Annual Report 2019

Annual Report 2019 - Funcom SE Page 2

Contents

Letter from the CEO 3

About Funcom 4

Active game portfolio 7

The Dreamworld Technology® 12

Report of the Management Board 12

Corporate Governance 20

Responsibility Statement 27

Corporate Governance Declaration 28

Report of the Supervisory Board of Directors 29

Consolidated Financial Statements:

Consolidated Statement of Comprehensive Income 33

Consolidated Statement of Financial Position 35

Consolidated Statement of Cash Flows 37

Consolidated Statement of Changes in Equity 38

Notes to the Consolidated Financial Statements 40

Company Financial Statements:

Statement of Financial Position 99

Statement of Comprehensive Income 100

Notes to the Company Financial Statements 101

Other information:

Other information 111

Auditor’s report 112

Annexes:

Annex I: Remuneration Committee report for 2019 121

Annex II: Investor Relations Policy 124

Annex III: Financial Calendar for Funcom 2020 127

Annex IV: Contact Details 128

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Letter from the CEO

“2019 is the year with most releases in Funcom’s history, with a total of 10 game and DLC

releases spread around four hardware platforms, 23 online stores and global retail distribution. It’s

also been a year where the games industry has been showing signs of shifts in business models

and trends, with the Epic Game Store growing in popularity, several game subscriptions services

changing the dynamics around game sales and in-game monetization models such as loot boxes

being under pressure from legislators.

Combined with the very large number of games being released into the market, this makes for a

competitive situation that leads to games requiring more than ever unique competitive advantages,

larger budgets or a dose of luck in order to become visible and succeed.

This has been felt in our publishing initiatives overall, with some of them like Conan Unconquered

not generating as much attention as we originally hoped for. The multi-platform approach we take

on other games such as Mutant Year Zero: Road to Eden, Moons of Madness and Conan Chop

Chop helps to alleviate some of this risk by making the games available on as many platforms as

possible at launch, but it also carries a technical and process cost, which impact the time needed

to get the games to market.

In the middle of these many publishing activities, Conan Exiles has been our bedrock. We’ve

continued actively developing it and released five DLCs in the year, released it to millions of

players as part of the Sony PS+ service, and have seen a very positive trend in the player

numbers and activity of the game. Conan Exiles proves that the core of Funcom in creating and

operating persistent online worlds is what we’re best at, and it’s something we’re taking to heart

both for the game and for the future internal projects.

The biggest, most exciting and most ambitious of our projects is without a doubt the DUNE open

world survival game we’re working on, after having secured the exclusive rights for PC and

Console games with this fantastic IP. It’s a game that is still a few years away and will be a more

ambitious and robust version of Conan Exiles set in the DUNE universe, designed to be a game as

a service from the outset.

Finally, towards the end of the year we saw Tencent come in and become our largest shareholder

by purchasing the shares from the previous largest shareholder, and later at the beginning of 2020

put in an offer to purchase all shares in the Company. Tencent shows strong interest for our plans

and wants to support us in making the next generation of survival and other persistent online

games and has been a great partner and shareholder. They have placed a fair offer to all

shareholders to sell their shares while committing to supporting the execution of the company’s

plans with both funding and industry expertise.

It’s exciting to see everything that is happening and it’s my firm belief that this path will lead to

great games with great successes!”

Rui Casais

Chief Executive Officer

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About Funcom

Funcom® is an independent developer and publisher of computer and console games.

Funcom SE (the Company or Funcom) was founded in 1993 and listed on the Oslo Stock Exchange

in 2005. The Company has developed and published around 30 game titles across several genres

and gaming platforms.

The Company holds a broad portfolio of released games

and controls some great IPs well suited for games

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Conan® Exiles launched into Early Access on PC in 2017, recouping its development costs after

just a week. This was followed by the full release of Conan Exiles in May 2018 on PC, Xbox One

and PlayStation 4 to great success, with the game selling over 1.4 million units between Early

Access launch and two weeks after full release. Conan Exiles continues the strong ‘games as a

service’ performance with the longevity of the game highlighted by the number of users growing year

on year, December ‘19 being the third best average number PC player month since the January

2017 launch and revenues in Q4 2019 being higher than in Q4 2018. In 2018 Funcom also published

Mutant Year Zero®: Road to Eden made by Swedish developer The Bearded Ladies, solidifying its

reputation as a publisher of externally developed games.

In 2019 the Company increased its published games portfolio with the launch of Conan

Unconquered in May 2019 developed by US based Petroglyph and Moons of Madness® launch at

Halloween 2019 by Norwegian developer Rock Pocket Games. Previous notable and still active

games include the online MMOs Secret World Legends® (relaunched in 2017), Age of Conan® and

Anarchy Online®. Today, around 190 talented individuals are employed at the Company’s studios

in Oslo, North Carolina and Portugal at the time of release of the annual report.

The launch of Conan Exiles in 2017 marked the successful execution of the strategic turnaround

initiated in 2015. Key objectives were securing short development time bringing all games fast to

the market, working on multiple games and revenue generating activities in parallel and doubling

the addressable markets by launching games on console in addition to PC.

In 2017 further strategic initiatives were made by adding publishing of externally developed games

and acquiring intellectual property rights. This created more revenue streams at a lower risk, leading

to more predictable cash flows and financials and a more stable base from which to grow. In early

2018 the Company secured control over its main Intellectual Property, Conan the Barbarian®,

through the creation of Heroic Signatures, a joint operation together with Cabinet Entertainment

containing the rights for interactive entertainment products utilizing Conan and a number of other

IPs.

In 2019 a six-year exclusive partnership to make games based on the DUNE IP, one of the world’s

best-known science fiction universes, was announced. Legendary Entertainment and Warner

Brothers are working to release a DUNE Hollywood blockbuster in December 2020. Funcom will

invest heavily into a DUNE open world game, that will build on the success and learnings from

Conan Exiles.

The four main revenue streams are as follows

• Games in operation & back catalogue: the portfolio of games in operation includes Conan

Exiles, Secret World Legends, Age of Conan, Anarchy Online and Moons of Madness. These

games are actively developed, new content is added, and events are held to support

engagement. The back catalogue includes Mutant Year Zero, Conan Unconquered and other

smaller games that are monetized without any ongoing development work or cost. With

frequent new releases we aim to increase the portfolio of operational games, increasing the

stable base cash flow.

• New internally developed games: with a minimum of two games in development internally

at all times. The Company's IPs and competence in Online games and RPGs are leveraged

for this purpose.

• New publishing games: the Company is building a network of trusted developers to partner

up to co-develop and/or publish games and bring them to market utilizing its internal

resources that the external developers do not typically have themselves, such as Marketing,

Sales, Community management, Online operations, Motion Capture, Localization, Quality

Annual Report 2019 - Funcom SE Page 6

Assurance and Customer Service and Technology and porting to console expertise. The

goal is to have two to three such externally developed products launched annually.

• Intellectual property licenses: Generation of activity, games and revenue from IP. This

includes the interactive IP licenses held through Heroic Signatures DA acquired in February

2018, including Conan the Barbarian, Mutant Year Zero, Solomon Kane and other IPs, as

well as our own IP portfolio comprising The Longest Journey, Anarchy Online and The Secret

World.

The Company carefully considers what niches to compete in and seeks niches that are too small for

the largest industry players to focus on and too difficult for small indie companies to compete in. The

company’s main niche, open-world multiplayer games requires a highly technically skilled

organization to deliver on challenging multi-player elements which represents a significant entry

barrier. Funcom has developed these skills over several years working on MMO games. Combining

game development plans and niches the Company aims to get a quick recoup of its investments

while maintaining a good chance of breakthrough success for each game.

The Company will focus on the PC and Console digital markets. Physical retail distribution of the

Company's games will be done when relevant and executed in conjunction with distribution partners.

Geographically, the Company secures global distribution, handling digital distribution in North

America and Europe directly, and selectively working with partners for other important markets.

Funcom will continue to leverage the internal Technology's team know-how and competence gained

during the creation of the DreamWorld Technology® to maintain a modern technological platform

that all of the Company's projects, internal or external, can leverage to obtain a key competitive

advantage in the market.

The Company’s strategy is designed to reduce the Company's overall risk exposure, control costs

through careful investment decisions and budgeting, increase the financial stability by having more

revenue sources and increase the odds of a break-out success by having more game releases and

focusing the internal development resources on the opportunities with the biggest upside.

For more information, visit www.funcom.com.

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Recent game launches

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Other games

Age of Conan

Age of Conan launched in 2008 and sold more than 1.4 million copies before it went over to a free-

to-play business model. Age of Conan's largest update in 2018 was the new Saga of Blood server.

Players competed for new rewards by stacking up kills in player-versus-player combat. New

leaderboards were also created.

Anarchy Online

The sci-fi MMO launched in 2001 and Anarchy Online still has a fan base and continues to generate

revenues. A new progression server for members was introduced in 2019.

The Park® / Hide & Shriek®

Smaller games set in the Secret World Legends universe. They were Funcom's first games made

in the Unreal 4 engine and gave the company valuable experience for future projects. Released in

2015 and 2016. A version of The Park was released on the Nintendo Switch platform in Q4 2019.

The Longest Journey®

The Longest Journey, Dreamfall: The Longest Journey (released 1999 and 2006) and Dreamfall

Chapters developed by Red Thread Games on a license from Funcom (released 2014-17), all take

place in this universe and continue to generate revenue.

Annual Report 2019 - Funcom SE Page 12

The Dreamworld Technology

The trademarked Dreamworld Technology platform is the technological foundation on which the

company’s games are built. This proprietary technology platform provides Funcom with a unique

competitive advantage by enabling more flexible, faster and more predictable development and

deployment of upcoming games.

A key part of Funcom's strategy has been to develop a proprietary technology platform for both

online and offline games. Dreamworld Technology eases the development and deployment process

of such products. This enables the Company to develop faster prototypes and early versions of new

games using limited staff and to test new game concepts’ feasibility before committing more

resources to the projects. Having a proprietary technology base that builds and expands on over the

shelf solutions like Unreal Engine also enables the Company to specialize and develop unique

features for its games.

Core components of the Dreamworld Technology platform include a flexible and powerful build and

versioning system, an extensive data handling backend allowing our teams to work on extremely

large datasets, secure server technology, as well as custom feature support for the Unreal Engine.

Key developments on the core technology front in 2019 include:

- Development of a set of live services, aimed at allowing Funcom to decouple its games from

functionality provided by specific platforms or storefronts;

- Development of the in-house automated testing framework;

- Initial development of a new internal system for writing efficient and parallelizable game logic;

and

- Initial development of a new scalable server system for Unreal Engine 4.

Report of the Management Board

This chapter of the annual report amongst other matters, contains certain statements that are made

pursuant to Section 2a of the Dutch Governmental Decree setting further regulations concerning the

contents of the report of the Board of Managing Directors (Vaststellingsbesluit nadere voorschriften

inhoud jaarverslag) of 23 December 2004 (Staatsblad 2004, 747), as most recently amended on 29

August 2017 (Staatsblad 2017, 747).

Funcom’s business activities

The operational objective of the Company, as stated in article 2 of the Articles of Association, is to

develop, market and carry on business in computer games, hereunder massively multiplayer online

games, online role-playing games and related games on electronic devices of different kinds. The

objectives of the Company further include to take and grant licenses and other industrial property

interests, assume commitments in the name of any enterprise within the same group of companies,

to take financial interests in such enterprises and to take any other action, such as but not limited to

the granting of securities or the undertaking of obligations on behalf of third parties, which in the

broadest sense of the term, may be related or contribute to the aforesaid objectives. Funcom has

development studios in Oslo in Norway, North Carolina in US and Lisbon in Portugal.

The financial objective of the Company is to maximize the return on investment to the shareholders

by securing sustainable long-term profitability and sufficient funding. Key drivers are establishing

and maintaining a high number of diversified revenue streams while maintaining development cost

and risk by limiting the game development time, leveraging third party developers and promote

internal and external monetization of intellectual property.

Annual Report 2019 - Funcom SE Page 13

Legal structure

For an overview of the legal structure of the Company and its subsidiaries (together referred to as

the ‘Group’) – please refer to Note 24.

Review of Funcom’s financial position and financial results for 2019

The company has just completed its three most profitable years to date in terms of EBITDA margin,

with 2019 being the second-best year. The below graph illustrates the successful execution of the

strategic turnaround initiated in 2015 and expanded in 2017.

Funcom’s 2019 revenue was USD 26 620 thousand, which is lower than 2018 revenue of USD 33

776 thousand, as the publishing games have not been able to fully compensate the expected

reduction of Conan Exiles’ revenue after full launch in 2018.

The Company had strong 2019 Earnings before Interest, Tax, Depreciation and Amortization

(EBITDA) of USD 12 137 thousand and 45.6% margin, which is the second best to date. 2018 had

EBITDA of USD 17 690 thousand (52.4%) and the EBITDA reduction is driven by lower revenue.

The 2019 EBITDA was positively impacted by an amount of USD 1 044 thousand as a result of the

implementation of IFRS 16.

Funcom performed four quarterly impairment tests in 2019. As no indicators to adjust down its game

values were found, no impairment of intangible assets was recorded in 2019. The management will

continue to monitor the value of Funcom’s assets and inform the market of any material changes.

The Earnings before Interest and Tax (EBIT) was USD -148 thousand in 2019. The decline from

USD 10 166 thousand in 2018 is due to lower revenues and amortization of publishing games being

significantly higher in 2019.

In consequence, the Company reported a net loss for 2019 of USD 289 thousand compared to a

net profit for 2018 of USD 6 618 thousand. Thus, the earnings per share (fully diluted) decreased

from USD 0.08 at the end of 2018 to USD - 0 at the end of 2019. These figures take into account

the 5:1 reverse split that the Company conducted on 1 February 2018. The Equity of the Company

at year-end increased to USD 46 317 thousand compared to USD 45 175 thousand in 2018.

In 2019 Funcom completed the acquisition of 50.1% of the Portugal based game development studio

“Zona Paradoxal, Lda” in exchange of the issuance of 102 363 new shares, each at a subscription

price of USD 1.665. This transaction increased the equity with USD 65 thousand.

The Company also issued a total of 175 133 (2018: 38 135) new shares in relation to exercise of

employee options during 2019.

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The cash position was USD 13 131 thousand, the expected decline from USD 19 902 thousand in

2018 is caused by significant investments in the development of games.

Going concern

The Company expects to need to secure additional funding in order to execute all the planned

activities for 2020 and 2021, the largest of which is the DUNE Multiplayer Open World game. The

amount to be secured will heavily depend on the DUNE investment budget and the performance of

the existing titles.

Based on the cash balance below, revenues from a broadening portfolio, future pipeline, a strong

shareholder base and access to additional capital the Company’s financial situation is sound. Based

on this the going concern assumption is justified and consequently the audited consolidated financial

statements of the Company for the year have been prepared on a going concern basis.

Notwithstanding the above, the actual performance of the Company may deviate significantly from

the projections.

Financial instruments

The Group has chosen not to use any financial instruments to hedge its exposure to foreign

exchange and interest rate risks arising from operational, financing and investment activities. Due

to the international structure of the Group, the Company has significant positions in other currencies

than US Dollars, for example Norwegian Krone. The Group does not invest in equity or debt

securities. Please refer to Note 29 and 30 for further information on financial instruments and risk

management.

Main Developments

Executive management

The Executive Management of Funcom comprises 4 executives with good domain knowledge within

their job functions and with senior management experience. The Executive Management of Funcom

currently includes the following positions: Chief Executive Officer, Chief Financial Officer, Chief

Operating Officer, and Chief Marketing Officer. Until 31 October 2019, the executive management

also had a Chief Product Officer.

Game launches in 2019

The Company continued to expand its publishing games portfolio with the launch of Conan

Unconquered on 29 May 2019, developed by US based Petroglyph. Moons of Madness, developed

by Norway based Rock Pocket Games, was released on PC on 22 October 2019, positively

received, with the console version launched on 24 March 2020. A Nintendo Switch version of The

Park, initially launched in 2015, was also launched in the fourth quarter

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Funcom’s revenue for 2019 was USD 26 620 thousand compared to USD 33 776 thousand in 2018.

The key platforms on which the games are sold are Steam, PlayStation 4 (Sony) and Xbox One

(Microsoft).

Pipeline - Games for launch after 2019

Development and releases of additional publishing projects helps grow the portfolio of released

games. In total, the Company currently has ongoing development work on 10 existing or new game

projects. Conan Chop Chop will be released in Q2 2020, and two unannounced publishing games

are being developed. With respect to new internally developed games, the Company is focusing on

the DUNE open world game with the Mutant Chronicles online shooter releasing after that.

During 2019, in total USD 20 261 thousand of game development was capitalized on all the games

(2018: USD 15 209 thousand).

IP investment

In order to diversify revenues and reduce royalty cost Funcom acquired 50% of Heroic Signatures

DA, holding the interactive licenses of an IP portfolio including Conan the Barbarian, Solomon Kane,

Mutant Chronicles and Mutant Year Zero. The arrangement had the immediate cash flow benefits

of halved royalties on Age of Conan and Conan Exiles. This was a cashless transaction where

Funcom after the reverse split issued 4 460 000 new shares on 1 February 2018, each with a par

value of EUR 0.20, at a subscription price of NOK 13.00 per share.

DUNE IP licensing

On 26 February 2019 it was announced that the Company has entered into an exclusive gaming

partnership with Legendary Entertainment for the creation of a minimum of 3 games based on the

DUNE Intellectual Property over the next six years, on PC and Console. DUNE is one of the world’s

best-known science fiction universes.

ZPX acquisition

On 8 January 2019 it was announced that Funcom had acquired 50.1% of the Lisbon, Portugal,

based company, Zona Paradoxal, Lda (“ZPX”) with whom it has had a working relationship since

2017.

ZPX is a game development company, which has provided services to Funcom on Conan Exiles,

Mutant Year Zero: Road to Eden and other projects and will continue to act independently with

Funcom as its main customer.

Strategically this acquisition secures control of an important development partner, allowing for

continued development cost savings when compared to Funcom’s main studios and for access to

the growing talent pool of Portugal and Spain. ZPX’s quality and client focused attitude and history

of providing varied services and executing projects in different time zones is also a good match for

Funcom’s projects in development, allowing them to support both internal and published projects

with ease. ZPX currently has around 30 employees and are searching for great talent to increase

the team. Part of the consideration for the acquisition of the 50.1% ownership in ZPX was 102 363

new shares that Funcom issued to the founders and shareholders of ZPX.

Market development

The global games market produces, publishes and distributes interactive content to its users

worldwide. Just as the movie- and music industry, the games industry directs its focus towards

production, publication and distribution of intellectual property rights. The company encourages all

its shareholders to look at the market development reports regularly produced by companies

focused on the gaming market such as Superdata (www.superdataresearch.com) and NewZoo

(www.newzoo.com). According to these reports, the global gaming market continues to be healthy

and have significant year-on-year growth.

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In 2019 the games industry has been showing signs of shifts in business models and trends, with

the Epic Game Store growing in popularity, several game subscriptions services changing the

dynamics around game sales and in-game monetization models such as loot boxes being under

pressure from legislators.

Internal & external environment

Funcom recognizes that its key assets are its employees and is committed to maintain a stimulating

working environment that offers the opportunity for both personal and professional development.

This is also necessary to continue to attract and retain highly qualified employees within the gaming

industry. As of 31 December 2019, the group employed 185 employees compared to 143 at the end

of 2018.

Sick leave in the group is considered low and no serious work-related incidents or accidents have

occurred or have been reported during the year. The working environment is considered good, and

the Company does not carry out activities that significantly pollute the environment. When recruiting,

the Funcom Group welcomes applications for employment from all sectors of the community and

strives to promote equal opportunity of employment to all.

Shareholders and capital

The main principle of Funcom’s shareholder policy is to maximize the return to shareholders over

time. Funcom will continue to ensure that information is communicated to the market equally and

that the information provides an accurate view of the status of the Company in all material respects

on an ongoing basis. The share capital of Funcom SE comprises of one class of ordinary shares.

Each share confers the right to cast one vote. At the end of 2019, Funcom SE had a share capital

of USD 18 287 thousand (2018: USD 18 224 thousand) consisting of 77 286 989 shares with a

nominal value of EUR 0.20 per share. There are no restrictions in relation to the transfer of shares

in the capital of Funcom SE. There are 6 307 365 outstanding share options granted to employees

and directors in the Company at the end of 2019 (2018: 4 108 398). As a natural consequence of

the Tencent voluntary offer, many of these were executed in March 2020, further details in Note 31.

General Meeting of Shareholders

It is a legal requirement that shares in Funcom SE that are to be admitted to listing on the Oslo Stock

Exchange are registered with the VPS (Verdipapirsentralen).

In order to facilitate registration with the VPS, the shares that are listed on Oslo Stock Exchange are

registered in the name of DnB Bank ASA (Funcom’s VPS Registrar). The VPS Registrar registers

interest in the shares in the VPS (in Norwegian: depotbevis). Therefore, not the shares themselves,

but the interests in the shares issued by the VPS Registrar are registered in the VPS and are listed

on Oslo Stock Exchange. The VPS Registrar is registered as the legal owner of the shares in the

shareholders’ register that Funcom SE maintains pursuant to Dutch law. The VPS Registrar, or its

designee, will hold the shares issued to investors as nominee on behalf of each investor. The VPS

Registrar provides for the registration of each investor’s depositary ownership in the shares in the

VPS on the investor’s individual VPS account.

The depositary ownership of the investors is registered in the VPS under the category of a “share”

and the depositary ownership is listed and traded on Oslo Stock Exchange. Investors who purchase

shares (although recorded as owners of the shares in the VPS) have no direct shareholder rights in

Funcom SE Each share registered with the VPS represents evidence of depositary ownership of

one share. The shares registered with the VPS are freely transferable, with delivery and settlement

through the VPS system. The VPS Registrar or its designee shall only vote the shares it holds, or

issue a proxy to vote on such shares, in accordance with each investor’s instructions. Funcom SE

will pay dividends directly to the VPS Registrar that has undertaken, in turn, to distribute the

dividends to the investors in accordance with contractual arrangements on that point. Typically, less

than 50% of the issued share capital of Funcom SE is represented at a general meeting, generally

represented through proxy.

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Corporate governance

On 27 May 2019 the conversion of Funcom from a N.V. (Naamloze Vennootschap) to a SE (Societas

Europaea) was formalized. The main purpose of the conversion was to structurally reflect the

diversified operational presence (in particular in terms of offices and employees) of the Funcom

group in different European countries, and to potentially take advantage of the flexibility such a

conversion offers, including but not limited to moving the converted Company to another European

state.

The Management Board believes that Funcom SE adheres to good practices in the field of financial

reporting, governance and control, equal treatment of shareholders and other areas of governance.

The Supervisory Board plays an independent role in relation to the Management Board. All shares

have equal rights and shareholders have equal access to all material information published by

Funcom via the Oslo Stock Exchange and the Company’s website www.funcom.com, including

financial reports, presentations, share information and presentation of the Supervisory Board.

The internal risk management and control systems of the Company are regularly analyzed, and the

Management Board believes them to be adequate for the size and operations of the Company. Any

important findings in this regard are discussed with the Supervisory Board.

The Company has also set up an internal control structure that includes plans and budgets,

segregation of duties as well as authorization schemes. This has been discussed with the

Supervisory Board. During the year the Company did not receive or discover indications that the

controls were not effective considering the size of the Company. During the year it performed certain

monitoring procedures such as high-level reviews and comparisons to plans and budgets and this

has confirmed the Company’s view. Funcom’s management will maintain focus on the internal

control structure and processes and perform evaluations on regular intervals. Management believes

that the internal control structures in place are adequate for Funcom’s purposes. There are no

defense mechanisms against take-over bids in the Company’s Articles of Association, nor have

other measures been implemented to limit the opportunity to acquire shares in the Company.

The Management Board consists of two males and the Supervisory Board consists of one female

and four males. In the appointment of directors and auditors, job profiles are used in which there is

no gender distinction. The Management and Supervisory Board seek a more diverse composition.

In any future replacement of Directors or Supervisory Board members both men and women are

invited to apply. In the final stage of the future selection of candidates, the quality of any candidate

will prevail.

Dividends

Funcom is investing its capital in the development of existing and future games, developed inhouse

or in cooperation with third parties where Funcom acts as publisher. Funcom also values the

flexibility to be able to pursue strategic opportunities. The Company will therefore retain its surplus

cash in the Company for the time being. Based on the performance of new game launches and the

company’s financial position a revision to this dividend policy might be considered.

Appropriation of profit/loss

The Management Board does not propose payment of a dividend. Management proposes to

appropriate the loss to retained earnings. Total equity after appropriation of the results for 2019 is

USD 46 317 thousand (2018: USD 45 175 thousand).

