Annual Report (ESEF) • Feb 24, 2021
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Download Source FileASETEK - 2020 213800ATZVDWWKJ8NI472020-01-012020-12-31213800ATZVDWWKJ8NI472019-01-012019-12-31213800ATZVDWWKJ8NI472020-12-31213800ATZVDWWKJ8NI472019-12-31213800ATZVDWWKJ8NI472018-12-31ifrs-full:IssuedCapitalMember213800ATZVDWWKJ8NI472018-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800ATZVDWWKJ8NI472018-12-31ifrs-full:TreasurySharesMember213800ATZVDWWKJ8NI472018-12-31ifrs-full:RetainedEarningsMember213800ATZVDWWKJ8NI472018-12-31213800ATZVDWWKJ8NI472019-01-012019-12-31ifrs-full:RetainedEarningsMember213800ATZVDWWKJ8NI472019-01-012019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800ATZVDWWKJ8NI472019-01-012019-12-31ifrs-full:IssuedCapitalMember213800ATZVDWWKJ8NI472019-12-31ifrs-full:IssuedCapitalMember213800ATZVDWWKJ8NI472019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800ATZVDWWKJ8NI472019-12-31ifrs-full:TreasurySharesMember213800ATZVDWWKJ8NI472019-12-31ifrs-full:RetainedEarningsMember213800ATZVDWWKJ8NI472020-01-012020-12-31ifrs-full:RetainedEarningsMember213800ATZVDWWKJ8NI472020-01-012020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800ATZVDWWKJ8NI472020-01-012020-12-31ifrs-full:IssuedCapitalMember213800ATZVDWWKJ8NI472020-01-012020-12-31ifrs-full:TreasurySharesMember213800ATZVDWWKJ8NI472020-12-31ifrs-full:IssuedCapitalMember213800ATZVDWWKJ8NI472020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800ATZVDWWKJ8NI472020-12-31ifrs-full:TreasurySharesMember213800ATZVDWWKJ8NI472020-12-31ifrs-full:RetainedEarningsMember213800ATZVDWWKJ8NI472020-01-01213800ATZVDWWKJ8NI472019-01-01iso4217:USDiso4217:USDxbrli:shares ANNUAL REPORT 2020 201720182019 2 ASETEK A/S - ANNUAL REPORT 2020 Asetek A/S BOARD OF DIRECTORS Jukka Pertola, Chairman Chris J. Christopher, Vice Chairman Erik Damsgaard COMPENSATION COMMITTEE Jukka Pertola Assensvej 2 DK-9220 Aalborg East Denmark Chris J. Christopher Jørgen Smidt Jørgen Smidt Phone: +45 9645 0047 Maria Hjorth EXECUTIVE MANAGEMENT André Sloth Eriksen, CEO Peter Dam Madsen, CFO Fax: +45 9645 0048 www.asetek.com [email protected] Web: Mail: NOMINATION COMMITTEE Ib Sønderby Claus Berner Møller Jukka Pertola AUDITOR CVR-number: 3488 0522 PwC, State Authorized Public Accountants Nobelparken, Jens Chr. Skous Vej 1 DK-8000 Aarhus C ISIN-number: DK0060477263 LEI: 213800ATZVDWWKJ8NI47 AUDIT COMMITTEE Maria Hjorth Phone: +45 8932 0000 CVR-no 33 77 12 31 Chris J. Christopher Erik Damsgaard EXECUTIVE MANAGEMENT André Sloth Eriksen CEO Peter Dam Madsen CFO LIQUID COOLING DONE RIGHT ASETEK A/S - ANNUAL REPORT 2020 3 MANAGEMENT REPORT FINANCIAL STATEMENTS CONTENTS Message from the CEO.................................................................................... 4 CONSOLIDATED FINANCIAL STATEMENTS................................... 30 PARENT COMPANY FINANCIAL STATEMENTS ............................ 58 OVERVIEW The Year 2020 Outlined................................................................................... 8 Asetek at a glance ............................................................................................... 9 Five-year summary........................................................................................... 10 MANAGEMENT STATEMENT................................................................... 65 INDEPENDENT AUDITOR’S REPORTS ................................................66 OTHER INFORMATION PERFORMANCE AND OUTLOOK Stock exchange releases................................................................................69 Definitions of ratios and metrics.................................................................70 Performance in 2020 .......................................................................................14 Expectations for 2021.......................................................................................15 GOVERNANCE Corporate governance.....................................................................................19 Risk management .............................................................................................22 Corporate social responsibility....................................................................23 Shareholder information................................................................................24 ARTICLES Gaming, Sustainability and Corona Accelerate a Positive Market Trend for Asetek ................................................................12 Corona