WIG40 LETTER FROM THE MANAGEMENT BOARD Warsaw, March 27th 2019 Dear Shareholders and Investors Please be invited to read the 2018 Annual Report of 11 bit studios S.A. It was an absolutely outstanding year for our Company, both in terms of our business achievements and financial performance. 2018 saw the premieres of Frostpunk (April 24th) and Moonlighter (May 29th), released by our 11 bit publishing division. Both releases turned out quite impressive. Frostpunk quickly moved to top positions on bestseller lists of the world's most important digital platforms, headed by Steam. Also Moonlighter climbed right up to the top on Steam, a major achievement for a relatively low-budget game of this size. The market success of Frostpunk and Moonlighter, backed by a number of awards and distinctions, demonstrated quite clearly that 11 bit studios S.A. has achieved world-class competence in the creation and release of video games. Furthermore, solid sales of both titles after mid-2018, supported by our marketing initiatives such as DLC packs and releases on new hardware platforms or in new language versions, have proved 11 bit studios S.A.’s competence in long-term monetisation of game products. The excellent sales figures reported for Frostpunk, Moonlighter and This War of Mine (even though it premiered more than four years ago) translated into record-high financial performance of 11 bit studios S.A. For 2018, the Company reported PLN 82.11m in revenue (up 328.8% on 2017) and PLN 46.95m in operating profit (up 516.1%). Net earnings came in at PLN 37.55m, a nearly ten-fold increase on the figure reported in 2018. They would have come in even higher, had it not been for non-cash provisions recognised in connection with the Company’s 2017−2019 Incentive Scheme, of nearly at PLN 6.2m in 2018. Our cash reserves were also record high. At the end of December 2018, 11 bit studios S.A. held over PLN 56,34m in bank accounts, bank deposits, bonds and units of a conservative investment fund. The amount also included PLN 14.55m in receivables, of which a large portion (PLN 4.14m) was due to the Company as a VAT refund on the acquisition of a property located at ul. Brzeska 2 in Warsaw in late 2018 to be used as a new office, with trade receivables making up the balance. As a result, the total value of 11 bit studios S.A.'s financial assets reported as at December 31st 2018 was PLN 70.88m (2017: PLN 33.91m). With the rock-solid financial footing, the prospects for the Company are quite bright, and our plans for the coming years very ambitious. In the quarters to come, the major project will be the production of a new game under the working title Projekt 8, with an estimated budget of approximately PLN 20m. We will also continue to roll out Frostpunk and monetise This War of Mine. Two new game products are also in the pipeline for this year. Moreover, our plan is to build three developer teams working in parallel, which will mean a substantial increase in the Company’s headcount from around 100 to 200 in the next 2-3 years. As a result, in the medium-term perspective of the next several years, 11 bit studios S.A. will be able to release one proprietary title every 12-18 months. Equally ambitious are our goals for the 11 bit publishing business. We strongly believe in a successful 2019 premiere of Children of Morta, another game to be released by our publishing team. The market success of Moonlighter not only boosted the financial performance of 11 bit studios S.A. for 2018, but also considerably reinforced our position as a competent publisher. As a result, we are able to add projects with ever-increasing size and commercial potential to our portfolio. We are already holding a number of promising discussions. In the medium term, our publishing division should release three to four games annually, increasing its contribution to earnings of 11 bit studios S.A. Thank you once again for the trust you have placed in us. We invite you to read our report. Grzegorz Miechowski Przemysław Marszał Michał Drozdowski President of the Management Board Member of the Management Board Member of the Management Board 2 TABLE OF CONTENTS LETTER FROM THE MANAGEMENT BOARD .............................................................................................................................................................. 2 TABLE OF CONTENTS ......................................................................................................................................................................................................... 3 FINANCIAL HIGHLIGHTS .................................................................................................................................................................................................... 5 Statement of financial position ...................................................................................................... 5 Statement of profit or loss ............................................................................................................ 5 Statement of cash flows............................................................................................................... 5 FINANCIAL STATEMENTS OF 11 BIT STUDIOS S.A. FOR 2018 ............................................................................................................................. 6 1. OVERVIEW ...................................................................................................................................................................................................................... 7 1.1. Company overview .......................................................................................................... 7 1.2. Covered periods.............................................................................................................. 7 1.3. Composition of the Company’s governing bodies as at December 31st 2018 ........................................ 7 1.4. Auditors ....................................................................................................................... 8 1.5. Company’s shareholding structure as at December 31st 2018 ........................................................ 8 1.6. Company shares held by members of its management and supervisory staff ....................................... 9 1.7. Commentary on estimates of financial results ........................................................................ 10 1.8. Headcount .................................................................................................................. 10 1.9. Functional and presentation currency .................................................................................. 10 1.10. Management Board’s statement ......................................................................................... 10 1.11. Representations of the Company’s Supervisory Board ................................................................ 10 2. FINANCIAL STATEMENTS OF 11 BIT STUDIOS S.A.......................................................................................................................................... 12 2.1. Statement of profit or loss and other comprehensive income (PLN) ............................................... 12 2.2. Statement of financial position (PLN) .................................................................................. 13 2.3. Statement of changes in equity (PLN) .................................................................................. 14 2.4. Statement of cash flows (PLN) ........................................................................................... 15 3. NOTES TO THE FINANCIAL STATEMENTS ......................................................................................................................................................... 16 3.1. International Financial Reporting Standards applied by the Company ............................................. 16 3.2. Statement of accounting policies ....................................................................................... 20 3.3. Significant judgements and estimates .................................................................................. 27 3.4. Revenue (PLN) ............................................................................................................. 28 3.5. Other income and expenses (PLN) ...................................................................................... 29 3.6. Depreciation and amortisation .......................................................................................... 30 3.7. Services (PLN) .............................................................................................................. 30 3.8. Salaries, wages and employee benefits (PLN) ......................................................................... 30 3.9. Finance income (PLN) ..................................................................................................... 31 3.10. Finance costs (PLN) ....................................................................................................... 31 3.11. Income tax relating to continuing operations (PLN) .................................................................. 32 3.12. Earnings per share (PLN).................................................................................................. 33 3.13. Property, plant and equipment (PLN) .................................................................................. 34 3.14.