Outlook

The long-term outlook of the Company is positive, with ongoing significant investments into both

internal and published games

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Key factors of the outlook

• The continued sales of Conan Exiles, its DLCs and a paid expansion in 2H 2020

• Launch of Moons of Madness on Xbox One and PlayStation 4 on 24 March 2020

• Launch of Conan Chop Chop in Q2 2020 on PC, Xbox One, PlayStation 4 and Nintendo

Switch

• Launch of a DUNE Multiplayer Open World game, investment budget still under

consideration and dependent on many parameters, but expected to be in the USD 30m to

50m range

• Launch of Mutant Chronicles online shooter, developed by Funcom North Carolina, after the

release of the DUNE Multiplayer Open World game

• Development and release of additional publishing projects and performance of the growing

portfolio of released games

Revenue and profitability should be expected to vary from quarter to quarter, depending on launch

activity of new games and downloadable content, discounts and other events. The Company’s

strategy of releasing both internally and externally developed games, allowing multiple releases

each year, is designed to increase diversification and reduce risk. As described below, we do not

expect the Covid-19 virus will have significant effect on our outlook.

Events after the reporting period

Tencent acquisition

On 22 January 2020 Tencent Holdings Limited announced that they (through an indirectly owned

subsidiary, the Offeror) would launch a voluntary cash offer of NOK 17.00 per share to acquire all of

the shares of Funcom not already owned by the Offeror. The Offer price represented a premium of

27.3% to the closing price of the shares on 21 January 2020 and was NOK 1.25 higher per share

than Tencent paid for 29% of the shares in 2019. The Offer was recommended by Funcom’s

Supervisory Board and Management Board. The Supervisory Board members representing

Tencent, Mr. Eddie Chan and Mr. Peng Lu, did not take part in any of the board discussions or

decisions on the matter. The independent agency Pareto Securities AS issued a fairness opinion

concluding the offer was fair from a financial point of view.

The Offeror and Funcom entered into a transaction agreement regarding the acquisition and DNB

Markets, a part of DNB Bank ASA, acted as the receiving agent. On 20 February 2020 an offer

document approved by Oslo Stock Exchange was published, and on 2 March 2020 a position

statement on the transaction according to Dutch regulation was published. The documents contain

details regarding conditions of the offer and post-closing intentions of the Offeror, for instance that

the Offeror has informed the Company that following an acquisition, there are no planned changes

to Funcom management, staffing or structure, with the Company remaining an independent

business. After the Offeror completed the acquisition of more than 95% of the shares in the

Company, a share squeeze-out procedure and delisting process is expected in line with the outlined

intentions in the documents. The Offeror shall replace the option program with a no less favorable

incentive plan. The transaction is not expected to have direct impact on the financials of the

Company, other than transaction cost typical to this kind of transaction.

Update on pipeline and funding

In conjunction with Tencent’s offer the Company announced that the Management Board would

recommend to the Supervisory Board to increase the ambition level of the DUNE open world game

and release it after approximately two years of production time, and that this would require a

redirection of resources from other initiatives, which would delay the Mutant Chronicles online

shooter game until after the release of the DUNE game, and that the company would secure the

necessary funding to support this plan. On 28 February 2020 the Supervisory Board approved the

recommendation.

Annual Report 2019 - Funcom SE Page 19

Effect of COVID-19 virus

All countries where Funcom has subsidiaries have been affected by the COVID-19 virus. All

employees who are able to work from home have done that in line with advice from local authorities.

Although the nature of work Funcom employees executes is suitable for working from home, we

expect a limited impact on overall productivity for the relevant time periods. Temporary effect on

ongoing sales, if any, is expected to be net positive due to people across the world spending more

time at home due to the virus, supported by initial trends in affected regions.

Also see Note 31 events after the reporting period in the Notes to the Consolidated Financial

Statements in this Annual Report.

Management statement

The Management Board of Funcom hereby confirms that these financial statements give a true and

fair view of the situation as per reporting date and of the course of the business during the year. The

significant risks that the Company faces are described in Note 30.

Badhoevedorp, the Netherlands, 23 April 2020

Rui Casais, CEO, Chairman of the Management Board

sgd

Christian Olsthoorn, Managing Director

Sgd

Annual Report 2019 - Funcom SE Page 20

Corporate governance

Funcom’s corporate governance policy

Funcom aspires to generate value for its owners through profitable and sustainable business

practices. Good corporate governance and management will ensure the greatest possible value

creation at the same time as Group resources will be used in an efficient and sustainable manner.

The added value will benefit shareholders, employees and the gaming community. Funcom is listed

on the Oslo Stock Exchange and is subject to Norwegian securities legislation and stock exchange

regulations as well as Dutch legislation.

Funcom’s key principles of corporate governance have been based upon the Dutch Corporate

Governance Code (De Nederlandse Corporate Governance Code), that can be found on

www.commissiecorporategovernance.nl and the Norwegian Code of Practice for Corporate

Governance (Eierstyring og Selskapsledelse), that can be found on www.nues.no. The Oslo Stock

Exchange requires listed companies to publish an annual statement listing all corporate governance

recommendations and presenting compliance with the recommendations or explaining why the

Company has chosen an alternative approach to the specific recommendation.

For the Dutch Corporate Governance Code, Funcom will present the best practice clauses where it

does not comply and explain the rationale for this.

This form of corporate governance, which separates the powers of management from those of

supervision, is considered to offer the most balanced framework governing the exercise of power.

The Supervisory Board oversees the efficient operation of the Company and reports to the

shareholders. Appointment of the managing directors is done by the General Meeting further to a

proposal from the Supervisory Board. The Supervisory Board appoints one of the managing

directors as chairman of the Management Board.

Statement of compliance to the Norwegian Code of Practice for Corporate Governance

1. Implementation and reporting on corporate governance

The Company has drawn up its own Corporate Code of Ethics and Value Platform. Compliance with

and the follow up of the Code of Ethics have been subject to internal processes. The Company has

not yet established separate guidelines for corporate social responsibility as implemented in the

code of practice in 2018 but considers the ethical guidelines to cover most of the relevant topics.

Departures from the recommendation: The Company will consider developing separate

guidelines for corporate social responsibility.

2. Business

The Company has clear objectives and strategies for its business as described in the Management

Board Report. This report also includes reference to the business activities clause from the Articles

of Association.

Departures from the recommendation: None

Annual Report 2019 - Funcom SE Page 21

3. Equity and dividends

Equity

The equity of the Company improved from USD 45 175 thousand at the end of 2018 to USD 46 265

thousand at the end of 2019.

Dividend policy

Further to the proposal of the Management Board, the Supervisory Board determines what portion

of the profits shall be retained by way of reserve. The portion of the profit that remains thereafter

shall be at the disposal of the General Meeting. This policy will be regularly evaluated as appropriate

according to the development of the Company.

Mandates granted to the Supervisory Board

Mandates granted to the board of Directors concerning the issued capital are restricted to defined

purposes and limited in time to the next General Meeting (GM).

Departures from the recommendation: None

4. Equal treatment of shareholders and transactions with close associates

Class of shares

The Articles of Association do not impose any restrictions on voting rights. All shares have equal

rights.

Transactions between related parties

Funcom’s Supervisory Board is committed to treating all the Company’s shareholders equally. In

2019, there were no transactions between the Company and its shareholders, Supervisory Board

Members, Management Board Members, executives, or those close to them, which might be

described as significant transactions, except those described in Note 28 in the Notes to the

Consolidated Financial Statements.

Pre-emption rights

A decision to waive the pre-emption rights of existing shareholders will be justified. Where the

Supervisory Board resolves to carry out an increase in the share capital and limits or excludes the

pre-emption rights of existing shareholders on the basis of a mandate granted by a General Meeting

the justification will be publicly disclosed in a stock exchange announcement issued in connection

with the increase in share capital.

Departures from the recommendation: None

5. Freely negotiable shares

Shares in Funcom are freely negotiable. The Articles of Association do not impose any restrictions

on transfer of shares. Funcom is listed on the Oslo Stock Exchange and works actively to attract the

interest of potential new shareholders. Good liquidity in the Company’s shares is important for the

Company to be seen as an attractive investment and thereby achieve a low cost of capital.

Executives in Funcom meet regularly with current and potential investors in Europe, the USA and

other relevant jurisdictions.

Departures from the recommendation: None

Annual Report 2019 - Funcom SE Page 22

6. General Meetings

By virtue of the General Meeting, the shareholders are guaranteed participation in the Group’s

supreme governing body.

Notification

The Norwegian Public Companies Act stipulates that at least 2 weeks’ notice must be given to call

a general meeting. Based on the law applicable to Dutch list companies, the notification must be

given at least 42 days before – not including the date of the meeting. In this respect, the Netherlands

being the home state of Funcom SE, the Company follows the Dutch law. Notification will be

distributed at least 42 days in advance and posted on the Company’s website.

Participation

The shares listed on Oslo Stock Exchange are registered in the name of DNB Bank ASA (Funcom’s

VPS Registrar). The VPS Registrar or its designee shall only vote the shares it holds, or issue a

proxy to vote on such shares, in accordance with each investor’s instructions.

Agenda and execution

The agenda is set by the Supervisory Board and/or the Management Board. For the Annual General

Meeting of Shareholders, the main items are specified in § 22 of the Articles of Association.

Departures from the recommendation:

The representatives of neither the Supervisory Board nor the auditor are generally present at GM’s.

The auditor is always on standby to attend the GM depending on shareholder attendance.

According to the Articles of Association GMs in Funcom are to be chaired by the Chairman of the

Supervisory Board or the vice-chairman of the Supervisory Board. This is a departure from the

recommendation for independent chairing of meetings and will be re-evaluated in the future.

7. Nomination Committee

Departures from the recommendation:

The Company does not have a Nomination Committee, as such a committee is not deemed to be

relevant given the Company’s current size. However, the Company will continue to re-evaluate this

policy according to its development in the future. The Supervisory Board shall carry out the duties

of proposing the candidates for election to the Supervisory Board and to the corporate assembly (to

the extent this exists) and the fees to be paid to members of these bodies. The Supervisory Board

shall justify such recommendations.

8. Corporate Assembly and the Supervisory Board – composition and independence

Due to the fact that Funcom SE is a Dutch company, the Company has a two-tier board structure,

comprised of a non-executive Supervisory Board that advises and supervises the Management

Board, which is responsible for the daily management of the Company.

According to the Company’s Articles of Association, there shall be at a minimum one member of the

Supervisory Board. All Supervisory Board Members are independent of the company’s executive

personnel and its main business connections. At least two members of the board are independent

of the Company’s main shareholders.

Departures from the recommendation:

Funcom SE does not have a Corporate Assembly as it is a Dutch company.

Annual Report 2019 - Funcom SE Page 23

9. The work of the Board of Directors

Board responsibilities

The Supervisory Board produces an annual plan for its work. The Supervisory Board has issued

instructions for its own work through regulations. The Supervisory Board’s main tasks include

participating in developing and adopting the Company’s strategy, performing the relevant control

functions and serving as an advisory body for the executive management. The Supervisory Board

approves the Company’s plans and budgets. Items of major strategic or financial importance for the

Company are items approved by the Supervisory Board. The Supervisory Board is responsible for

hiring the CEO and defining his or her work instructions as well as setting his or her wage.

Financial reporting

The Supervisory Board receives regular reports on the Company’s economic and financial status.

Notification of meetings and discussion of items

The Supervisory Board schedules regular meetings and / or conference calls each year. All

Supervisory Board Members receive regular information about the Company’s operational and

financial progress in advance of the scheduled Supervisory Board meetings. The Supervisory Board

members also regularly receive operations reports. The Company’s business plan, strategy and

risks are regularly reviewed and evaluated by the Supervisory Board. The Supervisory Board

Members are free to consult the Company’s senior executives as needed.

Conflicts of interest

In a situation involving the Chairman of the Supervisory Board personally, this matter will be chaired

by some other member of the Supervisory Board; furthermore he (or she) will refrain from

deliberating on and adopting of the resolutions in relation to that matter.

Use of Board Committees

Currently, the Company has an Audit Committee and a Remuneration Committee. This is detailed

in the Annual Report in the Report of the Supervisory Board.

The Board’s self-evaluation

The Supervisory Board’s working methods and interaction are discussed on an ongoing basis. In

this connection, the Board also evaluates its efforts in terms of corporate governance.

Departures from the recommendation: None.

10. Risk Management and Internal Control

The Company maintains internal controls and a system for risk management. Funcom has corporate

values and ethical guidelines.

Departures from the recommendation:

The Company’s management has set up a system of internal controls, which it considers to be

effective and efficient for the size of the Company. The system may be less detailed than expected

in the Norwegian Corporate Governance Code. The Company considers the internal control relating

to financial reporting to be at a reasonable level of assurance that the financial reporting does not

contain any material inaccuracies and confirms that these controls functioned properly in the year

under review and that there are no indications that they will not continue to do so.

11. Remuneration of the Board of Directors

The General Meeting stipulates the Supervisory Board’s remuneration each year. The proposal for

remuneration is made by the Chairman of the Remuneration Committee.

Departures from the recommendation:

Annual Report 2019 - Funcom SE Page 24

The Company will from time to time consider granting share options to members of its Supervisory

Board. The Company views share options as an important tool for remuneration of Supervisory

Board Members, e.g., to be able to have a board composition that reflects the global nature of its

business.

12. Remuneration of executive personnel

Guidelines

The Supervisory Board sets the terms of employment of the members of the Management Board.

Each year, the Supervisory Board undertakes a thorough review of salary and other remuneration

to the CEO as well as for other members of the Management Board. The Remuneration Policy is

reviewed on an annual basis by the Remuneration Committee of the Supervisory Board.

Departures from the recommendation:

The allocation of options to executive personnel is determined on a case by case basis and is not

made specifically dependent on the realization of certain targets that are determined in advance.

This practice promotes an extremely dynamic business, in terms of both products and management

responsibilities, which is appropriate for the fast-changing nature of the business environment.

13. Information and communications

The annual report and accounts – periodic reporting

The Company endeavors to present provisional Annual Accounts in February. Complete accounts,

the Report from the Supervisory Board and the Annual Report are made available to shareholders

and other stakeholders before the end of April. Beyond this, the Company currently presents its

accounts on a quarterly basis. The Financial Calendar is published on the Company’s website and

on the Oslo Stock Exchange’s website. In addition, certain financial and Company information can

be found at the Dutch Chamber of Commerce and at the AFM register. The website of the Dutch

Chamber of Commerce is: www.kvk.nl and the website of the AFM is: www.afm.nl. All shareholders

are treated equally as a matter of course.

Other market information

Open investor presentations are conducted in connection with the Company’s quarterly reports. The

CEO reviews the results and comments on products, markets and the prospects for the future.

The presentations made for investors in connection with the quarterly reports are available on the

Company’s website. Beyond that, the Company conducts an ongoing dialogue with and makes

presentations to analysts and investors.

It is considered essential to keep owners and investors informed about the Company’s progress and

economic and financial status. Importance is also attached to ensuring that the same information is

released to the entire equity market simultaneously. Care is taken to maintain an impartial

distribution of information when dealing with shareholders and analysts.

The Board has stipulated special guidelines for the Company’s contact with shareholders outside

the general meeting in its Investor Relations.

Departures from the recommendation: None

14. Takeovers

There are no defense mechanisms against take-over bids in the Company’s Articles of Association,

nor have other measures been implemented to limit the opportunity to acquire shares in the

Company.

Annual Report 2019 - Funcom SE Page 25

The Management Board will not seek to hinder or obstruct take-over bids for the Company’s

activities or shares. Any agreement with a bidder that acts to limit the company’s ability to arrange

other bids for the company’s shares will only be entered into where it is self-evident that such an

agreement is in the common interest of the company and its shareholders. If an offer is made for

the Company’s shares, the Management Board will arrange for a valuation from an independent

expert, and the Company’s Supervisory Board will issue a statement making a recommendation as

to whether shareholders should or should not accept the offer.

Departures from the recommendation: None.

15. Auditor

The auditor’s relationship with the Board

An outline of the work planned by the auditor is presented for the Audit Committee on an annual

basis. The Chairman of the Audit Committee conducts a separate discussion with the auditor and

management prior to the Supervisory Board’s discussion of the financial statements. The auditor is

always present or participates in a conference call during the Supervisory Board’s discussions of

the annual accounts. In that connection, the Supervisory Board is briefed on the financial statements

and items of special concern to the auditor, including any points of contention between the auditor

and management. The Supervisory Board arranges annual meetings and / or conference calls with

the auditor to discuss a report from the auditor that addresses the Company’s accounting principles,

risk areas and internal control routines.

The auditor’s relationship to management

The Supervisory Board has discussed guidelines for the business relationship between the auditor

and the Company.

Departures from the recommendation: None.

16. Sexual Harassment

There is zero tolerance for sexual harassment in Funcom. All temporary and permanent employees

as well as freelancers or contractors who are exposed to, or made aware of sexual harassment, are

encouraged to inform a trusted manager, employee or trustee in the company.

Sexual harassment means acts, omissions or expressions that are intended to act offensive,

intimidating, hostile, degrading or humiliating.

Sexual harassment means unwanted sexual attention and can be verbal, non-verbal as well as

physical. It can also occur online, on social media, via e-mail or text messages and / or image

messages.

Funcom is required to do its best to prevent harassment from occurring in the workplace and shall

follow up on any reported incidents and examine the claims thoroughly.

Departures from the Dutch Corporate Governance Code:

Funcom’s adopted code and practices are in compliance with the Dutch Corporate Governance

Code. Details of how Funcom complies with the Code can be found in other parts of the annual

report and Funcom site. Funcom has not complied completely with the Code in the following areas:

(i) Pursuant to Provision 1.3.1, the Management Board should appoint an internal auditor

and such appointment should be approved by the Supervisory Board. The Company

has not assigned a specific internal auditor. Given the size of the Company, it believes

its current internal control procedures are adequate. As noted in Provision 1.3.6 of the

Annual Report 2019 - Funcom SE Page 26

Dutch Corporate Governance Code, the size of the Company is – indirectly – an

acceptable reason for this departure. Considering that the Supervisory Board that its

current internal control procedures are adequate, which opinion is partly based upon

advice of the Audit Committee, the Supervisory Board takes the position that no

outsourcing of the internal audit function is required. The Company will continue to

review its internal control procedures.

(ii) Pursuant to Provision 2.1.5, the Supervisory Board should draw up a diversity policy for

the composition of the Management Board and the Supervisory Board. The Supervisory

Board has not drawn up such policy and there is no female member in the Management

Board. There is one female member of the Supervisory Board, and none in the

executive committee. The Company encourages selection of people from diverse

backgrounds.

(iii) Pursuant to Provision 2.2.2, members of the Supervisory Board should be appointed for

periods of four years and may be reappointed once for another four-year period. The

Supervisory Board members of Funcom are generally elected with terms expiring at the

end of the first ordinary General Meeting which is held after two full calendar years have

elapsed since the date of appointment. No member has surpassed eight years in the

Supervisory Board.

(iv) Pursuant to Provision 2.2.4, the Supervisory Board should draw up a retirement

schedule in order to avoid, as much as possible, Supervisory Board members retiring

simultaneously. The Company has not developed a retirement schedule and made it

generally available, but the Supervisory Board monitors the situation and makes sure

there is continuity and ongoing improvement in the management of the Company. The

Company aims to develop a more structured guideline.

(v) Pursuant to Provision 2.2.5, the Company should establish a selection and appointment

committee. The Company has decided not to establish a selection and appointment

committee. The Supervisory Board has taken over these tasks.

(vi) Pursuant to Provision 2.3.10, the Supervisory Board should be supported by a company

secretary. The Company has not assigned a specific secretary, but all related tasks are

performed.

(vii) Pursuant to Provision 2.5.4, the report of the Management Board should include an

account on company culture. The Management Board touches upon this issue, such as

in ‘Internal & external environment’ part of the report but aims to provide more detailed

information.

(viii) Pursuant to Provision 3.1.2, the terms and conditions governing share options and

conditions subject to which share options can be exercised should be taken into

consideration when formulating the remuneration policy. The Company has an option

program for the Management Board members where options vest immediately.

(ix) Pursuant to Provision 3.3.2, members of the Supervisory Board should not be awarded

remuneration in the form of shares and/ or rights to shares. The Company has reserved

the right to grant options to the Supervisory Board members. It views share options as

an important tool for remuneration of the Supervisory Board members.

Annual Report 2019 - Funcom SE Page 27

Responsibility Statement

In accordance with the updated best practice II.1.5 of the Dutch corporate governance code of

December 2016, the Managing Board confirms that internal controls over financial reporting provide

a reasonable level of assurance that the financial reporting does not contain any material

inaccuracies, and confirms that these controls functioned properly in the year under review and that

there are no indications that they will not continue to do so. The financial statements fairly represent

the Company’s financial condition and the results of the Company’s operations and provide the

required disclosures.

It should be noted that the above does not imply that these systems and procedures provide absolute

assurance as to the realization of operational and strategic business objectives, or that they can

prevent all misstatements, inaccuracies, errors, fraud and non-compliances with legislation, rules

and regulations.

With reference to section 5.25c, paragraph 2c of the Financial Markets Supervision Act, the

Management Board states that, to the best of its knowledge:

• The annual financial statements of 2019 give a true and fair view of the assets, liabilities,

financial position and profit or loss of the Company and the companies whose financial

information it consolidates; and

• The Report of the Management Board gives a true and fair view of the position as per 31

December 2019, the development during 2019 of the Company and its Group companies

included in the annual financial statements, together with a description of principal risks the

Company faces.

Badhoevedorp, 23 April 2020

Rui Casais, CEO, Chairman of the Management Board

sgd

Christian Olsthoorn, Member of the Management Board

sgd

Annual Report 2019 - Funcom SE Page 28

Corporate Governance Declaration

This declaration is in accordance with article 2a of the decree on additional requirements for annual

reports as amended on October 13, 2015 (“Vaststellingsbesluit nadere voorschriften

inhoud jaarverslag” (hereinafter the ‘Decree’). For the statements in this declaration as stipulated

in articles 3, 3a and 3b of the Decree reference is made to the relevant pages in the Annual Report

2017. The following statements are deemed to be included and repeated herein:

• the statement relating to the compliance with the principles and best practices of the Dutch

Corporate Governance Code (hereinafter the “Code”), including the motivated deviation of

the compliance of the Code, to be found in the chapter ‘Statement of compliance to the Dutch

Corporate Governance Code and the Norwegian Code of Practice for Corporate Governance

• the statement concerning the most important characteristics of the control and risk

management systems in relation to the process of the financial accounting of the Company

and the Group as included in the Annual Report in the “Report of the Supervisory Board”

• the statement about the functioning of the General Meeting of Shareholders and the most

important powers thereof as well as the rights of shareholders and how these may be

executed, as described in the chapter ‘Statement of compliance to the Dutch Corporate

Governance Code and the Norwegian Code of Practice for Corporate Governance”

• the statement regarding the composition and functioning of the Management Board, as

incorporated in the “Report of the Supervisory Board”

• the statement relating to the composition and functioning of the Supervisory Board and its

Committees, as incorporated in the “Report of the Supervisory Board”

• the statement about going concern as incorporated in the “Report of the Management Board”

• the provisions of the Norwegian Code of Practice for Corporate Governance largely follow

requirements as indicated in the EU take over directive

Badhoevedorp, 23 April 2020

Rui Casais, CEO, Chairman of the Management Board

sgd

Christian Olsthoorn, Member of the Management Board

sgd

Annual Report 2019 - Funcom SE Page 29

Report of the Supervisory Board of Directors

Annual report

The members of the Supervisory board of Funcom SE hereby present you with the Annual Report

for 2019, including the annual financial statements that were drawn up by the Management Board.

The annual financial statements have been examined by the external auditors of BDO Audit &

Assurance B.V. who has issued an unqualified audit opinion. We have reviewed and discussed the

Annual Report with the Management Board and the auditors prior to its publishing.

We submit the financial statements to the Annual General Meeting of Shareholders and propose

that the shareholders adopt them and discharge the Managing Directors from all liability in respect

of their managerial activities and the Supervisory Board from all liability in respect of their supervision

of the Management Board. The appropriation of the result for the year as determined by the

Supervisory Board, further to a proposal from the Management Board to that end, is presented in

the section “Other Information” in this report.

The Supervisory Board, in general, supervises the Management Board in its duty to manage the

Company. It performs its duties and activities in accordance with the Articles of Association of the

Company, its regulations, which are posted on the Company’s website, the applicable law and the

Dutch and Norwegian Corporate Governance Codes.