or Not: 25% Growth in G&E Segment .....................................16 Asetek Liquid Cooling will Make Substantial Contribution to EU’s Green Deal ...............................................................26 Reliability and Quality as Good as in the Space Industry ................39 LIQUID COOLING DONE RIGHT 4 We look back at a year that yielded remarkable results – the best ever. 2020 kept us busy on so many fronts. MESSAGE FROM THE CEO DEAR READER, Despite losing our biggest customer, our sales increased by more than 30% and our profits and cash-flows followed along. The machine is well lubricated and again showed its ability to scale up as needed. the climate thinktank Concito listed our technology as ‘best practice’. Good progress, indeed, and we see good traction now. There is still a strong need for fur- ther political actions in support of our climate agenda to reach the full potential, however. market reminds me of the liquid cooling market 20 years ago. Just about a year ago, as we entered into 2020, we were looking into a year with many challenges and also some well defined opportunities. Little did we know that a co- rona virus would sweep across the globe wreaking havoc in so many ways. Now, as the vaccines are developed and being distributed, we can hopefully see the end of it. Certainly, this has been a nuisance, but I have to say that I am extremely impressed with my team’s ability to adapt and carry on. We have now formed a strong, dedicated team within Asetek with the aim at offering products within a short time frame. We already carried out two M&A deals, as announced. We cannot say much more at this point, but stay tuned. I have also always said, that when I feel our current businesses have “grown up” the timing for an expanded strategic focus is right, and I do feel both businesses are grown up or very close. NEW BUSINESS Let’s look ahead. Upwards and onwards. I have always said that I would like for our business to have a third leg to stand on. I have the desire to have more robustness than two segments, based on one technology, can deliver. And even more importantly, I want to maintain a high growth rate for the next many years to come! Over the last 15 years we have grown more than 15% per year on average. With all the added activity, we need more space. We have acquired a building plot in Aalborg and have started drawing up the plans for our new home for our Denmark-based team. It will be a landmark, and I look forward to showing you around. We have been thinking hard and long about what to add to the mix. At the core, we are good at mechanics, electronics, and software. There is a word for that; Mechatronics. Since our inception, we have utilized the 3 branches of expertise in the liquid cooling products, but we can now venture outside of the that sphere. As a global organization, for many years we have been used to working across time zones etc. and it must have been that practice that kicked in. I don’t think we missed a single beat in Operations. And more importantly, we managed to keep up our development momentum throughout the crisis. We are still debating internally how much impact the corona virus has had on our business. We don’t know, is the truth. In 5 years, we can look back and give you a better answer. Enough about the virus for now! We are working on many other initiatives as you can im- agine. You can read about a few of them in this report, or in our new Sustainability report. And I invite you to sift through our web sites. The consumer electronics Gaming & Enthusiast segment is by nature quite volatile. It depends on the launch of exciting technologies and games and for our enthusiast customer base to continue wanting to tinker with electronics. We certainly believe it will continue. As mentioned above history shows us a solid growth rate. If you know me, you may know that I have a back- ground in racing. From racing moto cross as a kid over go-karts to formula cars – racing is in my DNA. When we were looking at different business opportunities, mixed with input from our e-Sports Academy (where we have six racing simulators) it became clear that the highly fragmented, and extremely rapidly growing sim- ulator racing -market would be a very strong candidate, and after countless evaluations of opportunities, Sim- Sports is where we settled. In many ways, the SimSports 2021 certainly looks interesting for Asetek, and we welcome you to join us on the journey. Thank