the expected earn-out payments due under the Audiencly share purchase agreement as part of the consideration payable under IFRS3.  The share purchase agreement included a “good leaver/bad leaver” clause which tied the payment of £6.9m of the earn-out liability recognised at 31 December 2022 to post-acquisition employment for the selling parties.  Under IFRS3, such payments should not be included within the fair value of consideration in the business combination, but instead should be recognised as an IAS19 employee benefit.  Later in 2022, subsequent to the completion of the acquisition, management amended the SPA to remove the good leaver/bad leaver clause, and thus the obligation for ongoing employment on the part of the sellers.  This amendment is considered by management to be reflective of circumstances that existed at the date of the acquisition, and as a result, it is management’s judgement that the clause should not be factored into the accounting for the acquisition and its consideration, and that amounts payable as earn-out should be included within the fair value of consideration paid for Audiencly. 

We do not agree with this judgement and consider the aforementioned portion of the earn-out to meet the requirements to be treated as post-acquisition remuneration for employment services.  For the reasons stated above, we are unable to obtain sufficient appropriate evidence over the accuracy of the provision for earn-out payments based on Audiencly’s earnings.  However, if the liability to make these payments is present at 31 December 2022, the relevant amounts should not be recognised as a component of the consideration for Audiencly under IFRS3, but as an expense in the income statement during 2022.  

Had we not disclaimed our audit opinion, this matter would have required a modification to the opinion.

End of extract.

Link to 2022 Financial statements 

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For more information

Chairman, Carl Palmstierna: ir@flexionmobile.com. Tel: +44 207 351 5944

About Flexion Mobile Plc: 

Flexion grows revenue and audiences for games. Our mission is to become the leading games marketing company. We offer unique game distribution and influencer marketing services to top grossing developers around the world.  Flexion boosts game revenue and audiences for games by maximising their performance in new alternative app stores, including the Amazon, Samsung, Huawei, Xiaomi and ONE Store. In 2022, the company acquired Audiencly GmbH, a leading game influencer marketing agency. Flexion Mobile Plc is listed on Nasdaq First North Growth Market, Shortname: FLEXM. Certified Adviser is FNCA Sweden AB.