The supervision of the Management Board by the Supervisory Board includes:

• evaluating and defining the long-term value creation strategy and assess the risks inherent

in the business activities;

• evaluation of the structure and operation of the internal risk management and control

systems;

• monitoring the financial reporting process;

• ensuring compliance with regulations and legislation;

• monitoring the Company’s IR activities; and

• monitoring the financial situation of the Company and decide on any related actions.

Activities

In 2019 the Supervisory Board of Directors held four in-person and conference call meetings. During

the meetings / calls the Company’s financial and operational status and objectives, strategy and

accompanying risks were discussed. The main focus during the year has been on the following

topics:

• regular evaluation of the Live Games performance (Conan Exiles, Mutant Year Zero,

Anarchy Online, Age of Conan, Secret World Legends, The Park, Hide and Shriek), the

launch of Conan Unconquered, Moons of Madness, and the games in development to be

launched in 2020 and later;

• regular evaluation of the cost structure of the Company and ways to improve net contribution

and overall profitability;

• regular assessment of the Company’s cash position and financing strategy ;

• assessment of the publishing of externally developed games;

• assessment of the joint operation Heroic Signatures DA;

• assessment of the acquisition of Portugal based company Zona Paradoxal Lda, ZPX, closed

in January 2019;

• assessment of the partnership with Legendary studios giving Funcom an exclusive right to

publish games based on the DUNE IP; and

• regular assessment of overall long-term value creation strategy of the Company, the

strategic changes made during the year and alignment with industry trends.

Annual Report 2019 - Funcom SE Page 30

The Supervisory Board is responsible for supervising the policy pursued by the Management Board

and the general course of affairs of the Company and the business enterprises that it operates. The

Supervisory Board assists the Management Board with advice relating to the general policy aspects

connected with the activities of the Company. In this context the Supervisory Board is inter alia

responsible for monitoring and advising the Management Board, supervising the Company’s

strategy, and monitoring the functioning of internal risk management and control systems. The

Supervisory Board supervises the objectives for financial structure and adopts the Company’s plans

and budgets. The Supervisory Board approves items of major strategic and/or financial importance

for the Company. All this is in accordance with the Company’s articles of association and applicable

law.

During the 2019 financial year the Supervisory Board has discussed its own functioning, that of its

individual members and that of the Remuneration Committee and the Audit Committee. The

Supervisory Board has received a report from the Audit Committee and the Remuneration

Committee on their deliberations and findings.

The Audit Committee consists of Egil Kvannli (chairman) and Peng Lu, after Andreas Arntzen left

the Supervisory Board on 9 October 2019. The Audit Committee has had 5 meetings in 2019,

focusing on supervising the integrity of the financial process and the reporting systems, the internal

audit and the financial risk management procedures, relevant policies and independence and quality

and performance of the external auditor. The Remuneration Committee consists of Eddie Chan

(chairman) and Susana Meza Graham, after the previous chairman Fredrik Malmberg left the

Supervisory Board on 16 December 2019. The Remuneration Committee had 4 meetings in 2019,

focusing on remuneration of executives and directors, option grants, and adjustments to the option

program and potential adjustments to the remuneration policy. See www.funcom.com for the

regulations of the two committees which further describe the work they do. It was concluded that

that the performance of the Supervisory Board, its individual members, the Remuneration

Committee and the Audit Committee, respectively, meet the standards set for that purpose as well

as the objectives determined in the beginning of 2019. The Supervisory Board has furthermore

discussed the overall composition of the Supervisory Board and competencies of its individual

members. The Supervisory Board has in addition discussed the composition and functioning of the

Management Board and its individual members.

In the course of the 2019 financial year the Supervisory Board has also discussed the risks

associated with the operation of the business. To that end the Management Board has presented

the Supervisory Board with its assessment of the functioning of the Company’s internal risk

management and control systems. The Supervisory Board is of the opinion that the current risk

management and control systems are adequate, and the Management Board has furthermore not

suggested any amendments thereto. The Audit Committee and The Supervisory Board have

assessed whether a separate department for the internal audit function should be established but

concluded that this is not suitable for the Company given its current size, scope and risk profile.

During the year the Supervisory Board has regularly had discussions with the Management Board

regarding its corporate strategy.

No supervisory board members had absences in 2019. Fredrik Malmberg recused himself from all

deliberations about the Cabinet transaction to avoid conflict of interest.

Ole Gladhaug, Egil Kvannli and Fredrik Malmberg joined the Supervisory Board on 5 October 2016.

Andreas Arntzen joined the board at 10 July 2018, Susana Meza Graham joined the board on 14

September 2018. Ole Gladhaug joined the board as Chairman. Both Mr. Gladhaug and Mr. Arntzen

resigned from the board on 9 October 2019. Eddie Tak Ho Chan and Peng Lu joined the Supervisory

Board on 16 December 2019. Fredrik Malmberg resigned from the board on 16 December 2019.

Mr. Chan and Mr. Lu are currently in their first term and both are representing the largest shareholder

in Funcom, Tencent Holdings Ltd, and are hence not considered independent board members.

Annual Report 2019 - Funcom SE Page 31

Required expertise and background of the Supervisory Board:

• Knowledge and experience in the financial, legal, economic, organizational and marketing

fields

• experience in managing or supervising the management of a listed company

• Knowledge of, experience in and affinity with the gaming industry

• Knowledge of and experience with working in an international environment

• The ability, also in terms of available time, to monitor and stimulate the general course of

affairs within the Company in a prompt and effective manner and to provide the CEO and

the Management Board with advice relating to the formulation and execution of the Company

policy

• No conflicts of interests at the time of appointment.

On 1 November 2016, the Supervisory Board decided to form an Audit Committee and a

Remuneration Committee, both with two members of the Supervisory Board.

The established remuneration policy has been followed during 2019. The total remuneration of the

Management Board consists of the following elements:

• A fixed element: annual salary and vacation allowance

• A variable element: options and bonus

• Pension and other benefits.

The Company’s complete remuneration policy can be found on www.funcom.com.

The Supervisory Board is of the opinion that it is presently constituted in compliance with best

practice provision of the Dutch Corporate Governance Code, with the understanding that – as

indicated below –two of its members cannot be considered as independent.

The following professionals served on the Supervisory Board as at year-end 2019:

Eddie Tak Ho Chan, Chairman of the Supervisory Board

(born in 1978, male, US citizen, 1st-term, member since 16 December 2019)

Mr. Eddie Tak Ho Chan serves as VP of International Partnerships & Strategy, Tencent. Previous

roles: Activision Blizzard – SVP, head of studio operations, VP, head of finance for US Sales Team,

VP, Strategy; McKinsey – Engagement Manager. Mr. Eddie Tak Ho Chan holds an MBA from

Columbia University and a Bachelor of Finance / Information Systems from NYU Stern School of

Business. As per 31 December 2019 Mr. Chan held 0 share options in the Company and 0 shares.

Peng Lu

(born in 1965, male, Australian citizen, 1st-term, member since 16 December 2019)

Mr. Peng Lu serves as Vice President, Tencent Games. Previous roles: general manager of Tencent

Games biz dev/partnership, general manager of Tencent Games mobile game publishing

department. Mr. Peng Lu holds a Bachelor of Science degree from the Fudan University, and a

Master of Technology Management from the University of New South Wales in Australia. As per 31

December 2019 Mr. Lu held 0 share options in the Company and 0 shares.

Egil Kvannli

(born 1972, male, Norwegian, 2nd term, member since October 5, 2016)

Mr. Kvannli has a background as Chief Executive Officer and Chief Financial Officer. Mr. Kvannli

now works for Wellit AS as Chief Financial Officer. From 2017 Mr. Kvannli worked for Global

Maritime Group as Chief Executive Officer, being responsible for a full turnaround of the Company.

From 2011 to 2015 Mr. Kvannli worked for Quickflange AS a Norwegian entity both as CFO and in

for the last two years as General Manager. From 2008 to 2010 Kvannli acted as VP Finance for

REC Site Services Pte Ltd., a Singapore entity.

Annual Report 2019 - Funcom SE Page 32

From 2005 to 2008 he was the CFO for Sevan Marine ASA. Mr. Kvannli furthermore worked for

MISWACO in Norway and in Houston, 1997-2005, the last two and a half last years as Financial

Director for Scandinavia. Mr. Kvannli holds a Bachelor-degree for Business and Administration, BI

of the Norwegian School of Management of Stavanger, Norway and Bishops University, Quebec,

Canada. As per 31 December 2019 Mr. Kvannli held 126 000 share options in the Company and 0

shares.

Susana Meza Graham

(born in 1976, female, Swedish citizen, 1

-term, member since 14 September 2018)

Mrs. Meza Graham is the Co-founder and Chairwoman of the Board for Aldeon, an investment

company in games & tech. Previous Board experience includes the trade association for Swedish

game developers and she currently holds board and advisory positions in a number of tech & games

start-ups. She has an extensive background in the Games Industry, and she has been involved in

building one of the larger, listed game companies in Sweden. She has held a variety of positions at

Paradox Interactive, including COO, where she led the company as part of the management team

and helped set the strategic direction, vision and goals of Paradox, and is currently acting as a

Senior Advisor for the company. Her main expertise lies in the business of games (publishing),

marketing & PR, communication & leadership as well as organizational growth. She also has

extensive experience of living and working abroad. Mrs. Meza Graham holds a bachelor’s degree

from the Stockholm University focused on International management and marketing. As per 31

December 2019 Mrs. Graham held 76 000 share options in the Company and 222 300 shares.

The Supervisory Board of Funcom currently consist of one woman and three men. In the

appointment of directors and auditors, professionals’ backgrounds are evaluated and there is no

gender distinction. Management and Supervisory Board would welcome a more diverse composition

in terms of gender in the future. In a future replacement of directors or supervisory board candidates,

the quality of any candidate will prevail.

Badhoevedorp, the Netherlands, 23 April 2020

The Supervisory Board of Directors in Funcom SE

Eddie Tak Ho Chan, Chairman

sgd

Peng Lu

sgd

Egil Kvannli

sgd

Susana Meza Graham

sgd

Annual Report 2019 - Funcom SE Page 33

Funcom SE

Consolidated Statement of Comprehensive Income

for the year ended 31 December

In thousands of US dollars

Note

2019

2018

Continuing operations

Revenue

6,7

26 620

33 776

Personnel expenses

8,27

-5 330

-4 899

General and administrative expenses

-8 204

-10 268

Depreciation, amortization and impairment losses

-12 285

-7 523

Other operating expenses

-948

-919

Operating expenses

-26 768

-23 609

Operating result

-148

10 166

Finance income

1 725

2 170

Finance expenses

-1 869

-4 097

Result before income tax

-291

8 240

Income tax (expense) / income

-2

-1 622

Result from continuing operations

-289

6 618

Result for the period

-289

6 618

Other comprehensive income

Items that may be reclassified subsequently to profit or

loss:

Exchange differences on translating foreign operations

102

-1 508

Other comprehensive income for the year, net of tax

102

-1 508

Total comprehensive income for the year

-187

5 110

Annual Report 2019 - Funcom SE Page 34

Funcom SE

Consolidated Statement of Comprehensive Income

for the year ended 31 December

In thousands of US dollars

Note

2019

2018

Result for the period attributable to:

Equity holders of Funcom SE

-277

6 618

Non-controlling interests

-12

-289

6 618

Total comprehensive income attributable to:

Equity holders of Funcom SE

-174

5 110

Non-controlling interests

-12

-187

5 110

Earnings per share *

From continuing operations

Basic earnings per share (US dollars)

-0.00

0.09

Diluted earnings per share (US dollars)

-0.00

0.08

* Based on result for the period

The accompanying notes are an integral part of the consolidated financial statements.

Annual Report 2019 - Funcom SE Page 35

Funcom SE

Consolidated Statement of Financial Position

As at 31 December

In thousands of US dollars

Note

2019

2018

ASSETS

Non-current assets

Intangible assets and goodwill

33 251

24 711

Right-of-use assets

3 926

Equipment

137

155

Other non-current financial assets

978

489

Total non-current assets

38 291

25 354

Current assets

Trade receivables

17,29

3 837

4 797

Prepayments and other receivables

18,29

1 828

1 269

Cash and cash equivalents

19,29

13 131

19 902

Total current assets

18 797

25 968

Total assets

57 088

51 322

Annual Report 2019 - Funcom SE Page 36

Funcom SE

Consolidated Statement of Financial Position

as at 31 December

In thousands of US dollars

Note

2019

2018

EQUITY AND LIABILITIES

Equity

Share capital

18 287

18 224

Reserves

189 852

188 539

Retained earnings (Accumulated deficit)

-161 874

-161 589

Equity attributable to owners of the Company

46 265

45 175

Non-controlling interest

20,25

Total equity

46 317

45 175

Non-current liabilities

Deferred tax liabilities

1 855

2 086

Lease liabilities

26,29

3 300

Other non-current liabilities

Total non-current liabilities

5 156

2 178

Current liabilities

Trade payables

1 329

1 200

Contract liabilities

234

222

Lease liabilities

26,29

1 241

Other short-term liabilities

22,29

2 812

2 547

Total current liabilities

5 615

3 969

Total liabilities

10 771

6 147

Total equity and liabilities

57 088

51 322

The accompanying notes are an integral part of the consolidated financial statements.

Annual Report 2019 - Funcom SE Page 37

Funcom SE

Consolidated Statement of Cash Flows

for the year ended 31 December

In thousands of US dollars Note

2019 2018

Cash flows from operating activities

Profit (loss) before income tax

-291 8 240

Adjustments for:

Depreciation, amortization and impairment losses 11

12 285 7 523

Share-based payments 8,20,27

920 2 903

Interest income/expense 12

-64 -49

Effect of exchange rate fluctuations

264 1 322

Working capital adjustments:

Change in trade and other receivables

257 -4 646

Change in trade payables

140 498

Change in other current assets and liabilities

272 1 428

Cash generated from operations

13 782 17 219

Interest received 12

242 49

Income tax and other taxes paid 14

-205 -71

Net cash from operating activities (A)

13 819 17 196

Cash flows from investing activities

Purchase of equipment 16

-50 -164

Acquisition of subsidiary, net of cash acquired 25

-74 -

Payment of development costs 15

-19 753 -16 422

Net cash used in investing activities (B)

-19 877 -16 585

Cash flows from financing activities

Principal paid on lease liabilities 26

-1 196 -

Interest paid on lease liabilities 26

-178 -

Proceeds from finance subleases 26

398 -

Net proceeds from issue of share capital 20

182 12 374

Net cash from financing activities (C)

-793 12 374

Net increase in cash and cash equivalents (A+B+C) 19

-6 851 12 985

Cash and cash equivalents at beginning of period 19

19 902 7 731

Effect of exchange rate fluctuations

80 -814

13 131 19 902

Cash and cash equivalents at end of period after exchange

effect

Annual Report 2019 - Funcom SE Page 38

Funcom SE

Consolidated Statement of Changes in Equity

for the year ended 31 December

In thousands of US dollars

Equity as at January 1, 2018: 13 525 165 028 8 936 -5 604 -168 206 13 678 - 13 678

Profit or loss for the period 6 618 6 618 6 618

Other comprehensive income the period -1 508 -1 508 -1 508

Total comprehensive income for the period - - - -1 508 6 618 5 110 - 5 110

Share-based payments expense 2 903 2 903 2 903

Exercise of options 197 796 993 993

Issue of new shares 2 803 16 199 19 001 19 001

Convertible loan to new shares 1 699 1 917 3 616 3 616

Transaction costs related to increase in equity -127 -127 -127

Total contributions and distributions 4 699 18 785 2 903 - - 26 386 - 26 386

Equity as at December 31, 2018: 18 224 183 812 11 839 -7 112 -161 589 45 175 - 45 175

-9 -9 - -9

Equity as at January 1, 2019: 18 224 183 812 11 839 -7 112 -161 597 45 166 - 45 166

Profit or loss for the period -277 -277 -12 -289

Other comprehensive income for the period 102 102 102

Total comprehensive income for the period - - - 102 -277 -174 -12 -187

Share-based payments expense 920 920 920

Exercise of options 39 143 182 182

Issue of new shares 23 147 170 170

Total contributions and distributions 62 290 920 1 273 1 273

Acquisition of subsidiary with NCI - 65 65

Total changes in ownership interests - - - - - - 65 65

Equity as at December 31, 2019: 18 287 184 103 12 759 -7 010 -161 874 46 265 52 46 317

Adjustment on initial application of IFRS 16, net of tax

Attributable

to owners of

the parent

Non-

controlling

interests

Total

Equity

capital

premium

Equity-settled

employee

benefits

reserve

Trans-

lation

reserve

Retained

earnings

Annual Report 2019 - Funcom SE Page 39

Summary of Notes to the Consolidated Financial Statements

1. Corporate Information 40

2. Basis of Preparation 40

3. Significant Accounting policies 42

4. Accounting estimates, judgments and uncertainty 55

5. Changes in significant accounting policies 57

6. Segment information 60

7. Revenue 61

8. Personnel expenses 62

9. General and administrative expenses 62

10. Other operating expenses 63

11. Depreciation and amortization 63

12. Finance income and expenses 64

13. Earnings per share 64

14. Income tax expense 65

15. Intangible assets and goodwill 68

16. Equipment 71

17. Trade receivables 71

18. Prepayments and other receivables 72

19. Cash and cash equivalents 72

20. Equity 72

21. Contract liabilities 74

22. Other short-term liabilities 74

23. Contigent liabilities 74

24. Group entities 75

25. Acquisition of subsidiary 75

26. Leases 77

27. Employee benefits 80

28. Transactions with related parties 83

29. Financial Instruments 86

30. Capital Management and Risk Factors 90

31. Events after the reporting period 97

Other

Basis of preparation

Performance for the year

Income taxes

Assets

Equity and liabilities

Group composition

Annual Report 2019 - Funcom SE Page 40

Funcom SE

Notes to the Consolidated Financial Statements

1. Corporate Information

Funcom SE (or the “Company”) is a public limited company registered in the Netherlands (Chamber

of Commerce number: 28073705). The Company is incorporated in Katwijk, The Netherlands. The

Group’s head office is in Prins Mauritslaan 37 – 39, Badhoevedorp, 1171 LP, The Netherlands. The

Company is listed on the Oslo Stock Exchange under the ticker “FUNCOM”. On 17 May 2019, the

General Meeting approved the conversion of the legal form of Funcom N.V. to Funcom SE, a

“societas europaea” company.

The consolidated financial statements of the Company as at and for the year ended 31 December

2019, comprise the Company and its subsidiaries (together referred to as the “Group”).

The objectives of the Group as stated in the Articles of Association of the Company, are to develop,

market and carry on business in computer games, hereunder multi player online games, online role

playing games and related games on electronic devices of different kinds, to take and grant licenses

and other industrial property interests, assume commitments in the name of any enterprises with

which it may be associated within a group of companies, to take financial interests in such

enterprises and to take any other action, such as but not limited to the granting of securities or the

undertaking of obligations on behalf of third parties, which in the broadest sense of the term, may

be related or contribute to the aforesaid objectives.

The consolidated financial statements were authorized for issue by the Supervisory Board on

23 April 2020.

2. Basis of preparation

The Company expects to need to secure additional funding in order to execute all the planned

activities for 2020 and 2021, the largest of which is the DUNE Multiplayer Open World game. The

amount to be secured will heavily depend on the DUNE investment budget and the performance of

the existing titles.

Going concern

Based on cash balance, revenues from a broadening portfolio, future pipeline, a strong shareholder

base and access to additional capital the Company’s financial situation is sound. Based on this

Management Board has concluded that the going concern assumption is justified and consequently

the unaudited condensed consolidated financial information of the Company for the year to date

have been prepared on a going concern basis. Notwithstanding the above, the actual performance

of the Company may deviate significantly from the projections. Notwithstanding the above, the actual

performance of the Company may deviate from the projections. Relevant risks are outlined in Note

30.

Rounding

All amounts are in thousands of US dollars unless stated otherwise. There may be some minor

rounding differences, or the total may deviate from the total of the individual amounts. This is due to

the rounding to whole thousands of individual amounts.

Statement of compliance

The consolidated financial statements have been prepared in accordance with International

Financial Reporting Standards (IFRS) and interpretations (IFRIC) as issued by the International

Accounting Standards Board (IASB) and adopted by the European Union.

Annual Report 2019 - Funcom SE Page 41

Presentation and functional currency

The consolidated financial statements are presented in US dollars (USD), which is the Company’s

functional currency, rounded to thousands. It is expected that US dollars will remain as the main

currency in the Group’s economic environment, due to a majority of US dollars revenues.

Basis of measurement

The consolidated financial statements have been prepared on a historical cost basis unless

otherwise stated in these accounting policies.

Estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make

judgements, estimates and assumptions that affect the application of policies and reported amounts

of assets, liabilities, income and expenses. The estimates and associated assumptions are based

on historical experience and various other factors that are believed to be reasonable under the

circumstances, the results of which form the basis of making the judgements about carrying values

of assets and liabilities that are not readily apparent from other sources. Actual results may differ

from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are recognized in the period in which the estimates are revised if the revision

affects only that period or in the period of the revision and future periods if the revision affects both

current and future periods.

Judgements made by management in the application of IFRS with significant effect on the financial

statement and estimates with a significant risk of material adjustment in the next year are discussed

in Note 3.

Accounting policies

The accounting policies set out below have been applied consistently to all periods presented in

these consolidated financial statements and have been applied consistently by Group entities.

Adoption of new and revised International Financial Reporting Standards and Interpretations

Standards and Interpretations affecting amounts reported in the current period

Only IFRS 16 did have an impact on the current period. The other standards did not have an impact

upon the financial statements of the group. For more information see note 5.

Standard/

Interpretation

Title

Date of issue

Applicable to

accounting periods

commencing on

IFRS 16

Leases

January 2016

1 January 2019

Amendments

to IFRS 9

Prepayment features with

Negative Compensation

October 2017

1 January 2019

IFRIC 23

Uncertainty over Income Tax

Treatments

June 2017

1 January 2019

Amendments

to IAS 28

Long-term interests in

Associates and Joint Ventures

October 2017

1 January 2019

Annual

improvement

Annual improvements to

IFRSs 2015-2017 cycle

December 2017

1 January 2019

Amendments

to IAS 19

Plan Amendment, Curtailment

or Settlement

February 2018

1 January 2019

Annual Report 2019 - Funcom SE Page 42

Standards and Interpretations in issue but not yet adopted

There are a number of standards, amendments to standards, and interpretations which have been

issued by the IASB that are effective in future accounting periods that the group has decided not to

adopt early. The most significant of these is are as follows:

Standard/

Interpretation

Title

Date of issue

Applicable to

accounting periods

commencing on

IFRS 17

Insurance contracts

May 2017

1 January 2021

Amendments

to references

Conceptual

Framework

Amendments to References to

the Conceptual Framework in

IFRS Standards

March 2018

1 January 2020

Amendment

to IFRS 3

Business Combinations

October 2018

1 January 2020

Amendments

to IAS 1 and

IAS 8

Definition of Material

October 2018

1 January 2020

Amendments

to IFRS 9,

IAS 39 and

IFRS 7

Interest Rate Benchmark

Reform

September 2019

1 January 2020

These new accounting standards and amendments will not have a significant impact on the Group’s

consolidated financial statements.

3. Significant accounting policies

3.1 Basis of consolidation

Subsidiaries

Subsidiaries are entities controlled by the Company. Control exists when the Company is exposed,

or has rights, to variable returns from its involvement with the investee and has the ability to affect

those returns through its power over the investee. Subsidiaries are included in the consolidated

financial statements from the date the control effectively commences until the date control ceases.

The acquisition method is applied when accounting for business combinations.

Inter-company transactions

Inter-company balances and unrealized income and expenses arising from intra-group transactions

are eliminated in full. Unrealized gains arising from transactions with associates are eliminated

against the investment to the extent of the Group’s share in the investment. Unrealized losses are

eliminated in the same way, but only to the extent that there is no evidence of impairment.

Annual Report 2019 - Funcom SE Page 43

3.2 Foreign currency

Foreign currency transactions

Transactions in foreign currencies are translated at the exchange rate at the date of the transaction.

Monetary assets and liabilities in foreign currencies are translated at the exchange rate at the

reporting date. Intangible assets are stated at historical cost and translated at the exchange rate of

the reporting date. Other non-monetary assets and liabilities in foreign currencies that are stated at

historical cost are translated at the exchange rate at the date of the transaction. Non-monetary

assets and liabilities in foreign currencies that are stated at fair value are translated at the exchange

rate at the date the values were determined. All foreign exchange gains and losses arising on

translation are recognized in the Statement of Comprehensive Income.