you for your interest in Asetek, We look back at a year that yielded remarkable results – the best ever. 2020 kept us busy on so many fronts. Our Gaming & Enthusiast group released more new products than ever before, and our Data Center group has been busy servicing both existing and new customers. André S. Eriksen, The Data Center business where we have been in the market for soon to be 10 years. During 2020, the Eu- ropean Commission acknowledged important Asetek viewpoints in their Green Deal climate initiative, and CEO and Founder of Asetek LIQUID COOLING DONE RIGHT 5 Asetek CEO André Sloth Eriksen and CFO Peter Dam Madsen (left) study the architect’s first sketches for Asetek’s new HQ and factory in Aalborg South. The site will be just 200-300 metres from the E45 motorway sliproad. LIQUID COOLING DONE RIGHT 6 LIQUID COOLING DONE RIGHT 7 The Year 2020 Outlined.....................................................................................8 Asetek at a glance .................................................................................................9 Five-year summary.............................................................................................10 Performance in 2020 ........................................................................................ 14 Expectations for 2021........................................................................................ 15 Corporate governance...................................................................................... 19 Risk management .............................................................................................. 22 Corporate social responsibility..................................................................... 23 Shareholder information................................................................................. 24 MANAGEMENT REPORT LIQUID COOLING DONE RIGHT 8 MANAGEMENT REPORT - OVERVIEW // Operational achievements during the year: / The Company announced collaboration with Hewlett Packard Enterprise (HPE) to deliver its premium data center liquid cooling solutions in HPE Apollo Systems targeting high performance computing and artificial intelligence applications. Commercial shipments began in the third quarter of 2020. // Asetek increased investments in Gaming and En- thusiast product development and marketing with several brand-behind-the-brand initiatives to feature the Asetek logo on box packaging, websites, forums, and packaging inserts. Initiatives also include written features about Asetek on partners’ websites, partici- pation in live events and live streams to communicate the commitment to performance, quality and reliability that the “Cooled by Asetek” mark represents. THE YEAR 2020 OUTLINED / Asetek continued its success as the leading supplier of liquid cooling solutions for high-end computing, shipping 1.2 million sealed loop liquid cooling units in 2020, compared with 895 thousand shipped in 2019. // Record revenue of $72.8 million, 34% growth from 2019 // Gross margins grew to 47% from 42% in 2019 // Adjusted EBITDA grew to $15.6 million from / The Company acquired JMH Gallows Pound Tech- nologies Ltd., a UK-based developer of hardware and software technology and owners of the Ultimate- GameTech brand, for a sum of GBP 1 million (approximately $1.4 million). As a result of this acquisi- tion, the Company is expecting to strengthen its intellectual property and product offerings in the Gaming and Enthusiast market. / Asetek’s Direct-to-Chip (D2C) liquid cooling is being utilized by Supermicro in a new high-performance com- puting cluster at the U.S. Lawrence Livermore National Labs. Asetek liquid cooling enables the deployment of high wattage processors in high density configurations to support compute-intensive workloads critical for science and technology research. $6.2 million in 2019 // Revenue in 2020 totaled $72.8 million, an increase of 34% from 2019 ($54.3 million), mainly reflecting in- creased shipments of Gaming and Enthusiast products. // In efforts to establish EU standards that will reduce permitted energy consumption used for data center cooling, Asetek executives continue to work with political leaders to create a wider understanding of the significant environmental benefits enabled by liquid cooling. // Gross margin expanded to 47% in 2020 from 42.3% in 2019. The growth primarily reflects a richer product mix, higher sales prices for Data center products and Asetek’s business model transition for Gaming and Enthusiast OEMs that customize their liquid coolers. / Asetek began delivering waste heat from its in-house data center to Aalborg Forsyning, the city’s municipal district heating network. Asetek’s RackCDU™ liquid cooling systems capture and deliver heat to the network to help warm homes and businesses in the city of Aalborg. This connection demonstrates the viability of Asetek’s technology in enabling power savings and reducing CO2 emissions. / The Company announced new products in the Gaming and Enthusiast market: NZXT’s Kraken Z-3 and X-3 series, powered by Asetek, include a new performance-engineered pump and cold plate, advanced temperature sensing and quieter operation. // During the year, Asetek earned operating income of $10.9 million ($1.0 million) and Adjusted EBITDA of $15.6 million ($6.2 million). // Asetek repurchased 844 thousand common shares The new Rad Card™ GPU Cooler, the industry’s first slot-in PCIe radiator card to provide liquid cooling for GPU’s in space constrained PC cases. during 2020 for a total cost of $6.4 million. Fractal Design’s Celsius+ CPU coolers, powered by Asetek, provide enthusiasts enhanced performance, virtually silent operation and elegant design. LIQUID COOLING DONE RIGHT MANAGEMENT REPORT - OVERVIEW 9 The sales and marketing team, based principally in USA, oversees the customer relationships to facilitate communi- cation and development, ensuring the developed product meets or exceeds customer demands. ASETEK AT A GLANCE Asetek is a global leader in liquid cooling solutions for computer hardware enthusiasts, gamers, servers and data centers. Asetek’s products enable increased performance and provide lower acoustic noise, power savings and im- proved efficiency when compared with air cooling. Sales and marketing teams based in Europe and Asia lead or assist efforts with the customers based outside of USA. The Company’s server products offer direct-to-chip liquid cooling solutions to OEM providers for delivery of cost effective, high performance data center solutions. Asetek’s Gaming and Enthusiast products are all-in-one coolers that provide reliable, maintenance-free liquid cooling to gaming and high-performance PC customers. The flow of physical product generally commences in Asia. Asetek’s manufacturing and logistics team in Xiamen, China select components and suppliers for the finished product to be assembled by the Company’s principal con- tract manufacturer based in Xiamen. Finished products are delivered directly to customer hubs in China, with smaller quantities shipped to Europe and USA. Lower volume, highly complex products and components are manufac- tured in Asetek facilities in Aalborg. With over eight million liquid cooling units deployed, Asetek’s patented technology is being adopted by a growing portfolio of OEMs and channel partners. Founded in 2000, Asetek is headquartered in Demark and has oper- ations in California, Texas, China and Taiwan. Asetek’s business model begins with its research and development team based in Aalborg, Denmark, which manages collaboration with the Company’s global custom- er base to define requirements and develop cutting edge technology. The Aalborg team works with the R&D team in Xiamen, China to identify the optimal sources for the necessary components to fulfill customer requirements. LIQUID COOLING DONE RIGHT 10 MANAGEMENT REPORT - OVERVIEW FIVE-YEAR SUMMARY FINANCIALS RATIOS & METRICS FISCAL YEAR 2020 2019 2018 2017 2016 FISCAL YEAR 2020 2019 2018 2017 2016 COMPREHENSIVE INCOME ($000'S) Revenue PROFIT & LOSS 72,750 34,194 10,928 54,334 23,005 1,048 67,314 26,172 4,419 58,194 20,969 2,757 50,921 19,750 4,669 Gross margin 47.0% 15.0% 11.2% 42.3% 1.9% 38.9% 6.6% 4.6% 15.7% 36.0% 4.7% 38.8% 9.2% Gross profit Operating margin Operating income (loss) Operating income before amortization, depreciation and financial items (EBITDA), unaudited Adjusted EBITDA, unaudited Financial items, net Return on invested capital (ROIC) Organic growth -0.8% -19.3% 5.6% 14.3% 12.3% 41.5% 33.9% 14,681 15,600 (1,502) 9,426 5,105 6,161 8,109 9,385 451 5,187 6,784 (1,258) 1,499 7,119 7,447 322 BALANCE SHEET Quick ratio 2.4 2.5 3.1 3.3 2.9 3.1 2.1 2.3 2.5 2.5 406 Current ratio Income before tax 1,454 (628) (1,072) 4,870 3,672 3,503 4,991 9,637 9,182 Days sales outstanding Inventory turns per year Days payable outstanding Debt to equity 116.1 18.4 88.6 13.9 79.0 15.9 63.2 4.2% 79.7 21.4 99.5 5.6% 92.8 