Foreign operations

Financial statements of consolidated entities are prepared in their respective functional currencies

and translated into US dollars (the Group’s presentation currency) as of year-end. Assets and

liabilities of the foreign operations, including goodwill and fair value adjustments arising on

consolidation, are translated at the exchange rates at the reporting date. The revenues and

expenses of foreign operations are translated at rates approximating the exchange rates at the dates

of the transactions. Foreign exchange differences arising on translation of foreign operations are

recognized directly in Other Comprehensive Income and accumulated in equity in the translation

reserve.

3.3 Revenue from contracts with customers

For each contract with a customer, the group identifies the performance obligations, determine the

transaction price, allocate the transaction price to performance obligations, determine whether

revenue should be recognized over time or at a point in time, and, finally, recognize revenue when

or as performance obligations are satisfied.

Performance obligations and timing of revenue recognition

The majority of the group’s revenue is derived from selling digital games to third party PC and

console platforms. Revenue is recognized at a point in time when the digital game is available to the

customer. There is limited judgement needed in identifying the point control passes.

Third party platforms

Funcom recognizes revenue from third party platforms at a point in time when the relevant sale has

occurred, the respective performance obligations in the contract are satisfied and the payment

remains probable. In general, the performance obligation is satisfied when the platform obtains

control with the relevant game and can monetize it through its platform. Any further responsibility,

for instance from refunds, typically rests on the third-party platform, which is classified as a principal

and not an agent. Funcom determines the transaction price to be the amount of consideration which

it expects to be entitled in exchange for transferring the promised services to the customer, net of

deducted taxes, fees and refund charges. No element of financing is deemed present as the sales

are made with a credit term of 15-90 days, which is consistent with market practice. Revenue

recognition of boxed video games sold through physical retail through a distribution channel is

recognized according to the same principles. The revenue recognition principles for third party

platforms are the same for PC and console.

Revenues from Funcom’s own channels

Funcom sells subscriptions, virtual currencies and virtual in-game items for digital PC games directly

to the customer from Funcom’s own online store. The payments are received through credit card

providers with limited delay.

Annual Report 2019 - Funcom SE Page 44

Subscriptions

Subscriptions constitutes a distinct performance obligation and are recognized on a straight-line

basis over the subscription period as the service is provided. Any unsatisfied or partially unsatisfied

performance obligations at year-end will be presented in the balance as a contract liability.

Virtual currency

A virtual currency constitutes a distinct performance obligation. Revenue is recognized over time,

spread out over the estimated duration of currency consumption. Any unsatisfied or partially

unsatisfied performance obligations at year end will be presented in the balance as a contract

liability.

Virtual in-game items

Virtual In-game items, such as virtual backpacks, constitutes a distinct performance obligation and

are recognized at a point in time when the virtual item is made available to the customer.

Bundles

During 2019 Funcom sold bundles with both subscription and virtual currency. These bundles

include separate performance obligations that are also sold separately. The transaction price is

allocated to the performance obligations based on its relative standalone selling price and

recognized over time.

Season passes

During 2019 Funcom sold bundles in the form of season passes. These bundles include separate

performance obligations that are also sold separately and delivered at different points in time. The

transaction price is allocated to each performance obligations based on its relative standalone

selling price. As of 31 December 2019, all the performance obligations related to the season passes

have been fulfilled.

Pre-orders

In cases where sales are made through pre-orders, the revenue is allocated to the release day, and

presented in the balance as a contract liability.

One-off deals

The Group has entered into agreements with game subscriptions services providers for one-off

deals regarding the right-to-use license for some of our games. The performance obligations and

extent of these deals varies from contract to contract and can include providing the customer with

game-related materials, game-keys and license rights. The transaction price as agreed in the

agreements are allocated to the identified performance obligations (which is generally one

performance obligation) to their standalone selling price. The Group will recognize the revenue at

the point in time when the performance obligations are fulfilled, the customer have accepted the

product, and the Group has received the cash or have a present right to payment.

External consulting services

External revenue from game related consulting services are based on time, and the performance

obligations are recognized over the period in which the services are rendered. The performance

obligations are generally satisfied, and the control transferred to the customer over time given that

the customer simultaneously receives and consumes the benefits provided by the Group.

IP Licensing royalties

The Group enters into licensing agreements for IP rights to the Group’s intellectual property licenses.

Consideration tied to the licensing arrangement may include minimum guarantees, milestone

payments and sales-based royalties. The Group is not required to undertake any activities that

significantly affect the intellectual property to which the customer has a right to use. Revenues from

milestones and minimum guarantees are recognized at the point in time when the performance

obligations are fulfilled, and the Group have an unconditional right to payment. The performance

Annual Report 2019 - Funcom SE Page 45

obligations include providing the customer with the right-to-use license to the Group’s intellectual

property. Sales-based royalties are a percentage of the customer’s sales and are recognized at the

point in time when the related sales occur by the customer.

Determining the transaction price

Most of the group’s revenue is derived from fixed price contracts and therefore the amount of

revenue to be earned from each contract is determined by reference to those fixed prices.

Some contracts provide customers with a limited right of return. These relate predominantly, but not

exclusively, to online sales direct to consumers. Historical experience enables the group to estimate

reliably the value of goods that will be returned and restrict the amount of revenue that is recognized

such that it is highly probable that there will not be a reversal of previously recognized revenue when

goods are returned.

Allocating amounts to performance obligations

For most contracts, there is a fixed price for each product sold. Therefore, there is no judgement

involved in allocating the transaction price to each product in such contracts. Where a customer

orders more than one product line, the Group is able to determine the split of the total contract price

between each product line by reference to each product’s standalone selling prices (all product lines

are capable of being, and are, sold separately).

Most extended warranties are sold on the Group’s behalf by retailers when the end customer buys

one of the Group’s products from the retailer. There is therefore also no judgement required for

determining the amounts received for extended warranties in retail sales – it is the priced charged

to the purchaser of the warranty. (From the group’s perspective, the contract with the end customer

for the warranty is separate from the contract with the retailer for the original sale of the goods). The

price of extended warranties charged in retail sales provides a basis for determining the relative

standalone selling price of the goods and warranty in non-retail sales.

Significant financing component

The Group applies the practical expedient for short-term advances received from customers. That

is, the promised amount of consideration is not adjusted for the effects of a significant financing

component if the period between the transfer of the promised good or service and the payment is

one year or less.

3.4 Contract liabilities

A contract liability is an entity’s obligation to transfer goods or services to a customer for which the

entity has already received the cash (or an amount of consideration is due) from the customer.

3.5 Expenses

Expenses are recognized in the Statement of Comprehensive Income when they arise, i.e. when a

decrease in a future benefit gives rise to a decrease in an asset, or an increase in a liability that can

be measured reliably. Expenses are measured at the fair value of the amount paid or payable.

3.6 Government grants

Subsidies from the authorities are not recognized until there is reasonable assurance that they will

be received and that the Group will comply with the conditions attaching to them.

Subsidies that compensate the Group for the costs of an asset are recognized as a deduction from

the asset that the subsidy is intended to cover and are recognized in the Statement of

Comprehensive Income over the useful life of the asset through a reduced amortization or

depreciation charge. Grants that compensate the Group for expenses incurred are recognized as

reduced expenses in the Statement of Comprehensive Income in the same periods in which the

expenses are recognized. There are no unfulfilled conditions or other contingencies attaching to

these grants. The group did not benefit directly from any other forms of government assistance.

Annual Report 2019 - Funcom SE Page 46

3.7 Income tax

The income tax expense consists of current and deferred tax. Income tax is recognized as an

expense or income in profit or loss except to the extent that it relates to items recognized in Other

Comprehensive Income or equity, in which case income tax is also recognized in Other

Comprehensive Income or equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted

or substantially enacted at the reporting date, and any adjustment to tax payable in respect of

previous years.

Deferred tax is recognized using the liability method, providing for temporary differences between

the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for taxation purposes. Deferred tax/tax assets are calculated on all taxable temporary differences,

with the exception of:

• the initial recognition of goodwill;

• the initial recognition of assets or liabilities in a transaction that is not a business combination

and that affects neither accounting nor taxable profit; and

• differences relating to investments in subsidiaries to the extent that it is probable that they

will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to the temporary

differences, based on the laws that have been enacted or substantively enacted by the reporting

date.

Deferred tax assets are recognized only when it is probable that an entity will have sufficient profits

for tax purposes to utilize the tax asset. At each reporting date, the Group carries out a review of its

unrecognized deferred tax assets and the value of the deferred tax assets it has recognized.

Unrecognized deferred tax assets from previous periods are recognized to the extent that it has

become probable that an entity can utilize the deferred tax asset. Similarly, an entity will reduce its

deferred tax assets to the extent that it is no longer probable that the related tax benefit can be

utilized.

Deferred tax assets and liabilities are recognized at their nominal value and classified as non-current

assets and liabilities in the Statement of Financial Position.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to

offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes

levied by the same tax authority on either:

• The same taxable group company; or

• Different group entities which intend either to settle current tax assets and liabilities on a net

basis, or to realize the assets and settle the liabilities simultaneously, in each future period

in which significant amounts of deferred tax assets or liabilities are expected to be settled or

recovered.

3.8 Intangible assets

Intangible assets are recognized in the Statement of Financial Position if it is probable that the future

economic benefits that are attributable to an intangible asset will flow to the Group, and the asset’s

cost can be reliably estimated. Amortization methods, useful lives and any residual values are

reassessed at each reporting date.

Subsequent expenditure on intangible assets is capitalized only when it increases the future

economic benefits embodied in the specific asset to which it relates. All other expenditure is

expensed as incurred.

Annual Report 2019 - Funcom SE Page 47

Research and development

Costs relating to research are recognized as an expense when incurred.

Expenses relating to development, such as labor cost, material costs and other directly attributable

costs are recognized as an expense when they are incurred unless the following criteria are met:

• the product or process is clearly defined, and the cost elements can be identified and

measured reliably;

• the technical solution for the product has been demonstrated;

• the product or process will be sold or used in the Company’s operations;

• the asset will generate future economic benefits; and

• sufficient technical, financial and other resources for completing the project are present.

When all the above criteria are met, subsequent costs relating to development will be capitalized.

Capitalized development expenditure is stated at cost less accumulated amortization and

impairment losses.

Development costs are amortized from the date that the assets are available for use. The

amortization period is between 18 months and 5 years, linearly or according to the reducing balance

method, depending on the type of the asset. The MMO games Age of Conan and Secret World

Legends and technology have an amortization period of up to 3 years, whereas other games have

an amortization period of two years or below. Externally developed publishing games have an

amortization period of 18 months. The company applies the diminishing balance amortization

method, also called accelerated amortization method, that reflects the pattern of consumption of the

future economic benefits. Typically, a high share of the amortization is applied to the time period of

the release, diminishing over time. If that pattern cannot be determined reliably, the company uses

the straight-line method. Subsequent improvements and/or additions are amortized separately over

the expected useful lives from the time these improvements and/or additions are completed and

available for use. Explanation is provided in Note 15.

Inefficiencies are tracked on a regular basis and identified inefficiencies related to an internally

generated intangible asset will be expensed when identified. In addition, an overall evaluation is

performed by the end of each financial year.

Trademarks and licenses

Trademarks and licenses that are acquired by the Group are measured at cost less accumulated

amortization and impairment losses. Amortization is recognized in the Statement of Comprehensive

Income on a straight- line basis over the estimated useful life, normally 2 - 5 years. Amortization

starts when the acquired assets are available for use.

Software

Costs to purchase new computer software programs are recognized in the Statement of Financial

Position as an intangible asset provided the software does not form an integral part of the related

hardware, in which case it is recognized as part of the related equipment. Software is stated at cost

less accumulated amortization and impairment losses. Software is amortized using the straight-line

method over the estimated useful life, normally 3 - 5 years.

Intellectual property

IP, Brands and IP licenses that are acquired by the Group are measured at cost. If there is no

foreseeable limit to the period over which the asset will generate cash flows, it will be classified as

indefinite useful life. At the end of each financial year the asset’s useful life will be reviewed and

tested for indicators of impairment.

Annual Report 2019 - Funcom SE Page 48

3.9 Equipment

Equipment is stated at cost less accumulated depreciation and impairment losses. When assets are

sold, the gross carrying amount and accumulated depreciation and impairment losses are

derecognized, and any gain or loss on the sale is recognized in the Statement of Comprehensive

Income. The cost of equipment includes the purchase price, any duties/taxes and directly

attributable costs required to get the asset ready for use. Where parts of an item of equipment have

different useful lives, they are accounted for as separate items of equipment.

Subsequent costs

The cost of replacing a part of an item of equipment is recognized in the carrying amount of the item

if it is probable that the future economic benefits embodied with the item will flow to the Group and

the cost can be measured reliably. All other costs are recognized in the Statement of Comprehensive

Income as incurred.

Depreciation

Depreciation is charged to the Statement of Comprehensive Income using the straight-line method

over the estimated useful life of the item of equipment. Estimated useful lives are as follows:

The useful lives and depreciation method are assessed at each reporting date. The same applies to

the residual value, if not insignificant.

3.10 Joint operation

While a joint venture is a joint arrangement whereby the parties that have joint control of the

arrangement have rights to the net assets of the arrangement, a joint operation is a joint arrangement

whereby the parties that have joint control of the arrangement have rights to the assets, and

obligations for the liabilities, relating to the arrangement. The accounting treatment of a joint

operation is different than that of a joint venture.

A joint operator recognizes in relation to its interest in a joint operation:

• its assets, including its share of any assets held jointly;

• its liabilities, including its share of any liabilities incurred jointly;

• its revenue from the sale of its share of the output arising from the joint operation;

• its share of the revenue from the sale of the output by the joint operation; and

• its expenses, including its share of any expenses incurred jointly.

When a joint operation does not constitute a business, the acquirer identifies and recognizes the

individual identifiable assets acquired and liabilities assumed. The cost of the group shall be

allocated to the individual identifiable assets and liabilities based on their relative fair values at the

date of purchase. Such a transaction or event does not give rise to goodwill. Other costs related the

transaction can be capitalized.

On 8 February 2018, Funcom completed a transaction to acquire 50% interest of Heroic Signatures

DA. Heroic Signatures DA (Delt Ansvar) is a general partnership registered in Norway. Funcom’s

interest in Heroic Signatures DA is accounted as a joint operation. Heroic Signatures DA revenue

originating from Funcom royalty fees are eliminated. This implies the asset value is shown under

intangible assets on the balance sheet and that Heroic Signatures DA third-party revenue is included

in Funcom’s consolidated revenue.

3.11 Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are

reviewed at each reporting date to determine whether there is any indication of impairment. For

Computers

3 years

Furniture

5 years

Annual Report 2019 - Funcom SE Page 49

intangible assets that are not yet available for use, the recoverable amount is estimated each year

at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its

fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted

to their present value using a pre-tax discount rate that reflects current market assessments of the

time value of money and the risks specific to the asset. For the purpose of impairment testing, assets

are grouped together into the smallest group of assets that generates cash inflows from continuing

use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-

generating unit”).

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit

exceeds its estimated recoverable amount. Impairment losses are recognized in the profit and Ioss

statement.

Impairment losses recognized in prior periods are assessed at each reporting date for any

indications that the loss has decreased or no longer exists. An impairment loss is reversed if there

has been a change in the estimates used to determine the recoverable amount. An impairment loss

is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount

that would have been determined, net of depreciation or amortization, if no impairment loss had

been recognized.

3.12 Equity

Share capital

Ordinary shares are classified as equity. Transaction costs relating to an equity transaction are

recognized directly in equity (share premium) after deducting tax expenses. Only transaction costs

directly linked to the equity transaction are recognized directly in equity.

Dividends

Dividends are recognized as a liability in the period in which they are declared.

3.13 Employee benefits

Defined contribution plan

The Group has established defined contribution pension plans according to the mandatory

arrangements applicable in the entities’ country of incorporation. Obligations for contributions to

defined contribution pension plans are recognized as an expense in the Statement of

Comprehensive Income when they are due.

Defined benefit plans

The Group does not have any defined benefit plans.

Profit-sharing and bonus plans

A provision is recognized for an undiscounted amount expected to be paid under bonus or profit-

sharing plans if the Group has a present legal or constructive obligation to pay this amount as a

result of past service provided by the employee and the obligation can be estimated reliably.

Share-based payment transactions

The share option program allows management and key personnel to acquire shares in the

Company. The plan is an equity-settled, share-based compensation plan, under which the entity

receives services from employees as consideration for equity instruments (options) in the Company.

Based on instruction from the Supervisory Board on the number of people that should be granted

options and the required combination of duration of employment and seniority level, the

Management Board allocates options per employee. The number of options granted to the

Annual Report 2019 - Funcom SE Page 50

Supervisory and Management Board members are decided by the General Meeting. The fair value

of the employee services received in exchange for the grant of the options is recognized as an

expense. The total amount to be expensed is determined by reference to the fair value of the options

granted. The grant date fair value of options granted is recognized as an employee expense with a

corresponding increase in equity. The fair value of the options granted is measured using the Black-

Scholes model, taking into account the terms and conditions as set forth in the share option program.

Measurement inputs include share price on measurement date, exercise price of the instrument,

expected volatility (based on weighted average historic volatility adjusted for changes expected due

to publicly available information), weighted average expected life of the instruments (based on

historical experience and general option holder behavior), expected dividends, and the risk-free

interest rate (based on government bonds). Service and non-market performance conditions

attached to the transactions are not taken into account in determining fair value. At each reporting

date, the entity revises its estimates of the number of options that are expected to vest based on the

non-market vesting conditions. It recognizes the impact of the revision to original estimates, if any,

in the Statement of Comprehensive Income, with a corresponding adjustment to equity.

Other employee benefits that are expected to be settled wholly within 12 months after the end of the

reporting period are presented as current liabilities. Short-term employee benefits are expensed as

the related service is provided. A liability is recognized for the amount expected to be paid if the

Group has a present legal or constructive obligation to pay this amount as a result of past service

provided by the employee and the obligation can be estimated reliably.

3.14 Assets and Liabilities

All assets and liabilities classified as current are expected to be recovered and settled no more than

twelve months after reporting period. All assets and liabilities classified as non-current are expected

to be recovered and settled in more than twelve months after the reporting period.

3.15 Provisions

Provisions are recognized when, and only when, the Group has a present legal or constructive

obligation as a result of a past event that can be estimated reliably, and it is probable that an outflow

of economic benefits will be required to settle the obligation. Provisions are reviewed on each

reporting date and their level reflects the best estimate of the liability. If the effect is material,

provisions are determined by discounting the expected future cash flows at a pre-tax rate that

reflects current market assessments of the time value of money and, where appropriate, the risks

specific to the liability.

3.16 Contingent liabilities and assets

Contingent liabilities are:

(i) possible obligations resulting from past events whose existence depends on future

events;

(ii) obligations that are not recognized because it is not probable that they will lead to an

outflow of resources; or

(iii) obligations that cannot be measured with sufficient reliability.

Contingent liabilities are not recognized in the consolidated financial statements apart from

contingent liabilities, which are assumed in a business combination. Contingent liabilities are

disclosed, except for contingent liabilities where an outflow of benefits is only remote.

A contingent asset is not recognized in the consolidated financial statements but is disclosed when

an inflow of benefits is considered more likely than not.

3.17 Segments

The Group determines and presents operating segments based on the information that internally is

provided to the Group’s chief operating decision maker. An operating segment is a component of

the Group that engages in business activities from which it may earn revenues and incur expenses,

Annual Report 2019 - Funcom SE Page 51

including revenues and expenses that relate to transactions with any of the Group’s other

components. An operating segment’s operating results are reviewed regularly by the Group’s chief

operating decision maker to make decisions about resources to be allocated to the segment and

assess its performance, and for which discrete financial information is available.

Segment profit is measured as revenue earned less personnel costs and other operating costs.

General and administrative costs, depreciation, amortization, impairment charges, financial items

and income tax are not allocated to the segments.

In the segment reporting, intra-group balances and transactions between group entities within a

single segment are eliminated in determining reportable amounts for each segment.

3.18 Financial Instruments

Funcom adopted IFRS 9 1 January 2018.

Classification of Financial Assets

IFRS 9 contains three principal classification categories for financial assets: measured at amortized

cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss

(FVTPL). The Group’s business model is to collect its receivables and collecting contractual cash

flows. The group classifies its financial assets as at amortized cost only if both of the following criteria

are met: i) the asset is held within a business model whose objective is to collect the contractual

cash flows, and ii) the contractual terms give rise to cash flows that are solely payments of principal

and interest.

The Group has concluded that its receivables meet the requirements to be classified at amortized

cost as they meet the business model test and are solely payments of interest and principal. The

Group did not have derivative financial assets or liabilities at 31 December 2019.

Cash and cash equivalents

Cash includes cash in hand and at bank. Cash equivalents comprise call deposits with a term of

less than 90 days from the date of acquisition. Cash in bank is recorded at face value.

Trade receivables and other receivables

Trade and other receivables are initially recognized at fair value and subsequently measured at

amortized cost using the effective interest method, less impairment losses. The interest element is

disregarded if it is insignificant

Impairment of Financial Assets

In line with IFRS 9 Funcom applies the forward-looking ‘expected credit loss’ (ECL) model. to

financial assets at amortized cost, cash and cash equivalents and trade receivables. This model

may require considerable judgement about how changes in economic factors affect ECLs. All of

Funcom’s trade receivables and other receivables are measured on a lifetime ECL basis. Funcom

determines its expected credit losses by using a provision matrix, which is based on actual historical

credit losses and is adjusted for any relevant forward-looking information, for instance about the

general economy and Group creditors. The short maturity of the trade receivables, typically weeks

or up to a couple of months, reduces the importance of forward-looking information.

Classification of Financial Liabilities

The Group has no financial instruments held for trading and hence does not designate any financial

liabilities at FVTPL. This means that Funcom measures its financial liabilities, including the liability-

portion of its convertible bonds, at amortized cost. Trade and other payables are initially recognized

at fair value and subsequently measured at amortized cost using the effective interest method, less

impairment losses. The interest element is disregarded if it is insignificant.

Annual Report 2019 - Funcom SE Page 52

Offsetting

Financial assets and financial liabilities are offset and the net amount presented in the statement of

financial position when, and only when, the Group currently has a legally enforceable right to offset

the amounts and intends either to settle them on a net basis or to realize the asset and settle the

liability simultaneously.

Hedge accounting

The Group does not apply hedge accounting and has no intention to do so in the near future.

Finance income

Finance income comprises interest receivable on funds invested and foreign currency gains. Interest

income is recognized in the Statement of Comprehensive Income as accrued, using the effective

interest method.

Finance expenses

Finance expenses comprise interest payable on borrowings and foreign currency losses. Interest

expense is calculated using the effective interest method.

Note 29 contains further detailed information on financial instruments.

3.19 Cash flow statement

The cash flow statement is prepared using the indirect method. Changes in balance sheet items that

have not resulted in cash flows, such as fair value changes, have been eliminated for the purpose

of preparing this statement. Interest paid and received, as part of normal operating activities, are

included under operating activities.

Cash flows denominated in foreign currencies have been translated at average estimated exchange

rates. Exchange differences affecting cash items are shown separately in the cash flow statement.

The purchase consideration paid for the acquired group company has been recognized as cash

used in investing activities where it was settled in cash. Any cash at banks and in hand in the

acquired group company have been deducted from the purchase consideration.

Transactions not resulting in inflow or outflow of cash, including finance leases, are not recognized

in the cash flow statement. Payments of finance lease instalments and the interest paid qualify as

repayments of borrowings under cash used in financing activities.

Short-term lease payments, payments for leases of low-value assets and variable lease payments

not included in the measurement of the lease liability within operating activities.

3.20 Business combinations

The Group accounts for business combinations using the acquisition method when control is

transferred to the Group. The consideration transferred in the acquisition is generally measured at

fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for

impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. The

consideration transferred for the acquisition of a subsidiary comprises the:

• fair values of the assets transferred;

• liabilities incurred to the former owners of the acquired business;

• equity interests issued by the group;

• fair value of any asset or liability resulting from a contingent consideration arrangement; and

• fair value of any pre-existing equity interest in the subsidiary.

Acquisition-related costs are expensed as incurred.

Annual Report 2019 - Funcom SE Page 53

3.21 Non-controlling interest

A non-controlling interest (NCI), also known as minority interest, is the portion of equity ownership

in a subsidiary not attributable to the parent company, who has a controlling interest (greater than

50%, but less than 100%) and consolidates the subsidiary's financial results with its own. Non-

controlling interest are measured by using the proportionate share of the recognized net assets at

the acquisition date. All of the Group’s non-controlling interest are related to the ZPX-acquisition.

Note 25 contains further detailed information on the acquisition.

3.22 Goodwill

Goodwill arises on acquisition of subsidiaries and associates, and is the excess of the:

• consideration transferred;

• amount of any non-controlling interest in the acquired entity; and

• acquisition-date fair value of any previous equity interest in the acquired entity

over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts

are less than the fair value of the net identifiable assets of the business acquired, the difference is

recognized directly in profit or loss as a bargain purchase.

Goodwill is measured at cost less any accumulated impairment losses. In respect of associates,

goodwill is included in the carrying amount of the investment in the associate.

3.23 Leases

The Group has applied IFRS 16 using the modified retrospective approach and therefore the

comparative information has not been restated and continues to be reported under IAS 17 and IFRIC

4. The details of accounting policies under IAS 17 and IFRIC 4 are disclosed in Note 3.24.

Policy applicable from 1 January 2019

At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract

is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a

period of time in exchange for consideration. To assess whether a contract conveys the right to

control the use of an identified asset, the Group uses the definition of a lease in IFRS 16. This policy

is applied to contracts entered into, on or after 1 January 2019.

As a lessee

At commencement or on modification of a contract that contains a lease component, the Group

allocates the consideration in the contract to each lease component on the basis of its relative stand-

alone prices. However, for the leases of property the Group has elected not to separate non-lease

components and account for the lease and non-lease components as a single lease component.

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease

liability adjusted for any lease payments made at or before the commencement date, plus any initial

direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to

restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the

commencement date to the end of the lease term, unless the lease transfers ownership of the

underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset

reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be

depreciated over the useful life of the underlying asset, which is determined on the same basis as

those of property and equipment. In addition, the right-of-use asset is periodically reduced by

impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid

at the commencement date, discounted using the interest rate implicit in the lease or, if that rate

cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses

Annual Report 2019 - Funcom SE Page 54

its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing

rate by obtaining interest rates from various external financing sources and makes certain

adjustments to reflect the terms of the lease and type of the asset leased.

Lease payments included in the measurement of the lease liability comprise the following:

• fixed payments, including in-substance fixed payments;

• variable lease payments that depend on an index or a rate, initially measured using the index

or rate as at the commencement date;

• amounts expected to be payable under a residual value guarantee; and

• the exercise price under a purchase option that the Group is reasonably certain to exercise,

lease payments in an optional renewal period if the Group is reasonably certain to exercise

an extension option, and penalties for early termination of a lease unless the Group is

reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured

when there is a change in future lease payments arising from a change in an index or rate, if there

is a change in the Group’s estimate of the amount expected to be payable under a residual value

guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or

termination option or if there is a revised in-substance fixed lease payment. When the lease liability

is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-

of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been

reduced to zero.

The Group presents finance lease receivables in ‘Prepayments and other receivables’ in the

statement of financial position. Right-of-use assets and lease liabilities are presented as separate

lines in the statement of financial position.

Incremental borrowing rate

The incremental borrowing rate (IBR) is the rate of interest that the Group would have to pay to

borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a

similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects

what the Group ‘would have to pay’. See note 4 - Accounting estimates for details how the

Incremental borrowing rate is determined.

Short-term leases and leases of low-value assets

The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-

value assets and short-term leases, including IT equipment. The Group recognizes the lease

payments associated with these leases as an expense on a straight-line basis over the lease term.

As a lessor

At inception or on modification of a contract that contains a lease component, the Group allocates

the consideration in the contract to each lease component on the basis of their relative standalone

prices.

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance

lease or an operating lease.

To classify each lease, the Group makes an overall assessment of whether the lease transfers

substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the

case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment,

the Group considers certain indicators such as whether the lease is for the major part of the

economic life of the asset.

When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-

lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-

use asset arising from the head lease, not with reference to the underlying asset. If a head lease is

Annual Report 2019 - Funcom SE Page 55

a short-term lease to which the Group applies the exemption described above, then it classifies the

sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, then the Group applies IFRS 15 to

allocate the consideration in the contract.

The Group applies the derecognition and impairment requirements in IFRS 9 to the net investment

in the lease. The Group further regularly reviews estimated unguaranteed residual values used in

calculating the gross investment in the lease.

3.24 Leases (policy 2018)

For contracts entered into before 1 January 2019, the Group used IAS 17 and IFRIC 4, and

determined whether the arrangement was or contained a lease based on the assessment of

whether:

• Fulfilment of the arrangement was dependent on the use of a specific asset or assets; and

• the arrangement had conveyed a right to use the asset. An arrangement conveyed the right to

use the asset if one of the following was met:

o the purchaser had the ability or right to operate the asset while obtaining or controlling more

than an insignificant amount of the output;

o the purchaser had the ability or right to control physical access to the asset while obtaining

or controlling more than an insignificant amount of the output; or

o facts and circumstances indicated that it was remote that other parties would take more than

an insignificant amount of the output, and the price per unit was neither fixed per unit of

output nor equal to the current market price per unit of output.

As a lessee

In the comparative period, as a lessee the Group classified leases that transferred substantially all

of the risks and rewards of ownership as finance leases. When this was the case, the leased assets

were measured initially at an amount equal to the lower of their fair value and the present value of

the minimum lease payments. Minimum lease payments were the payments over the lease term

that the lessee was required to make, excluding any contingent rent. Subsequent to initial

recognition, the assets were accounted for in accordance with the accounting policy applicable to

that asset.

Assets held under other leases were classified as operating leases and were not recognized in the

Group’s statement of financial position. Payments made under operating leases were recognized in

profit or loss on a straight-line basis over the term of the lease. Lease incentives received were

recognized as an integral part of the total lease expense, over the term of the lease.

As a lessor

When the Group acted as a lessor, it determined at lease inception whether each lease was a

finance lease or an operating lease. In 2018, the Group had one sub-lease that was classified as

operating lease. The revenues from the sub-lease was recognized directly in the profit or loss. Under

IAS 17, the Group did not have any finance leases as a lessor.

4. Accounting estimates, judgments and estimation uncertainty

Accounting estimates and judgments

In the application of the Group’s accounting policies, which are described in Note 3, management is

required to make judgments, estimates and assumptions about the carrying amounts of assets and

liabilities that are not readily apparent from other sources. The estimates and associated

assumptions are based on historical experience and other factors that are considered to be relevant.

Actual results may differ from these estimates.

Annual Report 2019 - Funcom SE Page 56

Development costs and technology

The Group has significant capitalized values of development costs, primarily of games but also some

related to technology. An asset can only be recognized if certain specific criteria are met. During a

development project there will be judgment involved in assessing when the research phase ends,

and the development phase commences. Key criteria are Funcom’s ability to complete the project,

existence of a market and expected profitability, typically this is documented in a business case

which is authorized by the board if the size of the investment is significant.

Intangible assets should be tested for impairment when there is an indicator that the asset may be

impaired. Both released games and games in development are impairment tested. The impairment

tests include management’s estimates and judgments about future cash flows and discount rates

applied that could lead to a significant impact on the Group’s future results. Please refer to Note 15

for more information.

Useful life of intangible fixed assets

The useful life of the Company’s games is estimated to define the amortization period. The Useful

life is estimated before launch based on expectations for the game and comparison with a peer

group of similar games, after launch the performance of the game is considered. To estimate the

lifetime for intellectual property the monetization plans are considered, together with an assessment

of whether there are any limits to the period over which the IP is expected to generate net cash

inflows. The estimated useful life is subject to uncertainty and judgment and the actual outcome may

differ significantly from the initial estimate.

Revenue recognition

The Group recognizes, as explained in Note 3.3, revenue from sale of goods and revenue from

license and royalty agreements generally on delivery of the product. The amount is reduced by

expected returns and price arrangements/discounts. The determination of the amount is based on

estimates of the outflow of economic benefits required to settle the obligation and on timing of the

returns. Actual rates of return and price may vary from the estimate.

Principal Agent Considerations

The Group evaluate sales of our products and content via third party digital storefronts to determine

whether revenues should be reported gross or net of fees retained by the storefront. Key indicators

that we evaluate in determining gross versus net treatment include, but are not limited to, the

following:

• the party responsible for delivery/fulfilment of the product or service to the consumer;

• the party responsible for consumer billing, fee collection, and refunds;

• the storefront and terms of sale that govern the consumer’s purchase of the product or

service; and

• the party that sets the pricing with the consumer and has credit risk.

Based on evaluation of the above indicators we report revenues on a net basis. (i.e., net of fees

retained by the storefront.)

Share option scheme

The Group determines the value of new options granted and the incremental cost of any changes

to the option terms based on Black-Scholes option pricing theory. Judgment is applied in determining

the required input parameters such as estimated volatility of the underlying share and lifetime of the

options. Historical data such as volatility, option lifetime and employee turn-over are considered.

Leases - Estimating the incremental borrowing rate

The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its

incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the

Group would have to pay to borrow over a similar term, and with a similar security, the funds

Annual Report 2019 - Funcom SE Page 57

necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic

environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires

estimation when no observable rates are available (such as for subsidiaries that do not enter into

financing transactions) or when they need to be adjusted to reflect the terms and conditions of the

lease (for example, when leases are not in the subsidiary’s functional currency). The Group

estimates the IBR using observable inputs (such as market interest rates) when available and is

required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit

rating).

Leases - Estimating the lease term

The Group determines the lease term as the non-cancellable term of the lease, together with any

periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any

periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group has several lease contracts that include extension and termination options. The Group

applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option

to renew or terminate the lease. That is, it considers all relevant factors that create an economic

incentive for it to exercise either the renewal or termination. After the commencement date, the

Group reassesses the lease term if there is a significant event or change in circumstances that is

within its control and affects its ability to exercise or not to exercise the option to renew or to

terminate. The Group has not included the renewal period as part of the lease term in any of our

leases as these are not reasonably certain to be exercised. The Group is growing at a fast phase

and do not have a history of renewing leased properties.

5. Implementation of IFRS 16 - Leases

The Group initially applied IFRS 16 Leases from 1 January 2019. A number of other new standards

are also effective from 1 January 2019, but they do not have a material effect on the Group’s financial

statements.

The Group applied IFRS 16 using the modified retrospective approach, under which the cumulative

effect of initial application is recognized in retained earnings at 1 January 2019. Accordingly, the

comparative information presented for 2018 is not restated – i.e. it is presented, as previously

reported, under IAS 17 and related interpretations. The details of the changes in accounting policies

are disclosed below. Additionally, the disclosure requirements in IFRS 16 have not generally been

applied to comparative information.

5.1 Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained

a lease under IFRIC 4 Determining whether an Arrangement contains a Lease. The Group now

assesses whether a contract is or contains a lease based on the definition of a lease, as explained

in Note 3.23.

On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the

assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that

were previously identified as leases. Contracts that were not identified as leases under IAS 17 and

IFRIC 4 were not reassessed for whether there is a lease under IFRS 16. Therefore, the definition

of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January

2019.

5.2 As a lessee

As a lessee, the Group leases many assets including property, office equipment and IT equipment.

The Group previously classified leases as operating, or finance leases based on its assessment of

Annual Report 2019 - Funcom SE Page 58

whether the lease transferred significantly all of the risks and rewards incidental to ownership of the

underlying asset to the Group. Under IFRS 16, the Group recognizes right-of-use assets and lease

liabilities for most of these leases – i.e. these leases are on-balance sheet. At commencement or on

modification of a contract that contains a lease component, the Group allocates the consideration in

the contract to each lease component on the basis of its relative stand-alone price. However, for

leases of property the Group has elected not to separate non-lease components and account for

the lease and associated non-lease components as a single lease component.

5.3 Leases classified as operating leases under IAS 17

Previously, the Group classified property leases as operating leases under IAS 17. On transition, for

these leases, lease liabilities were measured at the present value of the remaining lease payments,

discounted at the Group’s incremental borrowing rate as at 1 January 2019. Right-of-use assets are

measured as an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued

lease payments.

The Group tested its right-of-use assets for impairment on the date of transition and concluded that

there was no indication that the right-of-use assets was impaired.

The Group used a number of practical expedients when applying IFRS 16 to leases previously

classified as operating leases under IAS 17. In particular, the Group:

• did not recognize right-of-use assets and liabilities for leases for which the lease term ends

within 12 months of the date of initial application;

• did not recognize right-of-use assets and liabilities for leases of low value assets (e.g. IT and

office equipment);

• excluded initial direct costs from the measurement of the right-of-use asset at the date of

initial application; and

• used hindsight when determining the lease term.

5.4 As a lessor

The Group sub-leases some of its properties. Under IAS 17, the head lease and sub-lease contracts

were classified as operating leases. On transition to IFRS 16, the finance lease receivable

recognized from the head leases are presented as Other receivables and measured at fair value at

that date. The Group assessed the classification of the sub-lease contracts with reference to the

right-of-use asset rather than the underlying asset and concluded that they are finance leases under

IFRS 16.

The Group is required to make adjustments on transition to IFRS 16 for leases in which it acts as an

intermediate lessor for sub-leases.

5.5 Impact on transition

When measuring lease liabilities for leases, the Group discounted lease payments using its

incremental borrowing rate (IBR) at 1 January 2019. The weighted average incremental borrowing

rate (IBR) applied to lease liabilities at the date of initial application was 4.58%.

Expenses related to short-term and low value leases are not included in the lease commitments.

For more info related to short-term and low value leases see Note 26.

In thousands of US dollars

2019

4 029

-507

–

Lease liabilities recognized at 1 January 2019 3 522

Finance lease liabilities as at 31 December 2018

Extension options reasonably certain to be exercised

Operating lease commitments at 31 December 2018

Discounted using the IBR at 1 January 2019

Annual Report 2019 - Funcom SE Page 59

The initial application of IFRS 16 did not impact earnings per share.

On transition to IFRS 16, the Group recognized right-of-use assets, finance lease receivables, and

lease liabilities, recognizing the difference in retained earnings. The effects from IFRS 16 resulted

in a decrease in equity of net USD 9 thousand. The impact on transition is summarized below.

(IAS 17)

(Figures in TUSD) 31.12.2018 01.01.2019

ASSETS

Non-current assets

Intangible assets 24 711 24 711

Tangible fixed assets 155 155

Right-of-use assets - 2 681 2 681

Long term receivables

489 306 795

Total non-current assets

25 354 2 987 28 342

Current assets

Trade receivables 4 797 4 797

Prepayments and other receivables 1 269 441 1 710

Cash and cash equivalents 19 902 19 902

Total current assets 25 968 441 26 409

51 322 3 428 54 750

EQUITY AND LIABILITIES

Equity

Share capital 18 224 18 224

Reserves 188 539 188 539

Retained earnings -161 589 -9 -161 597

Total equity 45 175 -9 45 166

Non-current liabilities

Deferred tax liabilities 2 086 2 086

Long-term liabilities 92 -92 -

Lease liabilities, Long-term

- 2 490 2 490

Total non-current liabilities

2 178 2 397 4 575

Current liabilities

Lease liabilities, Short-term - 1 032 1 032

Contract liabilities 222 222

Trade payables 1 200 1 200

Other short-term liabilities 2 547 8 2 555

Total current liabilities 3 969 1 040 5 009

51 322 3 428 54 750

Total equity and liabilities

IFRS 16 impact on the opening statement of financial position

Effects from

IFRS 16

Total assets

Annual Report 2019 - Funcom SE Page 60

6. Segment information

The Group reports segment information in accordance with IFRS 8 Operating Segments. IFRS 8

requires operating segments to be identified on the basis of internal reports about components of

the Group that are regularly reviewed by the chief operating decision maker in order to allocate

resources to the segments and to assess their performance. The reportable operating segments of

the group are defined as:

• PC

• Console: PS4, Xbox and Nintendo Switch

• Other: IP revenue and game development services from third parties

The accounting policies of the reportable segments are the same as the Group’s accounting policies

described in Note 3. Segment profit is measured as revenue earned less personnel costs and other

operating costs. General and administrative cost, depreciation, amortization, impairment charges,

financial items and income tax are not allocated to the segments.

[1]

Segment profit (loss) is measured as revenue earned less personnel costs and other operating

costs related to segments. General and administrative expenses are costs not directly allocated to

games, depreciation, amortization, impairment charges, financial items and income tax are not

allocated to the segments.

[2]

Other activities referred to external royalties IP, external consulting services and other.

Segment assets only include the book value of released games. No other assets are allocated to

the segments.

The Group’s three largest customers, namely Microsoft, Sony and Valve, are digital platforms that

sell games to end users. The revenue of these three customers total USD 18 911 thousand (2018:

USD 23 949 thousand), representing 71.0% of the Group’s total revenue (2018: 70.9%).

Geographical information

The Group operates in a number of geographical areas. Presented below is a table that divides the

Group’s revenue and non-current assets into these main geographical areas.

Segment information

In thousands of US dollars

2019 2018 2019 2018

16 726 16 783 9 037 11 212

Console

9 554 16 418 6 536 11 726

Other activities

[2]

340 575 260 78

Total

26 620 33 776 15 833 23 015

General and administrative expenses

-3 696 -5 325

Depreciation, amortization and impairment charges

-12 285 -7 523

Net financial items

-144 -1 926

Profit (loss) before tax

-291 8 240

Revenue from external customers

Segment profit (loss)

[1]

January - December

In thousands of US dollars

PC Console

Under

development

SUM

Segment assets as at 31 December 2018

7 906 3 484 6 254 17 643

Segment assets as at 31 December 2019

6 910 2 463 16 493 25 866

Annual Report 2019 - Funcom SE Page 61

[1]

Revenue is attributed to a country based on the location of the selling entity.

[2]

Non-current assets are attributed to a country based on the geographical location of the assets.

7. Revenue

[1]

PC revenue relates to revenue from contracts with customers related to services. It also includes

direct sales through Funcom’s own channels.

[2]

Console revenue relates to revenue from contracts with customers related to services through 3rd

party stores.

[3]

Other activities referred to external royalties from IP, external consulting services and other, direct

sales.

Timing of revenue

USD 50 thousand (2018: USD 1 thousand) out of the PC revenue at a point in time, and all the PC

revenues over time, come from the sale of games from Funcom's own channels and are directly

sold to consumers. The revenues related to Console and the remaining of the PC revenue at a point

in time relates to sales sold through third party platforms. Other revenue relates to external royalties

In thousands of US dollars 2019 2018 2019 2018

The Netherlands 18 514 334 68

Norway 26 572 33 262 35 290 25 221

USA – – 2 482 65

Portugal 29 – 185 –

Total

26 620 33 776 38 291 25 354

Non-current assets

[2]

Revenue

[1]

Disaggregation of revenue from contracts with customers

In thousands of US dollars 2019 % 2018 %

[1]

16 726 62.8 % 16 783 49.7 %

Console

[2]

9 554 35.9 % 16 418 48.6 %

Other

[3]

340 1.3 % 575 1.7 %

Total 26 620 100 % 33 776 100 %

2019

In thousands of US dollars PC Console Other SUM

Segment revenue

16 726 9 554 340

26 620

Timing of revenue recognition:

–

At a point in time

14 541 9 554 –

24 095

Over time

2 185 – 340

2 525

Total 16 726 9 554 340 26 620

2018

In thousands of US dollars PC Console Other SUM

Segment revenue

16 783 16 418 575

33 776

Timing of revenue recognition:

At a point in time

13 111 16 418 –

29 528

Over time

3 672 – 575

4 247

Total 16 783 16 418 575 33 776

Annual Report 2019 - Funcom SE Page 62

from IP and external consulting services. In 2018, using IAS 17, it also included rental revenue from

subleases.

8. Personnel expenses

The remuneration of the Supervisory Board and Management Board members of Funcom SE is

subject to payroll tax in the Netherlands, though currently no members reside in The Netherlands.

9. General and administrative expenses

[1]

Professional services includes auditor's remunerations, accounting services, legal services and

other professional services.

[2]

Rent of office spaces are not recognized directly in the profit & loss under IFRS 16. In 2018, using

IAS 17, office lease was recognized directly in the profit & loss. For more info see Note 3.23, 3.24

and Note 26.

In thousands of US dollars

2019 2018

Salaries 10 928 8 678

Social Security Contributions 1 459 1 224

Contributions to defined contribution plans 279 181

Expenses for share option program 913 2 879

Other Personnel expenses 1 423 911

Government grants (Skattefunn) -511 -387

Capitalization of personnel expenses -9 161 -8 587

Total Personnel Expenses

5 330 4 899

Average Number of employees:

2019 2018

Europe 102 62

North America 73 62

Asia 1 1

Total 176 125

In thousands of US dollars 2019 2018

Marketing 1 475 3 001

Professional services

[1]

666 683

372 1 672

Royalties 4 724 3 914

Investor relations 180 215

IT, hardware and software 1 092 592

External game development

[3]

9 774 6 263

Government grants (Skattefunn) – -118

Other 316 504

Capitalization of G&A -10 393 -6 457

Total G&A expenses

8 204 10 268

Rent of premises and other office costs

[2]

Annual Report 2019 - Funcom SE Page 63

[3]

External game development includes funding to developers for publishing game and outsourced

services for games development.

Auditor's remunerations

Fees for audit services include the audit of the financial statements of the Company and its

subsidiaries. Fees for other audit services include review of government grants, intercompany debt

conversion and other audits. Fees for audit services are included in general and administrative

expenses in the consolidated financial statements. These fees are recognized when the service is

provided.

10. Other operating expenses

Commissions are fees paid to credit card service providers. Funcom uses such providers for sales

through its own platform. The commissions usually have fixed amounts and variable amounts.

Variable amounts are related to number of transactions.

11. Depreciation and amortization

[1]

Right-of-use assets consists of office leases. In 2018, using IAS 17, office lease was recognized

directly in the profit & loss as general and administrative expense. For more info see note 3.23, 3.24

and Note 26.

In thousands of US dollars 2019 2018 2019 2018 2019 2018

Audit of Funcom Group 192 192 29 33 220 225

Other audit services – – 12 – 12 –

Tax advisory services – – – – – –

Other non-audit services – – – – – –

Total

192 192 41 33 232 225

Other BDO member firms

and affiliates

BDO Audit &

Assurance B.V.

Total

In thousands of US dollars 2019 2018

Commissions 108 152

Hosting costs for online games 840 766

Total other operating expenses

948 919

In thousands of US dollars

2019 2018

Amortization of intangible assets 11 955 7 488

Depreciation of equipment 68 35

Depreciation of right-of-use assets

[1]

867 –

Impairment of right-of-use assets 53 –

Capitalization of development cost -658 –

Total 12 285 7 523

Annual Report 2019 - Funcom SE Page 64

12. Finance income and expenses

Exchange gains and losses are mainly arising from payables and bank accounts denominated in

other currency than USD.

13. Earnings per share

The basic earnings per share are calculated as the ratio of the result for the period attributable to

the equity holders of Funcom SE of USD -277 thousand (2018: USD 6 618 thousand) divided by the

weighted average number of ordinary shares outstanding 77 212 766 (2018: 73 487 371).

When calculating the diluted earnings per share, the weighted average number of ordinary shares

outstanding is adjusted for all the dilution effects relating to share options.

In thousands of US dollars 2019 2018

Interest income 244 44

Net foreign exchange gain 1 426 2 121

Other financial income 55 6

Finance income

1 725 2 170

In thousands of US dollars 2019 2018

Interest expense -179 -84

Net foreign exchange loss -1 690 -4 013

Finance expenses

-1 869 -4 097

In thousands of US dollars 2019 2018

Profit / (loss) for the period attributable to the equity holders of Funcom

-277 6 618

Profit for the period attributable to the equity holders of Funcom - continuing operations

-277 6 618

Issued ordinary shares as of January 1 77 009 57 931

Effect of new shares issued and options exercised 203 15 557

Weighted average number of shares at December 31 77 213 73 487

Basic earnings per share -$0.00 $0.09

Basic earnings per share - continuing operations -$0.00 $0.09

Weighted average number of shares at December 31, diluted 82 580 79 088

Diluted earnings per share -$0.00 $0.08

Diluted earnings per share - continuing operations -$0.00 $0.08

Annual Report 2019 - Funcom SE Page 65

14. Income tax expense

The Group has not recognized any income tax directly in equity. The income tax rate in Norway

changed from 23% to 22% with effect from 1 January 2019. Deferred tax has been calculated using

the tax rate of 22% for 2019 and for 2018. Current tax for the Norwegian subsidiaries was calculated

based on the applicable rate for 2019, i.e. 22% and applicable rate for 2018, i.e. 23%. The applied

‘weighted average tax rate’ is 20.53% for 2019 (2018: 23.68%) and the average effective tax rate is

-0.54% (2018: 19.69%). There were no effects of changes in IAS 12. In Norway, unused losses may

be carried forward without limit, while disallowed interest deductions can be carried forward for 10

years.