21.2 Income for the year 9,195 4,475 5,728 Comprehensive income BALANCE SHEET ($000'S) Total assets 11,587 133.6 8.7% 96.2 11.0% 109.7 2.8% 71,393 47,525 4,129 54,105 39,008 4,292 51,398 38,958 1,621 49,176 33,394 1,867 41,164 28,290 788 STOCK MARKET Total equity Earnings per share, basic (USD) Earnings per share, diluted (USD) Shares issued (000's) Treasury shares (000's) Share price (NOK) 0.36 0.35 (0.02) (0.02) 25,789 185 0.14 0.14 0.18 0.17 0.39 0.38 Interest-bearing debt Working capital 32,837 81,786 7,049 3,217 27,919 81,949 6,115 25,315 79,278 4,103 19,028 79,524 3,856 2,754 19,483 78,445 1,684 26,433 931 25,785 245 25,568 331 25,421 502 Invested capital Investment in property, plant and equipment, net Investment in intangible assets, net CASH FLOW ($000'S) Operating activities 108.80 35.98 31.00 - 40.60 33.30 119,083 105.00 75.28 53.50 16.33 1,920 2,414 1,871 Share price to earnings Market capitalization ($000's) BUSINESS DRIVERS Sealed loop units shipped (000's) Average selling price per unit, Gaming and Enthusiast (USD) 323,054 90,205 322,972 154,661 11,430 (4,816) (5,088) 2,594 8,870 (2,154) (648) 3,843 (3,659) 455 6,088 (4,298) (2,091) 788 7,806 (2,912) 175 Investing activities 1.201 895 1.119 1.020 949 Financing activities Total cash flow 5,878 229 4,550 53.9 661 110 57.9 560 97 56.3 709 95 52.2 626 93 48.2 645 79 Revenue per employee ($000's) Number of employees Please refer to the Definitions of Ratios and Metrics on page 70 of this Report LIQUID COOLING DONE RIGHT 11 LIQUID COOLING DONE RIGHT 12 Gaming and eSports used to be something for young enthusiasts, involving snacks and cola GAMING, SUSTAINABILITY AND CORONA ACCELERATE A POSITIVE MARKET TREND FOR ASETEK We meet up with Jimmy Fussing by Zoom from his home office that – like so many others – he has had to set up this winter as the world waits for the Corona vaccination programme to be completed and take effect. more strongly in that short period than in the whole of the preceding 7 years. A much bigger e-commerce sector requires more and more cloud solutions. today, and there’s no reason to think the trend won’t continue. “A few years ago, we saw the company’s share price rising steeply, but at that time it was perhaps mainly due to a fever of expectation. Today, we can sense – in the latest accounts, for example – that Asetek is meeting those expectations. Both of Asetek’s existing business areas – gaming and solutions for data centers – are moving in the right direction,” adds Jimmy Fussing. “At the same time, these are truly sustainable products that can make a significant difference to society.” “When we also consider another general social trend toward sustainability and energy saving, Asetek has just the right technology and product platform,” says Jimmy Fussing. He is also convinced that, for the first time in many years, we are going to see a period of real growth in demand for electricity, something he believes is highly favourable for Asetek’s other line of business, on-proces- sor liquid cooling for data centers, which – among other things – makes it possible to reuse up to 80% of inbound power. Vækstfonden invested in Asetek all the way back in 2004, when it was a talented little start-up, and has since sold half of its shares, doing so immediately after the company went public in 2013. But they are still involved, with a stake of around 6% of Asetek at the time of print. Jimmy Fussing is Managing Partner of the venture fund Heartcore Capital, formerly Sunstone Technology Ventures, which administers Vækstfonden’s investment in Asetek A/S. The Danish government investment fund is one of Asetek’s major institutional investors. Heartcore Capital also puts capital from institutional investors such as pension funds into start-ups. Today, Heartcore Capital is involved in 55 tech start-ups across Europe, and is the country’s biggest venture fund. MATURE COMPANY WITH GREAT POTENTIAL “Gaming and eSports used to be something for young enthusiasts, involving snacks and cola. Now, anyone can see that many, many more people – including those from the parents’ generation – are getting into it. They follow their favourite team, they play along and start to worship the best players on a par with famous sporting idols in the physical world. The new heroes are eSport stars, and a whole generation of young people looks up to them. They are role models, and becoming like them requires investment in more powerful computers. It demands just the right