The following components are included in the Group’s tax expense:

In thousands of US dollars 2019 2018

Current period tax (expense)/income -4 -78

-4 -78

Deferred tax expense

Origination and reversal of temporary differences 2 065 -2 999

Recognition of previously unrecognized tax losses -2 000 782

Withholding tax -58 0

Derecognition of recognized tax losses 0 672

7 -1 545

Income tax (expense)/income excluding tax on sale of

discontinued operations 2 -1 622

Income tax (expense)/income from continuing operations 2 -1 622

Income tax from discontinued operation (exluding gain on sale) 0 0

2 -1 622

Income tax on gain on sale of discontinued operations 0 0

Total income tax (expense)/income 2 -1 622

In thousands of US dollars 2019 2018

Result before income tax -291 8 240

Tax according to the average tax rate in USA, China, Netherlands and Norway 63 -1 841

Tax effect of non-deductible expenses -17 0

Tax effect of non-taxable income -171 -129

Changes in deferred taxes recognized on the balance sheet -7 -1 420

Withholding tax, capital asset tax, and other non-income taxes 4 -293

Utilisation of losses carried forward 350 1 955

Deferred tax asset related to carry forward tax losses not recognised -221 14

Tax effect of change in tax rate 0 91

Income tax (expense) / income 2 -1 622

Annual Report 2019 - Funcom SE Page 66

The Group has unutilized tax losses of USD 13 626 thousand as of 31 December 2019 (2018: USD

5 367 thousand) which expire as follows:

Deferred tax liability/tax asset

2019 2018

Deferred tax liability -1 862 -2 086

Deferred tax asset, net 7

Deferred tax asset (liability), net -1 855 -2 086

Deferred tax effect of tax increasing temporary differences:

Equipment and intangible assets -5 022 -2 921

Provisions -2

Total deferred tax effect of tax increasing temporary differences -5 024 -2 921

Deferred tax effect of tax reducing temporary differences:

Tax losses carried forward 2 850 833

Equipment and intangible assets 6 8

Withholding tax 258

Provisions/receivables 58 49

Total deferred tax effect of tax reducing temporary differences 3 172 890

Deferred tax asset (net) not recognised in the balance sheet: 3 54

Recognised deferred tax asset (liability), net -1 855 -2 086

Reconciliation of deferred tax asset, net:

Opening balance -2 086 -671

Change according to statement of income 9 -1 452

Exchange differences, prior year adjustments etc. 222 37

Deferred tax asset (liability), net, at year-end -1 855 -2 086

In thousands of US Dollars

Expiry year 2019 2018

2025 196 593

2026 82 82

2027 - -

2028 1 494 1 494

2029 - -

2030 - 196

2031 - 24

2032 - -

2033 617 857

2034 - -

2035 - -

2036 - -

2037 - -

2038 - -

Indefinite 11 237 2 122

Total tax losses 13 626 5 367

Annual Report 2019 - Funcom SE Page 67

The tax losses carried forward related to Funcom SE are generated from holding and financing

activities and may only be offset against future profits from similar activities under certain conditions

as set by the Dutch law on the corporate income tax. Future trading profits may consequently not

be utilized against such tax losses. Tax losses for Funcom SE can be offset against the profit from

the previous year (carry back), or – if this is not possible –with future profits (carry forward), which

is limited to 6 years (up to and including 2018, the carry forward period was 9 years). The standard

corporate income tax rate in the Netherlands stands in 2019 at 25% (2018: 25%). There are two

taxable income brackets. A lower rate of 19% (2018: 20%) applies to the first income bracket, which

consists of taxable income up to EUR 200 000. The standard rate applies to the excess of the taxable

income. The lower rate will further decrease from 19% in 2019 to 16.5% in 2020.

The final tax assessment received by Funcom SE with respect to the financial year 2017 report carry

forward losses amounting to USD 1 917 thousand as of the end of 2017. Funcom SE expects a

taxable profit amounting to USD 1 243 thousand with respect to the financial year 2018, against

which the carry forward losses from prior years may apply.

According to IAS 12 when an entity has a history of recent losses, the entity recognizes a deferred

tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient

taxable temporary differences or there is convincing other evidence that sufficient taxable profit will

be available against which the unused tax losses or unused tax credits can be utilized by the entity.

The Group’s tax losses and negative differences between the book value and the value for tax

purposes of assets, which form the basis for the deferred tax assets, are in particular located in the

Norwegian operating companies. The management has discussed to which extent the Group will be

able to utilize the deferred tax asset. In evaluating the Group’s ability to utilize the deferred tax

assets, all available positive and negative evidence have been considered, including past operating

results, the existence of cumulative losses in the most recent fiscal years and our forecast of future

taxable income on a jurisdiction by jurisdiction basis, as well as feasible and prudent tax planning

strategies.

Since the criteria under IAS 12.35 have been met, the Company did recognize on its statement of

financial position a deferred tax asset pertaining to Funcom Oslo AS and its subsidiaries amounting

to USD 2 730 thousand, which is offset against deferred tax liabilities. For the year ended 31

December 2019, a net deferred tax liability amounting to USD 1 860 thousand is recognized on the

statement of financial position with respect to Funcom Oslo AS and its subsidiaries (2018: USD 2

075 thousand).

Annual Report 2019 - Funcom SE Page 68

15. Intangible assets and goodwill

[1]

For more info related to acquisitions through business combinations see Note 25.

No impairments were booked in 2019 or 2018 on Intangible assets and goodwill.

The following values of intangible assets are under development and in use.

In thousands of US dollars

Development

costs

Software

Trademarks &

licenses

Trademarks &

licenses

Goodwill Total

Cost

Balance at January 1, 2018 125 017 436 173 – – 125 626

Acquisitions, internally developed 10 439 – – – – 10 439

Other acquisitions 4 770 – – 7 714 – 12 484

Disposals -102 127 – -173 – – -102 300

Translation difference – -25 – -830 – -854

Balance at December 31, 2018 38 098 411 – 6 884 – 45 394

Acquisitions, internally developed 11 745 – – – – 11 745

Acquisitions, business combinations

[1]

– – – – 333 333

Other acquisitions 8 516 150 – – – 8 666

Disposals – -140 – – – -140

Translation difference -162 -4 – -85 – -252

Balance at December 31, 2019 58 197 417 – 6 799 333 65 747

Accumulated amortization and

impairment losses

Balance at January 1, 2018 115 142 166 69 – – 115 376

Amortization for the year 7 307 77 104 – – 7 488

Disposals -102 127 – -173 – – -102 300

Translation difference 133 -14 – – – 119

Balance at December 31, 2018 20 455 228 – – – 20 683

Amortization for the year 11 876 79 – – – 11 955

Disposals – -140 – – – -140

Translation difference – -2 – – – -2

Balance at December 31, 2019 32 331 165 – – – 32 496

Carrying amount at Jan. 1, 2018 9 875 270 104 – – 10 249

Carrying amount at Dec. 31, 2018 17 643 183 – 6 884 – 24 711

Carrying amount at Jan. 1, 2019 17 643 183 – 6 884 – 24 711

Carrying amount at Dec. 31, 2019 25 866 252 – 6 799 333 33 251

Estimated useful lives 1.5-5 years 3-5 years 2-5 years Indefinite Indefinite

Method of amortization

Straight line

and

diminishing

balance

method

Straight line Straight line n/a n/a

In thousands of US dollars 2019 2018

Class

Under

Development

In Use Total

Under

Development

In Use Total

Development costs 16 493 9 374 25 866 6 254 11 389 17 643

Software – 252 252 – 183 183

Trademarks and licenses – 6 799 6 799 – 6 884 6 884

Goodwill – 333 333 – – –

Total

16 493 16 758 33 251 6 254 18 457 24 711

Annual Report 2019 - Funcom SE Page 69

In 2019, Funcom had development costs that was not capitalized of USD 1 917 thousand.

Calculation of recoverable amounts

When calculating the recoverable amount (value in use) from cash generating units the Group uses

a discounted pre-tax cash flow projection reflecting the latest information that influences the

expected performance of the assets. The cash flows are discounted using a pre-tax rate of 11.9 per

cent (2018: 13.3 per cent). For games in use a 3-year cash flow is used, for games under

development cash flow until up to 3 years post launch is used. For trademark and licenses with

indefinite lifetime and goodwill a corresponding perpetual cash flow calculation is applied. The

applied perpetual growth rate is 2%. Predicting with high certainty the cash flows from games is

difficult. The estimates represent management’s best estimate but is subject to a relatively high

degree of uncertainty, especially for games not launched.

Recoverable amount less Carrying Amount for under development is USD 17 030 thousand and 14

989 thousand for in use.

Sensitivity Analysis: Development

1% change of the discount rate would have the following effect on the discounted cash flow of the

cash generating units

In thousands of US dollar

Increase (decrease) of discounted cash flow

Cash generating unit

1 % increase WACC

1 % decrease WACC

Under Development

-1 294

1 349

In Use

-253

259

Total

-1 547

1 608

5% change in the estimated cash flow expected to be realized by the cash generating units would

have the following effect

In thousands of US dollar

Increase (decrease) of discounted cash flow

Cash generating unit

5 % increase cash flow

5 % decrease cash flow

Under Development

1 380

-1 380

In Use

1 126

-1 126

Total

2 506

-2 506

Based on the sensitivity analysis performed it is concluded that any reasonable change in the key

assumptions would not require an impairment. This analysis assumes that all other variables remain

constant. As the analysis is done on the sum of several games, individual games can reach the

break-even point faster. On individual game level, examples of assumptions that are particularly

sensitive and could potentially make the discounted future cash flow lower than Carrying Amount

includes the level of subscription deal revenue for Moons of Madness and Conan Unconquered and

timing of release for the Mutant Chronicles online shooter.

Dreamworld Technology

The initial cost of the technology was fully amortized in 2013. Improvements and/or additions to the

technology are amortized separately over the expected useful lives of the relevant elements of the

asset, normally five years. The DreamWorld Technology has been amortized since the launch of

Age of Conan in May 2008. At the end of 2019, the cumulative impairment for DreamWorld was

USD 10 504 thousand (2018: USD 10 504 thousand).

IP licenses held through Heroic Signatures DA

In February 2018 Funcom acquired 50% of Heroic Signatures DA in exchange for issuing 4 460 000

new shares, each at a subscription price of NOK 13 per share. The transaction increased the equity

Annual Report 2019 - Funcom SE Page 70

with USD 7 493 thousand. The value of the new shares was used as valuation for the underlying

assets. An additional USD 221 thousand in cost related to the transaction was added as acquisitions

cost. The asset value is measured at cost and shown as intangible assets on the balance sheet.

Heroic Signature’s IP licenses are granted indefinitely through licensing agreements with Cabinet

Interactive LLC. Funcom Group’s ownership in Heroic Signature DA is also indefinite. The indefinite

lifetime of the IP licenses is supported by significant revenue generation over the last 10 years.

There are also significant plans to monetize the IP licenses in the next years. Since there is no

foreseeable limit to the period over which the IP is expected to generate net cash inflows, the IP

licenses should be regarded as having an indefinite useful life.

Sensitivity Analysis Goodwill and IP with indefinite life

Based on the sensitivity analysis performed it is concluded that any reasonable change in the key

assumptions would not require an impairment.

Amortization of Age of Conan and Secret World Legends

The Company amortizes investment in the development of technology and game assets on a

systematic basis over their useful life. The MMO games Age of Conan and Secret World Legends

and technology have had an amortization period of five years since launch of the games. After a

thorough assessment the amortization period of Age of Conan and Secret World Legends was

reduced to three years, better reflecting the current situation of the industry and the games. The

change increased the amortization with USD 62 thousand in 2019, impact in future years is expected

to be immaterial

Contractual commitments

The Group has contractual commitments for development costs and minimum guarantees for IP

license payments of USD 2 960 thousand (2018: USD 974 thousand).

Goodwill

Goodwill represents the excess of purchase price over the fair value of tangible and identifiable

intangible assets acquired. All goodwill relates to the acquisition of ZPX. For more info related to the

ZPX-acquisition see Note 25.

In thousands of US dollars 2019 2018

Goodwill, as at January 1 – –

Arising on acquisition of ZPX

333 –

Goodwill, as at December 31

333 –

Annual Report 2019 - Funcom SE Page 71

16. Equipment

[1]

For more info related to acquisitions through business combinations see Note 25.

17. Trade Receivables

Please refer to Note 29 Financial Instruments for further details.

In thousands of US dollars

Computers Furniture Total

Cost

Balance at January 1, 2018 35 11 46

Acquisitions 93 71 164

Translation difference – – –

Balance at December 31, 2018 128 82 210

Acquisitions 38 12 50

Acquisitions, business combinations

[1]

14 – 14

Translation difference -9 -5 -15

Balance at December 31, 2019 171 88 259

Accumulated depreciation

Balance at January 1, 2018 – 10 10

Depreciation for the year 28 7 35

Translation difference 6 4 9

Balance at December 31, 2018 34 20 55

Depreciation for the year 52 16 68

Acquisitions, business combinations

[1]

12 – 12

Translation difference -8 -4 -13

Balance at December 31, 2019 90 32 122

Carrying amount at Jan. 1, 2018 35 1 37

Carrying amount at Dec. 31, 2018 94 61 155

Carrying amount at Jan. 1, 2019 94 61 155

Carrying amount at Dec. 31, 2019 81 57 137

Method of depreciation Straight line Straight line

Estimated useful lives 3 years 5 years

In thousands of US dollars 2019 2018

Trade receivables 3 837 4 797

Allowances for doubtful debt – –

Total

3 837 4 797

Annual Report 2019 - Funcom SE Page 72

18. Prepayments and other receivables

[1]

In 2018, using IAS 17, prepaid office lease was classified as Prepayments and other receivables.

In 2019, using IFRS 16, all office lease payments are booked as a reduction of lease liabilities. For

more info see Note 3.23, 3.24 and Note 26.

19. Cash and cash equivalents

20. Equity

Share Capital

As of 31 December 2019, the authorized share capital comprised of 150 million ordinary shares

(2018: 150 million). The nominal value of the shares is Euro 0.20. The holders of ordinary shares

are entitled to receive dividends as declared from time to time and are entitled to one vote per share

at the Company shareholders’ meetings.

The share capital is translated into US dollars using historic rates. All issued shares are fully paid.

The Group does not hold any of the Company’s own shares.

Events in 2019

In January 2019 Funcom completed the acquisition of 50.1% of the Portuguese video game

development service provider Zona Paradoxal, Lda (“ZPX”) with whom it has had a working

In thousands of US dollars

2019 2018

Settlement account for VAT 108 163

Government grants (Skattefunn) 511 472

Prepaid rent

[1]

2 149

Finance Lease Receivable 442 –

Other prepayments 296 484

Other receivables 469 –

Total

1 828 1 269

In thousands of US dollars 2019 2018

Non-restricted cash at bank and in hand 12 851 19 693

Restricted cash 280 209

Total cash and cash equivalents 13 131 19 902

Number of shares 2019 2018

Outstanding as at 1 January 77 009 493 57 930 522

Issues against payment in cash 175 133 7 638 135

Issues from conversion of bond/loan – 6 980 836

Issues from Cabinet Transaction – 4 460 000

Issues from ZPX Transaction 102 363 –

Outstanding as at 31 December 77 286 989 77 009 493

Nominal value of the share-capital at

December 31 (EUR)

15 457 398 15 401 899

Annual Report 2019 - Funcom SE Page 73

relationship since 2017. Part of the consideration for the acquisition of the 50.1% ownership in ZPX

was 102 363 new shares that Funcom issued to the shareholders of ZPX, each at the price of USD

1.665 per share. The transaction increased the equity attributable to shareholders of Funcom SE

with USD 170 thousand and the equity attributable to non-controlling interests by USD 65 thousand.

For more info regarding the acquisition see Note 25.

In May 2019, Funcom issued 175 133 new shares in relation to exercise of employee options.

Options

In June 2019 Funcom issued 338 000 options to members of the Management Board, 208 000

options to members of the Supervisory Board, and 1 969 000 options to other employees as part of

the Group’s options program.

Equity-settled employee benefits reserve

The Equity-settled employee benefits reserve comprises of share-based payments related to the

Groups employee option program. See Note 3.10 for further description of the Group’s Equity-settled

employee benefits.

Translation reserve

The translation reserve comprises of all foreign exchange differences arising from the translation of

the financial statements of foreign operations, excluding amounts attributable to non-controlling

interests.

Non-controlling interests in Funcom SE group companies

The non-controlling interests (NCI) relate to minority stakes held by third parties in Zona Paradoxal,

Lda (“ZPX”). The total non-controlling interest as at 31 December 2019 amounted to USD 53

thousand (2018: nil).

Dividends

The Group did not pay any dividends in 2019.

Events in 2018

In February 2018 Funcom executed a private placement of 6 800 000 new shares at a subscription

price of NOK 13 per share. The total gross proceeds to Funcom in the private placement was NOK

88.4 million. The transaction increased the equity of the Company with USD 11 508 thousand after

USD 127 thousand in transaction fees.

In February 2018 Funcom completed the acquisition of 50% of "Heroic Signatures DA" in exchange

for issuing 4 460 000 new shares, each at a subscription price of NOK 13 per share. The transaction

increased the equity with USD 7 493 thousand.

In March 2018, USD 3 000 thousand of Funcom convertible bond (including accrued interest) was

converted into 5 791 505 Funcom shares at the price of USD 0.518 per share.

In June 2018, Funcom issued 597 141 new shares in relation to exercise of employee options.

In August 2018, Funcom issued 161 641 new shares in relation to exercise of employee options.

In October 2018, USD 616 thousand of Funcom convertible bond (including accrued interest) was

converted into 1 189 331 Funcom shares at the price of USD 0.518 per share.

In November 2018, Funcom issued 79 353 new shares in relation to exercise of employee options.

Annual Report 2019 - Funcom SE Page 74

Options

In June 2018 Funcom issued 138 000 options to members of the Management Board, and 208 000

options to members of the Supervisory Board as part of the Group’s options program.

In June 2018, after its Annual General Meeting, the company issued 1 590 500 options to its

employees as part of the Group’s options program.

In September 2018 Funcom issued 38 000 options to a new member of the Supervisory Board as

part of the Group’s options program.

Equity-settled employee benefits reserve

The Equity-settled employee benefits reserve comprises of share-based payments related to the

Groups employee option program. See note 3.11 for further description of the Group’s Equity-settled

employee benefits.

Translation reserve

The translation reserve comprises of all foreign exchange differences arising from the translation of

the financial statements of foreign operations.

Dividends

The Group did not pay any dividends in 2018

21. Contract liabilities

Contract liabilities is cash received in advance of performance and not recognized as revenue during

the period. The amount consists of unused Funcom points, subscription prepayments from

subscribers and pre-orders for games that will be releases in 2020. This represents the unsatisfied

performance obligations resulting from fixed price contracts. Management expects that 100% of the

transaction price allocated to the unsatisfied contracts as of 31 December 2019 will be recognized

as revenue during the next reporting period.

All contract liabilities outstanding as at 31 December 2018 was recognized as revenue during 2019.

22. Other short-term liabilities

23. Contingent liabilities

As at 31 December 2019 the Group had no contingent liabilities.

In thousands of US dollars 2019 2018

Taxes and social security payable 577 416

Payable to Heroic Signatures DA 270 214

Accrued expenses 1 965 1 917

Total 2 812 2 547

Annual Report 2019 - Funcom SE Page 75

24. Group entities

Group entities

The Funcom Group consist of 8 companies. Funcom SE, the parent company of the Group, five

wholly owned subsidiaries, one majority-owned subsidiary and one joint operation, being Heroic

Signatures DA.

The proportion of ownership interests held by Funcom equals the proportion of the voting rights.

Joint operation

Funcom Oslo Licensing AS has a 50% interest in a joint operation called Heroic Signatures DA

which was set up as a partnership together with Cabinet Interactive. Heroic Signatures DA is the

owner of several IP licenses, and receives royalty revenues from these IP licenses from customers

around the world.

Heroic Signatures DA’s country of incorporations is Norway, but it does not have permanent

establishment in that country.

25. Acquisition of subsidiary

On 17 January 2019, Funcom acquired 50.1% of the shares and voting interests in Zona Paradoxal,

Lda (“ZPX”). The acquisition will increase the Groups own development capacity for upcoming

games and reduce costs to the Group. The Group also expects to use the expertise and knowhow

acquired in the development of new games. The Group has an option to acquire the remaining

shares of ZPX. The strike price is based on an EBITDA multiple with a minimum threshold with

respect to the transaction price of the acquired 50.1% of the shares.

Since the acquisition date, ZPX has contributed USD 29 thousand to external group revenues and

USD -24 thousand to group profit. If the acquisition had occurred on 1 January 2019, group revenue

and group profit for the period would have been the same. Acquisition costs of USD 10 thousand

arose as a result of the transaction. These have been recognized as part of administrative expenses

in the statement of comprehensive income.

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and

goodwill are as follows:

Name 2019 2018

Funcom SE 100 % 100 %

Funcom Inc. 100 % 100 %

Nephilim LLC 100 % 100 %

Funcom Oslo AS 100 % 100 %

Funcom Oslo Licensing AS 100 % 100 %

Heroic Signtures DA 50 % 50 %

Funcom Games Beijing Ltd 100 % 100 %

Zona Paradoxal Lda 50.1 % 0 %

Portugal

Country of incorporation

United States

Norway

The Netherlands

Ownership interest

Norway

China

Annual Report 2019 - Funcom SE Page 76

Purchase consideration

Fair value recognized on acquisition

Due to the nature of the assets and liabilities acquired, the management considered the fair value

to be materially equal to the carrying amount at acquisition date.

Goodwill

[1]

Non-controlling interest is measured at the proportionate share of net assets.

The main factors leading to the recognition of goodwill are

• The presence of certain intangible assets, such as the assembled workforce of the acquired

entity, which do not qualify for separate recognition; and

• cost savings which result in the Group being prepared to pay a premium.

The goodwill recognized will not be deductible for tax purposes.

Note 31.1 Purchase consideration

In thousands of US dollars 2019

Cash consideration

228

Shares issued, at fair value

170

Total consideration transferred 398

Note 31.2 Fair value recognised on acquisition

In thousands of US dollars 2019

Tangible fixed assets

Trade receivables

Prepayments and other receivables

Cash and cash equivalents

154

Trade payables

-6

Other short-term liabilities

-98

Total identifiable net assets acquired 130

In thousands of US dollars 2019

Consideration transferred

398

Non-controlling interest

[1]

Fair value of identifiable net assets

-130

Goodwill 333

Annual Report 2019 - Funcom SE Page 77

26. Leases

26.1 Group as a lessee (IFRS 16)

The Group leases office facilities. The leases typically run for a period of 3 to 10 years, with an option

to renew the lease after that date. Lease payments are normally index regulated every year

according to the consumption price index. For certain leases, the Group is restricted from entering

into any sub-lease arrangements, without the lessor’s written consent. Previously, these leases were

classified as operating leases under IAS 17.

One of the leased properties has been sub-let by the Group. The lease and sub-lease expire in

2020.

The Group leases Office and IT equipment with contract terms of one to three years. These leases

are short-term and/or leases of low-value items. The Group has elected not to recognize right-of-

use assets and lease liabilities for these leases.

Information about leases for which the Group is a lessee is presented below.

Right-of-use assets

Lease liabilities

In thousands of US dollars

Office

leases

Total

Balance at 1 January 2 681 2 681

Depreciation of right-of-use assets -867 -867

Impairment of right-of-use assets -53 -53

Additions to right-of-use assets 2 186 2 186

Foreign exchange movements -22 -22

Balance at 31 December 3 926 3 926

In thousands of US dollars

Office

leases

Total

Balance at 1 January 3 521 3 521

Non cash flows:

Interest expense 178 178

Additions to lease liabilities 2 186 2 186

Variable lease payment adjustment 23 23

Foreign exchange movements 7 7

Financing cash flows:

Principal paid on lease liabilities -1 196 -1 196

Interest paid on lease liabilities -178 -178

Balance at 31 December 4 542 4 542

Annual Report 2019 - Funcom SE Page 78

Amounts recognized in profit or loss - Leases under IFRS 16

[1]

Short-term leases mainly consist of leased servers used for hosting. These leases typically have

a non-cancellable period of one to three months.

[2]

Excluding short-term leases of low-value assets.

As of 31 December 2019, the aggregate undiscounted commitments for short-term leases is USD

1 thousand.

Amounts recognized in statement of cash flows

[1]

Presented as Interest received under operating activities.

Lease liabilities

In thousands of US dollars

2019 2018

2019 - Leases under IFRS 16

Interest expense on lease liabilities -178 –

Depreciation of right-of-use assets -867 –

Impairment of right-of-use assets -53 –

Interest income from sub-lease 28 –

Expenses relating to short-term leases

[1]

17 –

Expenses relating to low-value assets

[2]

69 –

2018 - Operating leases under IAS 17

Lease expense – -1 373

– 514

Total -983

-860

Sub-lease income presented in 'Revenue'

In thousands of US dollars

2019

2019 - Leases under IFRS 16

Principal paid on lease liabilities -1 196

Interest paid on lease liabilities -178

398

Total -947

Interest income received from sub-leases

[1]

Proceeds from finance sub-leases

In thousands of US dollars

2019

2019 - Leases under IFRS 16

Less than one year 1 421

One to two years 1 182

Two to three years 918

Three to four years 368

Four to five years 349

854

Total undiscounted lease liabilities 5 092

551

Net lease liabilities 4 542

More than five years

Nonincurred finance expense

Annual Report 2019 - Funcom SE Page 79

Extension options

Some property leases contain extension options exercisable by the Group up to one year before the

end of the non-cancellable contract period. Where practicable, the Group seeks to include extension

options in new leases to provide operational flexibility. The extension options held are exercisable

only by the Group and not by the lessors. The Group assesses at lease commencement date

whether it is reasonably certain to exercise the extension options. The Group reassesses whether it

is reasonably certain to exercise the options if there is a significant event or significant changes in

circumstances within its control.

26.2 The Group as a lessor

The Group has sub-leased one building. Since the sub-lease is for the major part of the economic

life of the asset, it has been classified as a finance lease. The finance lease receivables have been

presented as part of current prepayments and other receivables.

During 2019, the Group recognized interest income on finance lease receivables of USD 28

thousand (2018: nil). In 2018, Under IAS 17, the Group did not have any finance leases as a lessor.

In 2019, under IFRS 16, the Group have no operating leases as a lessor.

The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease

payments to be received after the reporting date.

In thousands of US dollars

2019

2019 - Leases under IFRS 16

Less than one year -449

One to two years –

–

Total undiscounted lease receivable -449

-7

Net investment in the lease -442

More than two years

Unearned finance income

Annual Report 2019 - Funcom SE Page 80

27. Employee benefits

Defined contribution plans

The Group has established defined contribution pension plans in some of its subsidiaries. The

premium paid relating to these schemes in 2019 was USD 279 thousand (2018: USD 181 thousand).

Share based payments

The Company has established a share incentive program to stimulate continued growth and further

development of the group’s business as it is of the opinion that the option to subscribe for shares in

the Company is an effective incentive for the Funcom group’s employees and board members. The

exercise price of the granted options is equal to the weighted market price of the shares 5 trade

days prior to and 5 trade days following the date of grant, which means the option only has value if

the share price increases from the time it is granted. Options are conditional on the employee

remaining an employee or director of the Company. The Company has no legal or constructive

obligation to repurchase or settle the options in cash.

On 1 June 2018 the annual general meeting approved changes to the option program. The key

changes were extension of option lifetime from 5 to 10 years and elimination of the vesting period.

The elimination of the vesting period means all cost associated with options issued is booked

immediately, rather than spread out over the previous 3-year vesting period. In addition, cost from

options issued in previous years, but initially periodized to the following years is added to this year’s

expenses.

Option program in Funcom SE

The Company executed a 5:1 reverse stock split with ex date 1 February 2018, exchanging five

existing shares for one new share. As a result, the options authorized before that date have been

adjusted to reflect the reverse stock split, i.e. five options authorized were revised to one option

authorized. The following share issuances (for options and other purposes) have been authorized

by the shareholders meeting:

Time of authorization

Number of

shares issuances

authorized

Expiry of

authorization

May 10, 2005

250 000

May 10, 2008

November 30, 2006

200 000

November 30,

2008

December 19, 2008

600 000

December 19,

2010

May 18, 2010

600 000

May 18, 2011

June 27, 2011

1 600 000

GM 2012

June 27, 2012

2 000 000

GM 2013

June 27, 2013

3 000 000

GM 2014

June 27, 2014

6 600 000

GM 2015

June 26, 2015

6 000 000

GM 2016

February 25, 2016

28 000 000

GM 2017

June 30, 2016

28 000 000

GM 2017

June 27, 2017

5 000 000

GM 2018

June 1, 2018

7 500 000

GM 2019

May 27, 2019

7 700 000

GM 2020

Total number of options authorized

97 050 000

Annual Report 2019 - Funcom SE Page 81

The following table shows the share options outstanding at the end of the year with the expiry date

and exercise prices.

List of outstanding options:

Number of

options

Weighted

average

exercise price

(USD)

Number of

options

Weighted

average

exercise price

(USD)

2019 2019 2018 2018

Outstanding options on January 1

4 108 398 1.89 2 988 160 1.35

Options granted

2 515 000 1.71 1 974 500 2.41

Options exercised

-183 533

1.14

-838 135

1.18

Options terminated

-16 127 1.14

Options expired

-132 500 2.43 - -

Outstanding options on Dec 31

6 307 365 1.83 4 108 398 1.89

Expiry day 2019 2018

2.06.2019 USD 2.14

- 12 200

10.07.2019 USD 0.76

- 19 000

31.08.2019 USD 2.17

- 5 500

28.09.2019 USD 2.17

- 5 500

30.09.2019 USD 2.17

- 5 500

25.10.2019 USD 0.62

- 4 200

25.10.2019 USD 1.45

- 9 000

25.10.2019 USD 2.17

- 5 500

12.11.2019 USD 2.17

- 5 500

12.12.2019 USD 2.17

- 11 000

4.01.2020 USD 2.17

18 000 -

1.02.2020 USD 2.30

22 400 -

7.02.2020 USD 2.17

5 500 -

25.02.2020 USD 2.17

18 000 -

6.03.2020 USD 2.17

5 500 -

20.03.2020 USD 2.17

11 000 -

22.05.2020 USD 2.17

11 000 -

30.06.2020 USD 1.77

- 32 233

15.08.2020 USD 1.98

15 200 -

16.08.2020 USD 1.94

36 000 -

11.10.2020 USD 1.82

23 500 -

1.11.2020 USD 1.66

396 083 -

24.08.2022 USD 1.58

40 000 40 000

20.09.2022 USD 1.27

36 051 43 134

24.06.2023 USD 1.06

78 066 93 066

27.06.2023 USD 1.05

40 000 40 000

26.06.2024 USD 2.82

202 400 226 800

27.06.2024 USD 2.80

80 000 100 000

30.01.2025 USD 1.09

60 000 60 000

26.06.2025 USD 1.18

- 20 000

25.02.2026 USD 0.87

70 000 70 000

30.06.2026 USD 0.62

328 465 427 765

11.10.2026 USD 0.76

80 000 80 000

30.03.2027 USD 1.63

10 000 10 000

7.07.2027 USD 1.45

750 700 857 500

1.06.2028 USD 2.48

308 000 346 000

29.06.2028 USD 2.17

1 337 500 1 541 000

14.09.2028 USD 2.13

38 000 38 000

13.06.2029 USD 1.71

2 286 000 -

Sum

6 307 365 4 108 398

Options

Exercise price

Annual Report 2019 - Funcom SE Page 82

The weighted average fair value of options granted during the period determined using the Black-

Scholes valuation model was USD 0.36 option (2018: USD 0.77). The significant inputs into the

model were a weighted average share price of USD 1.63 (2018: USD 2.22 – 2.56) at the grant date,

the exercise prices shown above, volatility 52.45% (2018: 60.00%), dividend yield 0% (2018: 0%),

expected option life of 1.24 years (2018: 1.4-3 years), expected annual turnover rate of 7% (2018:

7%) and an annual risk free rate of 1.14% (2018: 0.83%-1.28%). The volatility measured is based

on the variation in daily share prices for Funcom.

The following directors possess options and/or own shares (directly or indirectly):

At the end of 2019

Name

Number of

options

Comments

Supervisory Board

Ole Gladhaug (4) 197 000

Egil Kvannli 126 000

Fredrik Per Malmberg (2) - 126 000

Andreas Arntzen (4) 76 000

Susana Meza Graham 222 300 76 000

Eddie Tak Ho Chan (3) -

Peng Lu (3) -

Management Board

Rui Casais 47 000 689 332

Christian Olsthoorn 133 500

At the end of 2018

Name

Number of

options

Comments

Supervisory Board

Ole Gladhaug 141 000

Egil Kvannli 88 000

Fredrik Per Malmberg 4 500 000 88 000

Andreas Arntzen (1) 38 000

Susana Meza Graham (1) 155 000 38 000

Management Board

Rui Casais 40 000 389 332

Christian Olsthoorn 95 500

(1) Andreas Arntzen and Susana Meza Graham joinged the Supervisory Board in 2018.

(2) Fredrik Malmberg resigned from the Supervisory Board on 16 December 2019.

(3) Eddie Tak Ho Chan and Peng Lu joined the Supervisory Board on 16 December 2019.

(4) Ole Gladhaug and Andreas Arntzen resigned from the Supervisory Board on 9 October 2019.

CEO of Funcom N.V.

CEO of Funcom SE

Annual Report 2019 - Funcom SE Page 83

28. Transactions with related parties

Identification of related parties

The Group has a related party relationship with its subsidiaries (see Note 24), members of the

Supervisory and Management Boards, its executive officers and shareholders.

Remuneration to the Supervisory Board

On 27 May 2019, the General Meeting approved annual remuneration to the Chairman of the

Supervisory Board of EUR 31 000 (2018: EUR 31 000) and EUR 21 000 (2018: EUR 21 000) for all

other members of the supervisory board. The Company has established a share incentive program

to stimulate continued growth and further development of the group’s business as it is of the opinion

that the option to subscribe for shares in the Company is an effective incentive for the Funcom

group’s employees and board members.

Supervisory Board

member

Total remuneration

Board fee

TUSD

Share based TUSD

2019

Ole Gladhaug (6) 47 27 20

Fredrik Malmberg (2) 38 24 13

Egil Kvannli 37 24 13

Andreas Arntzen (6) 31 18 13

Susana Meza Graham 37 24 13

Eddie Tak Ho Chan (3)

Peng Lu (3)

Total: 190 116 74

2018

Ole Gladhaug 142 37 105

Alain Tascan (4) 98 21 77

Magnus Grøneng (5) 38 13 25

Fredrik Malmberg (2) 95 25 70

Egil Kvannli 95 25 70

Andreas Arntzen (1) 57 12 45

Susana Meza Graham (1) 38 7 31

Total: 562 139 423

Supervisory Board

member

Number of options

granted during the

year

Number of options

exercised durng the

year

Total number of

options held /

controlled at year

end

Number of shares

held / controlled at

year end (incl.

related parties)

2019

Ole Gladhaug

56 000 - 197 000 -

Fredrik Malmberg (2)

38 000 - n/a n/a

Egil Kvannli

38 000 - 126 000 -

Andreas Arntzen

38 000 - 76 000 -

Susana Meza Graham

38 000 - 76 000 222 300

Eddie Tak Ho Chan (3)

Peng Lu (3)

208 000 - 475 000 222 300

2018

Ole Gladhaug

56 000 - 141 000 -

Alain Tascan (4)

38 000 n/a n/a n/a

Magnus Grøneng (5)

- n/a 19 000 n/a

Fredrik Malmberg

38 000 - 88 000 n/a

Egil Kvannli

38 000 - 88 000 -

Andreas Arntzen (1)

38 000 - 38 000 -

Susana Meza Graham (1)

38 000 - 38 000 155 000

246 000 - 412 000 155 000

Total remuneration is composed of:

Annual Report 2019 - Funcom SE Page 84

(1) Andreas Arntzen and Susana Meza Graham joined the Supervisory Board in 2018.

(2) Fredrik Malmberg resigned from the Supervisory Board on 16 December 2019.

(3) Eddie Tak Ho Chan and Peng Lu joined the Supervisory Board on 16 December 2019.

(4) Alan Tascan resigned from the Supervisory Board on 31 October 2018.

(5) Magnus Grøneng resigned from the Supervisory Board on 10 July 2018.

(6) Ole Gladhaug and Andreas Arntzen resigned from the Supervisory Board on 9 October 2019

Remuneration to the Supervisory Board and Management Board:

In thousands of US dollars

2019

2018

Salaries and benefits in kind (short-

term employee benefits)

469

513

Share-based payments

193

761

Pension plan contributions

Total remuneration

668

1 280

Remuneration to the Management Board:

In thousands of US dollars

Management Board member

Total remune-

ration

Remune-

ration

Bonus

Bonus % of

total

remunerati

Severance

Pension

cost

based

2019

Rui Casais

444 241 91 21 % - 5 106

Christian Olsthoorn

37 24 - - - - 13

Total:

480 265 91 19 % - 5 119

2018

Rui Casais

622 260 89 14 % - 6 267

Christian Olsthoorn

96 25 - - - - 71

Total:

717 285 89 12 % - 6 338

Management Board member

Number of

options

granted

during the

year

Number of

options

exercised

during the

year

Total

number of

options held

/ controlled

at year end

Number of

shares held

/ controlled

at year end

2019

Rui Casais

300 000 - 689 332 40 000

Christian Olsthoorn

38 000 - 133 500 -

Total: 338 000

822 832 40 000

2018

Rui Casais

100 000 - 389 332 40 000

Christian Olsthoorn

38 000 - 95 500 -

Total: 138 000

484 832 40 000

Total remuneration is composed of:

Annual Report 2019 - Funcom SE Page 85

Transactions with shareholders

Mr. Hans Peter Jebsen was the largest shareholder of Funcom SE until 30.09.2019 and controls the

company Kristian Gerhard Jebsen Group Ltd. that in turn controls KGJ Investments S.A., SICAV-

SIF (KGJI). The actual, indirect holdings in Funcom SE of Mr. Jebsen through the companies he

controls were 0% as of 31 December 2019 (2018: 29.06%).

Transactions with a Supervisory Board member

In December 2017, the Company announced that it had entered into an agreement regarding the

establishment of a joint operation with Cabinet Group LLC and the issuance of 22 300 000 new

shares in Funcom, each with a par value of EUR 0.04, at a subscription price of NOK 2.6 per share

(pre reverse split in Q1 2018), to Tranicos LLC. The transaction was completed in February and the

joint operation took the form of Heroic Signatures DA. Tranicos LLC held 6.45% of the total

outstanding shares immediately after the transaction.

Tranicos LLC is a company controlled by Cabinet Group LLC. Cabinet Group LLC is controlled by

Mr. Fredrik Malmberg, a former member of the Supervisory Board of Funcom. Fredrik Malmberg did

not hold any shares in Funcom, neither directly nor indirectly, prior to the transaction.

The Company has entered an agreement to invest in a game made by the company Bearded Dragon

International LTD. Fredrik Malmberg has also co-invested in the game through an entity called Game

Ark LTD. In 2019, Funcom invested USD 1 345 thousand (2018: USD 2 654 thousand) in the game,

all of which has been capitalized for both years.

The Group has no contractual commitments for development costs to Bearded Dragon. During 2019

the Company incurred publishing development expenses of USD 465 thousand (2018: USD 917

thousand) on the game developed by Bearded Dragon. During 2019 USD 2 428 thousand was paid

as royalty (2018: USD 0 thousand). At the end of 2019, the Company had a royalty payable of USD

653 thousand (2018: USD 407 thousand) to Bearded Dragon.

For 2019 Funcom paid USD 0 thousand (2018: USD 68 thousand) in royalty fees for Age of Conan

and Conan Exiles to Conan Properties which is controlled by Cabinet Group LLC. At year end USD

0 thousand (2018: USD 0 thousand) was owed. In February 2018 the license agreement for Age of

Conan and Conan Exiles was transferred from Conan Properties to Heroic Signatures DA.

During 2019 Heroic Signatures DA paid USD 141 thousand (2018: USD 0 thousand) in royalty fees

to Conan Properties which is controlled by Cabinet Group LLC. The royalties relate to a revenue

share from a licensing agreement with NETent Product Services Ltd. regarding use of the Conan

Barbarian IP. Conan Properties have cost in sourcing and following up this agreement, including

royalties paid to a third-party agent.

During 2019 Heroic Signatures DA paid USD 1 078 thousand to each of its partners, Cabinet Group

LLC and Funcom Licensing AS, as repayment of previous paid in capital.

On 22 January 2020 Tencent Holdings Limited announced that they (through an indirectly owned

subsidiary, the Offeror) will launch a voluntary cash offer of NOK 17.00 per share to acquire all of

the shares of Funcom not already owned by the Offeror. The Offer price represents a premium of

27.3% to the closing price of the shares on 21 January 2020. The Offer was recommended by the

Supervisory Board and the Management Board. The Supervisory Board members representing

Tencent, Mr. Eddie Chan and Mr. Peng Lu, have not been part of any of the board discussions or

decisions on the matter, neither have they been part of processing the transaction from Tencent

side.

Transactions with a Management Board member

Christian Olsthoorn is a partner with Temmes Management Services, which has service contracts

with Funcom. For 2019 services amounting to USD 84 thousand (2018: USD 99 thousand) were

Annual Report 2019 - Funcom SE Page 86

charged (including USD 24 thousand (2018: USD 25 thousand) gross for the managing director

position remuneration), and USD 24 thousand (2018: USD 20 thousand) was owed at the end of the

year.

29. Financial instruments

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial

instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from

credit sales. It is Group policy to assess the credit risk of new customers before entering contracts.

The impairment model in IFRS 9 is based on the premise of providing for expected losses. The

contractual terms of the financial assets on the Group balance sheet give rise to cash flows on

specified dates that are solely payments of principal and interest, measured at amortized cost.

Funcom’s trade receivables are to a large extent due to credit card companies with short maturities

and no significant financing components have been identified.

Credit risk also arises from cash and cash equivalents and deposits with banks and financial

institutions. Funcom’s cash and cash equivalents are considered to have low credit risk as DNB

Bank ASA is a well-known institution with high credit ratings, e.g. AA- and Aa2 long term rating from

S&P and Moody's with stable outlook.

The company considers the probability of default upon initial recognition of asset and whether there

has been a significant increase in credit risk on an ongoing basis throughout each reporting period.

Trade receivables and lease receivables are written off when there is no reasonable expectation of

recovery. Indicators that there is no reasonable expectation of recovery include, amongst others,

the failure of a debtor to engage in a repayment plan with the group. Impairment losses on trade

receivables are presented as net impairment losses within operating profit. Subsequent recoveries

of amounts previously written off are credited against the same line item.

Loss allowance are considered for full lifetime. Under IFRS 9 all other financial instruments expected

credit losses are measured at an amount equal to the 12-month expected credit losses. The non-

current receivable related to security deposits for office leases, has been by applying the low credit

risk exemption for financial instruments with a credit rating of “investment grade”.

Funcom has determined its expected credit losses by using a provision matrix where receivables

have been grouped by type. The credit loss estimates are based on actual historical credit losses

and adjusted for the credit worthiness of creditors and any available relevant forward-looking

information, for instance about the general economy and Group creditors. Knowledge of payment

problems of any of our key creditors would impact our assessment of expected credit losses. The

trade receivables are primarily receivable from large corporations with a high credit worthiness such

as Microsoft, Sony, Valve and credit card service providers. The short maturity of the trade

receivables reduces the importance of forward-looking information, which has not indicated any

specific scenarios that would require a significant increase of the default rate. The Group has not

incurred any credit losses during the last three years, there are no credit-impaired financial assets

and no significant increase in credit loss risk since initial recognition has been identified in any

financial instrument. Based on this the Group has concluded a nil IFRS 9 default rate is appropriate,

for each class of financial instruments.

Annual Report 2019 - Funcom SE Page 87

Class of financial asset

Default rate (IFRS 9)

Non-current

Trade receivables

Cash

Maximum credit exposure

The carrying amount of financial assets represents the maximum credit exposure. The maximum

exposure to credit risk at the reporting date was:

[1]

The trade receivables are primarily receivable from credit card service providers for which no

publicly available credit ratings are available. However, based on long-term relationship with these

providers it is considered that there is a very low risk of non-collection.

[2]

Security deposits for office leases are presented in the statement of financial position as Other

non-current financial assets. The difference between the Security deposits for office lease amount

and the Other non-current financial consist of a non-current prepayment which is not included in

this table. The deposits are held by European banks which have stable credit ratings according to

Moody's and Standard & Poor's. The majority is held with DNB Bank ASA, with a stable Aa2 credit

rating according to Moody's.

[3]

Other short-term receivables only include finance lease receivable and VAT receivables.

[4]

Cash and cash equivalents are held with European and North American banks which have stable

credit ratings according to Moody's and Standard & Poor's. The majority of the Group’s cash is held

with DNB Bank ASA, with a stable Aa2 credit rating according to Moody's.

Receivables on credit card service providers amount to USD 189 thousand of the trade receivables

carrying amount on 31 December 2019 (2018: USD 257 thousand).

The maximum exposure to credit risk for trade receivables at the reporting date by geographic region

was:

Impairment losses

The aging of trade receivables at the reporting date was:

In thousands of US dollars

2019 2018

Trade receivables

[1]

3 837 4 797

Security deposits for office leases

[2]

478 489

Other short-term receivables

[3]

550 1 269

Cash and cash equivalents

[4]

13 131 19 902

Total 17 996 26 456

In thousands of US dollars 2019 2018

Asia 119 330

North America 3 189 3 358

Europe 529 1 109

Total 3 837 4 797

Annual Report 2019 - Funcom SE Page 88

The Group recorded no impairment losses for receivables in 2019 (2018: nil). The management

expects to receive 100% of the receivables and have not recorded an impairment loss for the

receivables. The cash was collected in the beginning of 2020.

Liquidity risk

The Group manages liquidity by maintaining adequate reserves and banking facilities. Forecast and

actual cash flows are monitored on a continuous basis. The following are the contractual maturities

of non-derivative financial liabilities, including estimated interest. The Group has no derivative

financial liabilities that give rise to contractual cash outflows.

[1]

Lease liabilities: the contractual cash flows include non-incurred finance expense.

The Company expects to need to secure additional funding in order to execute all the planned

activities for 2020 and 2021, the largest of which is the DUNE Multiplayer Open World game. The

amount to be secured will heavily depend on the DUNE investment budget and the performance of

the existing titles.

Currency risk

The Group is exposed to foreign currency risk on sales, purchases and cash and cash equivalents

denominated in other currency than United States dollars. Large variations in Euro or Norwegian

kroner exchange rate compared to the US dollar could significantly influence the Group’s Statement

of Comprehensive Income. Even if management were to implement an active hedging policy, a

currency related risk, which may have an impact on the Statement of Comprehensive Income, would

still exist. Most of the operational expenses are currently denominated in US dollar and Norwegian

kroner. The significant cash position in Norwegian kroner is perceived by the management as a

natural hedge against the operational expenses in these currencies.

The Group’s exposure to foreign currency risk was as follows based on carrying amounts:

In thousands of US dollars 2019 2018 2019 2018

Not past due 3 725 4 787 – –

Past due 0-30 days 30 2 – –

Past due 31-120 days 18 8 – –

More than 120 days 65 – – –

Total

3 837 4 797 – –

Gross

Impairment

As at December 31, 2019

In thousands of US dollars

Carrying

amount

Contractual

cash flows

6 months

or less

7-12

months

Year 2 Year 3 Thereafter

Lease liabilities

[1]

4 542 5 092 761 660 1 182 918 1 571

Trade payables 1 329 1 329 1 329 – – – –

Other payables 2 812 2 812 2 812 – – – –

Total 8 682

9 232 4 901 660 1 182 918 1 571

As at December 31, 2018

In thousands of US dollars

Carrying

amount

Contractual

cash flows

6 months

or less

7-12

months

Year 2 Year 3 Thereafter

Other non-current liabilities 92 -49 – – -49 – –

Trade payables 1 200 1 200 1 200 – – – –

Other short-term liabilities 2 547 2 547 2 547 – – – –

Total 3 839

3 698 3 747 – -49 – –

Annual Report 2019 - Funcom SE Page 89

[1]

Finance Lease Receivables are reported under Current prepayments and other receivables in the

statement of financial position.

The following exchange rates were applied during the year:

Sensitivity analysis: Currency

A 10 percent weakening of the US dollars compared to EUR, NOK and CAD other currencies would

have increased (decreased) equity and profit and loss by the amounts shown below. The analysis

includes only outstanding foreign currency (non-US dollar) denominated monetary items and adjusts

their translation at the period end for a 10 per cent change in foreign currency rates. This analysis

assumes that all other variables, e.g. interest rates, remain constant.