technical equipment, and that’s where Asetek comes into the picture,” explains Jimmy Fussing. He points out that about 2 billion people follow eSport “In our view, André Eriksen, the founder and CEO of Asetek, is a gifted, determined and visionary entrepreneur who, together with the rest of the team, has succeeded in growing and maturing Asetek into a major, established, internationally-focused company,” says Jimmy Fussing. “We believe the company has a potential that is about to be fulfilled in earnest, so that in theory it could evolve into a new Danfoss,” referring to the world-famous Danish energy technology manufacturer, where Asetek’s founder first learned the ropes as a newly trained engineer and toolmaker, before he founded Asetek on the idea that computers and processors should be water-cooled. These times, says Jimmy Fussing, are highly favourable to Asetek, on many significant parameters – even when it comes to Corona. “As unpleasant as the pandemic has been and still is all around in other ways, Corona has also helped to accelerate new consumer patterns that are making Asetek’s market position stronger and stronger – and that is hardly going to roll back when the pandemic is over,” says Jimmy Fussing. As an example, he mentions that the extent of the world’s online retail trade has more than doubled during the pandemic of the last 10-11 months – a trend that has seen the penetration rate grow LIQUID COOLING DONE RIGHT 13 ASETEK A/S - ANNUAL REPORT 2019 13 Jimmy Fussing is Managing Partner of the venture fund Heartcore Capital, formerly Sun- stone Technology Ventures, which administers Vækstfonden’s investment in Asetek A/S. Jimmy Fussing believes the times are highly favourable to Asetek on the great majority of significant parameters - even when it comes to Corona. LIQUID COOLING DONE RIGHT 14 MANAGEMENT REPORT - PERFORMANCE AND OUTLOOK The average exchange rate of USD to DKK during 2020 BALANCE SHEET STATEMENT OF CASH FLOWS PERFORMANCE IN 2020 was 3% lower than the average rate in 2019. Approxi- mately 77% of the Company’s operating expense in 2020 was denominated in DKK (78% in 2019), resulting in an unfavorable impact to operating expense in 2020 when compared with 2019. Asetek’s total assets at December 31, 2020 were $71.4 million, compared with $54.1 million at the end of 2019. The principal components of this change include: trade receivables increased by $10.0 million as a result of a 78% increase in fourth quarter 2020 revenue compared with the same period of prior year; cash and cash equivalents increased by $2.6 million due to net income growth partly offset by share repurchases; intangibles increased by $1.3 million from a business acquisition during the year. In November 2020, the Company acquired JMH Gallows Pound Technologies Ltd., a UK-based developer of hardware and software technology and owners of the UltimateGameTech brand, for a sum of GBP 1 million (approximately $1.4 million). Net cash provided by operating activities was $11.4 million in 2020 ($8.9 million provided in 2019). The increase from 2019 was principally due to increased net income in 2020, partly offset by growth in receivables and inventory associated with higher operating volumes. PROFIT AND LOSS Total revenue for 2020 was $72.8 million, representing growth of 34% from 2019 ($54.3 million). Sealed loop cooling unit shipments for 2020 totalled 1.2 million, a 34% increase over 2019 (895 thousand). Average Selling Prices (ASP) for the year 2020 decreased to $53.91 from $57.88 in 2019. Gross margin increased to 47.0% in 2020 from 42.3% in 2019. The above fluctuations reflect increased demand in the Gaming and Enthusiast market and Asetek’s business model transition. Shipments under the new model have lower ASPs as Asetek moves to de- livering only the principal core technology with improved margins, while the customer adds their unique features with ancillary components. Adjusted EBITDA was $15.6 million in 2020, compared with $6.2 million in 2019. Adjusted EBITDA in 2020 repre- sents operating income of $10.9 million, plus depreciation of $3.8 million, plus share-based compensation of $0.9 million. Cash used by investing activities was $4.8 million, related to additions to intangible assets and purchase of property and equipment. The increase from prior year is principally due to the previously mentioned $1.4 million business acquisition and purchase of equipment for data center manufacturing ($1.8 million used