A 10 percent strengthening of the US dollars against the above currencies at 31 December, would

have had the equal but opposite effect on the above currencies to the amounts shown above, on

As at December 31, 2019

In thousands of US dollars

USD EURO NOK CAD Other Total

Trade receivables 3 392 317 41 66 22 3 837

Finance Lease Receivables

[1]

– – – 442 – 442

Cash and cash equivalentes 7 324 735 4 872 23 177 13 131

Long-term lease liabilities -2 245 -109 -946 – – -3 300

Short-term lease liabilities -206 -85 -538 -412 – -1 241

Trade payables -537 -181 -222 – -389 -1 329

Other short-term liabilities -812 -917 -1 083 – – -2 812

Net balance sheet exposure

6 915 -239 2 124 118 -190 8 728

As at December 31, 2018

In thousands of US dollars

USD EURO NOK CAD Other Total

Trade and other receivables 3 925 837 4 13 18 4 797

Cash and cash equivalentes 10 499 2 330 6 775 128 170 19 902

Trade payables -504 -275 -344 – -77 -1 200

Net balance sheet exposure

13 920 2 892 6 435 141 111 23 499

2019 2018 31.12.2019 31.12.2018

EUR 1.1192 1.180 1.1234 1.145

NOK 0.1136 0.123 0.1139 0.115

CAD 0.7538 0.772 0.7696 0.706

CNY 0.1447 0.151 0.1437 0.145

USD 1.0000 1.000 1.0000 1.000

Average rate

Spot rate at December 31

In thousands of US dollars

Profit or Loss

December 31, 2019

EUR 24

NOK -212

CAD -12

Other 19

December 31, 2018

EUR -289

NOK -644

CAD -14

Other -11

Annual Report 2019 - Funcom SE Page 90

the basis that all other variables remain constant. The sensitivity is based on the assumption of a

10% strengthening of the US dollar against local currency on the reporting date.

Interest rate risk

At the reporting date, the Group has no interest-bearing financial instrument. The convertible bond

has been completely converted into Funcom shares in 2018.

Sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rate at the reporting date would have increased (decreased)

equity and profit or loss by the amounts shown below. This analysis assumes that all other variables,

in particular foreign currency rates, remain constant.

Classes of financial instruments

All financial assets in the Statement of Financial Position are classified as loans and receivables at

amortized cost.

Fair values

The carrying amounts of Trade payables, Trade and other receivables, Cash and cash equivalents

and Non-current financial assets (Security deposits for office leases and a non-current prepayment)

are a reasonable approximation of fair value.

30. Capital Management and Risk Factors

Capital management

The Supervisory Board policy is to maintain a strong capital base so as to maintain investor, creditor

and market confidence and to sustain future development of the business. The Supervisory Board

monitors the return on capital, which the Group defines as net operating income divided by total

shareholders’ equity, excluding minority interests. The Company also manages its capital to ensure

that it will be able to continue as a going concern. This includes a regular review of cash flow

forecasts and, if deemed appropriate, subsequent attraction of funds through execution of equity

and/or debt transactions. In doing so, the Supervisory Board’s strategy is to achieve a capital

structure which takes into account the best interests of all stakeholders. Funcom’s capital structure

includes cash and cash equivalents and equity.

In addition, the Supervisory Board is of the opinion that options to subscribe for shares in the

Company are an effective incentive for the Funcom Group’s employees and board members. The

Company has therefore established a share incentive program in order to stimulate continued

growth and further development of the Group’s business.

The Company is not subject to externally imposed capital requirements. There were no changes in

the group’s approach to capital management during the year.

Risk factors

Management has discussed the various risks in Funcom and the implications of these risks. The

risks described below do not constitute a full list of the risks the Company is exposed to. Additional

risk factors may also impair the Company’s operations. The order in which the risks are presented

In thousands of US dollars 2019 2018

Loans and borrowings – –

Cash and cash equivalents 13 131 19 902

Net exposed to interest risk 13 133

19 904

100 bp increase in intrest rate

131 199

100 bp decrease in intrest rate

-131 -199

Annual Report 2019 - Funcom SE Page 91

below is not intended to provide an indication of the likelihood of their occurrence nor of their severity

or significance.

Revenue risks

Dependence on performance of individual games

Funcom's financial performance, including future income, is highly influenced by the performance of

current games, and new games to be released in the future. Under the Funcom strategy, Funcom

will develop both smaller and larger games, publish third party developed games as well as conduct

both in-going and outgoing licensing. Funcom expects that the financial performance of the

Company will be materially dependent on the performance of its larger games, as well as the

success of the overall strategy.

Funcom's financial performance is also dependent on a number of other factors related to its games,

such as development costs, license costs and successful development of new content for the current

Live Games including full launch of Conan Exiles on PC, Xbox and PlayStation. If some of Funcom's

games attain low revenue numbers (i.e. only produces sufficient revenue to cover Funcom's

investment in the game) there may be a negative impact on future cash flows and the valuation of

Funcom. In particular, the Live Games have historically been the main revenue contributor for

Funcom. Furthermore, the games in development are intended to be funding sources for the

development of future new games, and lower cash inflows than expected could also have an indirect

effect in terms of reduced revenues, earnings and cash flows from new games and the future funding

requirements of the Company.

It is in the nature of computer games, including Funcom's Live Games, that they produce declining

revenues over time due to the ageing of the games. There is, thus, a risk that Funcom's Live Games

will not produce sufficient revenue in the future if the Company is not able to retain the players of its

current Live Games, for example due to ageing or Funcom not being able to produce updates or

new content for its current Live Games. There can be no assurance that Funcom is able to develop

new games that produce sufficient revenue.

Dependence on the attractiveness of the licensed brands

Funcom will have a strong portfolio of brands going forward which should be attractive for other

companies (i.e. licensee(s)) to produce game titles with. However, the willingness to become a

licensee, and the success of the new games based on these brands are dependent on the

attractiveness of the brands. The developments of these brands are often influenced by factors

outside of Funcom's control, such as the creative processes of the licensor (if the brand is licensed),

development of new content or products under the brand and general market perception. There is

a risk that such factors may affect the performance of Funcom's games negatively.

Dependence on consumer satisfaction

The commercial success of Funcom's games, and games produced through license(s) from

Funcom, is to a high degree dependent on consumer satisfaction. Consumer satisfaction is

dependent on the perceived fun factor, quality of service of the support and error correction services.

Even though the Company strives to ensure high consumer satisfaction there is a risk that the

consumers will be unsatisfied with products produced by Funcom or any licensees, the support and

the number of bugs and errors in the products. Consumer satisfaction may also be affected by the

gaming community related to the specific game.

Rating risks

Funcom is, as a developer of mature games, exposed to the risk that rating agencies in the various

markets will set the allowed age level to play the Funcom games too high or too low and thereby

potentially limiting the addressable market. Rating agencies, including the Entertainment Software

Rating Board18, may also change their rating policies, or fine Funcom for rating breaches, although

Funcom always strives to adhere to rating regulations. Funcom may also receive the attention of

Annual Report 2019 - Funcom SE Page 92

regulatory compliance organizations, such as the US Federal Trade Commission which enforces

the Children's Online Privacy Protection Act, focusing on the gaming industry, both through public

relations campaigns and through legal procedures. It is also a risk that disloyal employees or disloyal

outside parties by mistake, or on purpose, introduce unknown and/or controversial material into the

games of the Company that may constitute a risk for legal penalties or other actions from rating

agencies.

Reviews

The commercial success of Funcom's games may be, to a high degree, dependent on favorable

reviews by the major gaming publications and sites. Should Funcom fail to meet the expectations

this may have a negative effect in the review scores of its game and thereby potentially on the sales

potential of the games.

Pricing risk

Above factors such as quality, popularity and performance of the games can strongly influence the

price Funcom is able to effectively charge for its games. Whereas external factors such as prices of

similar games, structure and terms of distribution platforms and general supply and demand for

video games can also affect this, there is not a market price dependency as in commodity markets.

Development risks

Launch risks for online games and risk of non-retention of players after launch

The number of players of newly launched games may increase rapidly over a short amount of time,

which may imply risks of technical failure within the games if the game servers cannot support such

increase in number of players. The Company cannot exclude the possibility that future launches will

encounter such problems. This may lead to a negative consumer perception of the game.

Even though the launch of a game may be successful initially, there can be no assurance that

Funcom succeeds in creating additional attractive content for the game and thereby retaining the

players.

Delay of product releases

For the current development projects, the Group has a strong focus on making plans, analyzing

risks, estimating time needed in each project phase and measuring progress. There is, however, a

large inherent development timeline risk in all software development, including in game software

development, and there is no assurance that development schedules will be held. The timeline can

also be jeopardized due to factors external to the Group, such as larger companies or games

occupying the intended release period. If the Group does not manage to release games at the

planned dates, the development budgets of the games may increase. There is also a risk that

competitors will gain a foothold in the market at the expense of the Group or that the games will be

less competitive when launched due to advances of competitors, making users less willing to spend

additional time and money on new games from the Group.

Unsuccessful projects under development

There is currently a large number of games in development and operation worldwide and consumers

have many different options to choose from. Through the history of video games, the market has

never accommodated many top-selling products at any one time, although that number is growing.

With its already released game, Conan Exiles, the Company has moved into the segment of "Open

World, Online, Multiplayer Survival Games" and there is a risk that one or more of Funcom's games

within this segment could be unsuccessful. Within this games segment, Funcom's competitors

include developers such as Daybreak Game Company, Bluehole, Bohemia Interactive, Facepunch

Studios Ltd. and Studio Wildcard. For games developed within other segments, there are a number

of competitors which increases the risk that future games will be unsuccessful. In the other segments

where Funcom competes, examples of competitors include Activision Blizzard, Electronic Arts,

Ubisoft, Bethesda Softworks and Take-Two Interactive in addition to many other smaller, but still

extremely relevant, game publishers.

Annual Report 2019 - Funcom SE Page 93

Competition and changes in markets and trends

The market for Funcom's games is exposed to competitors and is trend oriented. The competitors

may develop more popular games and achieve higher attention from the customers in the computer

games market. Failure of Funcom to maintain competitive games and service offerings may render

the products of Funcom obsolete or limit the ability for Funcom to generate revenue from their

products, and thus have a material adverse effect on Funcom.

Further, Funcom's games are exposed to changes and variations in market trends for PC and

console games, including if consumer demand for games is directed towards other genres of games

than those offered by Funcom from time to time.

Further, Funcom may develop games that do not become profitable if Funcom's games fail to meet

the market trends at the time of release of a specific game.

If consumer demand becomes more directed towards other genres of games than those offered by

Funcom from time to time or if Funcom fails to meet market trends at the time of release of a specific

game, this must be expected to have an adverse effect on the earnings and financial position of

Funcom.

Difficulties in recruiting and loss of key employees

Funcom is dependent on the ability to recruit, motivate and retain highly skilled technical, managerial

and marketing personnel. Funcom may experience difficulties in recruiting, motivating and retaining

the necessary expertise and key employees, or may need to pay higher compensation, which could

adversely affect operating results. Further, it should be taken into consideration that work permits

can be difficult to obtain. Also, there is a risk of losing vital information if key employees, for various

reasons, leave Funcom. Funcom's current development studios are not located in large gaming

hubs, which can reduce the speed at which recruiting can be executed.

External parties and counterparty risk

Funcom's success depends also partly on the ability of the Company's partners to effectively fulfil

their commitments, including the distribution services offered by Steam, Microsoft and Sony, the

continued licensing from Conan Properties International and the continued right to use the Unreal 4

graphics engine. Funcom also has partners in the areas of hosting and server administration, billing,

publishing, sales and distribution, hardware as well as development of technology and other game

related development. In addition, Funcom has game development partners that it works with in

relation to publishing and distribution. In general, the Group is subject to counterparty risk. If the

contractual counterparties of the Group are unwilling or unable to fulfil their contractual obligations,

this may have an adverse effect on the earnings and financial position of the Group.

Difficulties in enforcing the Company’s intellectual property and proprietary rights

Funcom’s success depends on its proprietary game technology. Funcom relies on a combination of

trade secret, copyright and trademark laws, non-disclosure agreements and contractual provisions

to protect its proprietary rights. International copyright and trademark laws protect Funcom’s

technology. Existing trade secrets and copyright laws afford only limited protection, and

unauthorized parties may attempt to copy aspects of Funcom’s proprietary rights or to obtain and

use information and technology that Funcom regards as proprietary. In addition, the laws of some

foreign jurisdictions do not protect Funcom’s proprietary rights in the same manner and to the same

extent as the laws of the Netherlands, the United States and Norway do. There can be no assurance

that the steps taken by Funcom to protect its proprietary rights will be adequate. Similar risks will

also apply to the intellectual property rights Funcom gets access to through Heroic Signatures.

Intellectual Property Rights of others

Annual Report 2019 - Funcom SE Page 94

Funcom operates in a competitive industry. Technology is evolving at a fast pace and innovating

companies develop solutions in relatively close technological proximity. This poses the risk that the

Company could inadvertently encroach upon the protected rights of others, including rights protected

by patents. This is the nature of the industry in which Funcom operates. Funcom is aware of the fact

that there may be patents potentially forming basis of infringement claims. United States patents

and/or litigation in the United States are particularly worrisome because there are a large number of

United States software patents in existence. There is also to a greater extent a culture for

opportunistic patent litigation in the United States. Infringement on copyrights, design rights and

trademark law could surface as well. There is always an inherent risk of substantial claims related

to infringement of intellectual property rights. If any claims of infringement of intellectual properties

are submitted towards contract parties from which Funcom licenses intellectual property, this could

also have a negative impact on the rights and obligations of the Company under any such contract.

Loss of reputation

Any negative publicity related to the Company or its partners could adversely affect its reputation

and the value of the Group's intellectual property. The Company is exposed, among others, to the

risk that litigation, consultants, employee or officer's misconduct, operational failures, disclosure of

confidential information, negative publicity, whether or not founded could damage the Company's

reputation. Any erosion of the Company's reputation may have a material adverse effect on its

business, revenues and results of operations or financial conditions.

Technical risks

Game engine technologies

The Company is dependent on the Dreamworld Technology and the Unreal Engine technology to

generate revenue, as these technologies form the basis of the games developed and published by

Funcom, including its Live Games. The Dreamworld Technology provides Funcom with a unique

competitive advantage by enabling more flexible, faster and more predictable development and

deployment of upcoming games. Funcom is continuously striving to further develop and improve the

Dreamworld Technology, including by making the Dreamworld Technology compatible with third

party software such as the Unreal Engine 4 technology.

The Unreal Engine technology is licensed from Epic Games and developments made to that

technology by the licensor might require additional development from the Company and could

potentially impact revenues or time to market of a project. If the Company is not able to utilize the

Dreamworld Technology, or third parties' technology like the Unreal Engine in the future or is not

able to develop the Dreamworld Technology further, including making the Dreamworld Technology

compatible with appropriate third-party software, in order to meet the standards of future video

games, the Company will incur additional development costs and may experience lack of revenue.

Technological risks

Any game is heavily dependent on the underlying hardware configuration of the device running the

game, managed by Funcom itself or through third party service providers like G-Portal. Funcom's

games support a variety of hardware platforms capable of running the games and each platform can

have multiple configurations of its hardware. The number of combinations of platforms and

configurations is such that it is unfeasible to guarantee optimal game performance on them all and

thus there is a risk that specific configurations do not perform as well as specified and have an

adverse effect on Funcom's ability to gain revenues.

Additionally, online games depend on a large number of complicated hardware and software

components that need to work successfully together. Any errors, bugs or viruses in any software

may harm the operation of the online game and thus have an adverse effect on Funcom's ability to

gain revenues. Similarly, any errors, power failures, shortcuts etc. in any hardware component may

harm the operation of the online game and thus have an adverse effect on Funcom's ability to gain

Annual Report 2019 - Funcom SE Page 95

revenues. Although Funcom endeavors to reduce the technological risks before a game launch and

during the operations of a game, these risks will always be present to some degree at launch.

Hacking and cheating

Funcom's online games may be subject to hacking and cheating activities. Any such activity may

affect Funcom's ability to operate their online games at the level the games' players expect, which

will in turn affect Funcom's ability to gain revenues.

Risks related to the Internet

Funcom's online games are operated on the Internet, as are the digital stores responsible for most

of Funcom's games sales. Funcom considers itself materially dependent on the Steam online

distribution client for computer games, and for the services provided by Microsoft Xbox and Sony

PlayStation. Funcom's revenues are therefore dependent on the continued and uninterrupted

operation of the Internet. Any adverse incident hereunder but not limited to bugs, viruses, worms,

power outages, government restrictions, etc. affecting the Internet may affect Funcom's ability to

gain revenues.

Theft or loss of source code

Funcom’s source code is stored in a fireproof safe but is also available to employees working on the

Company’s games. Should all or parts of the source code be stolen or lost, this may affect Funcom’s

ability to gain revenues or reduce its technological edge in the market.

Piracy

Funcom's games are subject to digital piracy, where consumers obtain an illegal copy of the game

instead of purchasing it from an accredited store. Funcom's online games with strong server-based

gameplay are less affected by this issue, but any single player or limited multiplayer games will

potentially be affected.

Economic risks

Macroeconomic fluctuations

Funcom is exposed to the economic cycle as changes in the general economic situation could affect

demand for Funcom's products. Computer games are used for entertainment and therefore the

demand may decline during recession when disposable income decreases.

Variability of operating results may cause the Group's results to negatively affect the financial

position of the Group. Funcom's operating results may vary from month to month, as demand for

Funcom's games will fluctuate in accordance with customer demands for Funcom's products.

Funcom has a comparatively small number of Live Games and releases few games each year,

which implies that the operating results of Funcom are more dependent on the performance of the

current Live Games than larger gaming companies. The customer demand of Funcom's products

generally declines slowly, but steadily after launch of a game, but may fluctuate due to updates of

the games, marketing campaigns, in-game events, reviews, media attention (including social media

attention), and other circumstances. The customer demand of Funcom's products may also fluctuate

due to popularity of a competing game and increase in popularity of the general genres of Funcom's

games. Even though the Company believes that updates, marketing campaigns and in-game events

will contribute positively to the popularity of its games, no assurance can be made that such activities

will imply an increased demand for Funcom's products. Funcom's operating result may thus be hard

to forecast due to unpredictable demand for its products, the competitive environment, other general

economic and market conditions and unanticipated difficulties in pursuing Funcom's business

strategy, and this variation in operating results may cause the financial position of the Group to vary,

implying, inter alia, that the Company may experience higher liquidity requirements than expected.

Annual Report 2019 - Funcom SE Page 96

Significant variations in operating results may have a material adverse effect on the Group's

business, operations, financial position, results of operation, cash flow and/ or prospects.

Contracts

Several of the agreements entered into by Funcom are governed by the laws of jurisdiction in which

Funcom does not have a presence. In addition, dispute resolution is set to venues in different places

in Europe and the United States. This may increase the legal risk and increase the costs in

connection with the enforcement of any specific agreement.

Currency fluctuations

Because a considerable share of the Group's business is conducted in currencies other than its

functional currency, Funcom will be exposed to volatility associated with foreign currency exchange

rates and may experience currency exchange losses upon such volatility and/ or difficulties to cover

its liabilities in case of an adverse development of the exchange rate between the revenue

currencies and operational expenses of Funcom. Funcom's key revenue currencies are US dollar,

Euro and British pound. The majority of the operational expenses is denominated in Norwegian

kroner, US dollar, Euro and British pound. In particular, a lower USD to NOK exchange rate will

reduce the ability to cover operational costs in NOK with USD revenue. The Company does not

currently use any financial instruments to hedge its exposure to currency exchange rate risks arising

from operational, financing and investment activities.

Tax exposure

The Company is incorporated in the Netherlands with subsidiaries in Norway, China and the United

States, and as of 2019 in Portugal as well. The overall tax charge depends on where profits are

accumulated and taxed since these countries have different tax systems and tax rates. The Group

is today taxed under a number of different legal systems with different laws for tax residency, tax

credits and tax exemption. Consequently, the Group is exposed to changes of tax policies and

changes of tax legislations, proactively and/or retroactively. The Company is of the view that it

reports profits and losses in accordance with tax rules applicable to the Group. The tax authorities

in the jurisdictions where the Group operates are not bound by the judgment of the Company, and

there can be no assurance that they will agree to it. If one or more of the relevant tax authorities

challenges the Company's view, this may result in an increased overall tax charge.

Sales tax exposure

The Group generates sales transactions from potentially all over the world. Because of this, the

Group is exposed to different sales tax issues, including VAT issues. On 1 January 2015, a new EU

VAT regulation came into force where electronic services will be taxed in the country where the

customer is established rather than where the service provider is located. This change in regulation

created VAT exposure in different EU states and increased the overall amount of VAT to be remitted

given the difference in VAT rates in each state. The Group obtains from its payment service

providers relevant information to calculate and process VAT payments. Further, the changes in

regimes for value added tax may lead to higher costs in complying with the regimes for value added

tax on digital goods. Should the Group fail to comply with the different regulations it might lead to

real cash costs, including irrecoverable VAT, penalties, and interest.

Further, there can be no assurance that an increase in overall charge of value added tax may be

recovered in higher sales prices for Funcom's products and may therefore entail an adverse effect

on the earnings of the Group.

Deferred tax asset and operating losses

The tax losses carried forward related to Funcom SE are generated from holding and financing

activities and may potentially only be offset against future profits from similar activities. Future trading

profits may consequently not be utilized against such tax losses. Furthermore, there is a risk that

tax losses carried forward will not be recognized by the tax authorities if the Company wishes to

Annual Report 2019 - Funcom SE Page 97

offset such carried forward losses and the tax authorities considers that the profits have not been

obtained from similar activities as those related to the carry forward losses.

Tax credits

Funcom Oslo AS has received tax credits for its technology research efforts in Norway

(SkatteFUNN) and continues to explore additional incentives in different countries to help fund the

game and technology development.

The tax credits that Funcom Oslo AS receives have been obtained through the SkatteFUNN R&D

tax incentive scheme, a government program designed to stimulate research and development in

Norwegian trade and industry. Under the SkatteFUNN scheme, qualifying companies receive

support through either tax credits or payment of an amount corresponding to the tax credits (if the

company is not in a taxable position).

There can be no assurance that Funcom Oslo AS, or other Group companies, will be eligible for

SkatteFUNN tax credits, or tax credits available under other schemes, in the future.

Financial risk

Pre 2017 Funcom has a history of operating losses mainly as a result of the significant investments

made in the Company's games not generating sufficient income. The recent strategic changes

increasing the frequency of games releases through more internal games, adding externally

developed games, releasing games on more platforms and adding revenue from intellectual property

is intended to increase robustness, improve ongoing cash flow and reduce the reliance on individual

game releases. The Company's overall performance is still largely dependent on the revenues from

existing and future games and investors should refer to the Going concern assessment in the Report

of the Management Board for a more thorough assessment.

The Company expects to need to secure additional funding in order to execute all the planned

activities for 2020 and 2021, the largest of which is the DUNE Multiplayer Open World game. The

amount to be secured will heavily depend on the DUNE investment budget and the performance of

the existing titles. There is a risk that the company is not able to secure funding for these plans,

which could force reduced ambitions and cost cutting.

Compliance risk

Funcom is a public company with shares traded on Oslo Stock exchange. Therefore, the Company

has the obligation to comply with strict securities trading rules and regulations applicable in Norway

and the Netherlands. Failure to comply could lead to penalties and other sanctions.

Further risk description

Further risk includes control risks related to the joint operation Heroic Signatures DA, risk related to

the share, see chapter 2 risk factors of the prospectus released 22 February 2018 for further

information.

31. Events after the reporting period

Option execution

On 2 March 2020, as a natural consequence of the recommended voluntary cash offer for all shares

in Funcom at NOK 17 per share made by Tencent Cloud Europe B.V. (Tencent) that started on 20

February 2020, and in accordance with the General Terms of the applicable stock option plan, a

total of 4 059 165 stock options were exercised at an average exercise price of NOK 13.11 per

share. Out of these options 1 585 720 were exercised by primary insiders. The remaining number

of outstanding stock options is 2 219 300, out of which 2 153 900 stock options are not "in the

money".

Annual Report 2019 - Funcom SE Page 98

Tencent acquisition

On 22 January 2020 Tencent Holdings Limited announced that they (through an indirectly owned

subsidiary, the Offeror) would launch a voluntary cash offer of NOK 17.00 per share to acquire all of

the shares of Funcom not already owned by the Offeror. The Offer price represented a premium of

27.3% to the closing price of the shares on 21 January 2020 and was NOK 1.25 higher per share

than Tencent paid for 29% of the shares in 2019. The Offer was recommended by Funcom’s

Supervisory Board and Management Board. The Supervisory Board members representing

Tencent, Mr. Eddie Chan and Mr. Peng Lu, did not take part in any of the board discussions or

decisions on the matter. The Offeror shall replace the option program with a no less favorable

incentive plan. The independent agency Pareto Securities AS issued a fairness opinion concluding

the offer was fair from a financial point of view.