in 2019). Foreign currency transactions in 2020 resulted in a $1.4 million loss ($0.2 million gain in 2019). Cash used by financing activities was $5.1 million in 2020, including $6.4 million for the repurchase of Asetek’s com- mon shares and $0.8 million for payments on capitalized leases. The Company also paid down its line of credit by $0.3 million. These effects were partly offset by $2.4 million received for shares issued on options exercised by employees ($0.6 million used in 2019). Income tax expense of $0.2 million in 2020 decreased from 2019 ($2.1 million) due to increased utilization of deferred tax assets during the year. Total liabilities increased by $8.8 million in 2020, resulting principally from growth in operating volumes and related incentive compensation for employees. Trade payables, accrued compensation and employee benefits, and ac- crued liabilities increased by $5.9 million and $1.7 million, and $1.4 million respectively. In 2020, total operating expense was $23.3 million, a 6.0% increase from 2019 ($22.0 million), reflecting investment in the Company’s infrastructure. During 2020, Asetek increased staffing by 35% to support revenue growth. Asetek's total comprehensive income was $11.6 million for 2020, compared with total comprehensive loss of $1.1 mil- lion in 2019. Comprehensive income included a positive $2.4 million translation adjustment in 2020 (negative $0.4 million in 2019). Net increase in cash and cash equivalents was $2.6 million in 2020, compared with increase of $5.9 million in 2019. Legal cost incurred associated with defense of existing IP and securing new IP was $2.4 million in 2020 ($2.7 million). Fiscal year 2019 operating expense included an offset of $0.8 million for settlements awarded to Asetek in patent infringement lawsuits. The increase in trade payables is also partly the result of the Company's proactive management of suppliers and timing of payments. Share-based compensation cost associated with warrants and options issued to employees was $0.9 million in 2020 ($1.1 million). LIQUID COOLING DONE RIGHT MANAGEMENT REPORT - PERFORMANCE AND OUTLOOK 15 LIQUIDITY AND FINANCING DATA CENTER: CONSOLIDATED RESULTS: EXPECTATIONS FOR 2021 As of December 31, 2020, the Company has working capital of $32.8 million and non-current liabilities of $2.6 million. Since 2016, the Company has generated positive cash flows and operating income. From 2013 to 2016, Asetek financed operations principally through offerings of common shares on the Oslo Stock Exchange. During 2020 the Company expanded its OEM partners with the additions of HPE and Supermicro, which resulted in the addition of nearly 20 new liquid cooled offerings to its data center line of products. Including Fujitsu, Asetek’s long-standing OEM, the Company anticipates growth in shipments of RackCDU™ liquid cooling in 2021. The Company's consolidated results for 2020 exceeded Management's expectations communicated in the prior year report due to favorable effects of COVID-19 shelter- in-place restrictions, which resulted in strong demand for the Company's Gaming and Enthusiast products. For 2021, the Company expects revenue to increase by 10% to 20% from 2020, with gross margins lower than 2020. As such, management expects the Company to report operating income of between $9 and $15 million in 2021. However, Management notes significant challenges in predicting future earnings due to variations in import tariffs and foreign exchange rates. The Company recognizes continued uncertainty related to potential impact from COVID-19 over time. These uncertainties can impact actual performance and expectations. GAMING AND ENTHUSIAST: In 2020, favorable effects of COVID-19 shelter-in-place restrictions which resulted in strong demand in PC gam- ing and eSports drove Asetek’s Gaming and Enthusiast revenue to record levels. In 2021, Asetek expects to continue to invest in and launch innovative new high-per- formance products for gamers and enthusiasts. With two recently announced acquisitions – JMH Gallows Pound Technologies Ltd. and Granite Devices Inc., both devel- opers of gaming hardware and software technology – the Company plans to capitalize on opportunities identified within the Asetek eSports Academy. Consistent with prior years, Asetek plans to continue to focus its resources on the Gaming and Enthusiast segment, growing market share through existing and new OEMs, and building the Asetek brand. While there is no assurance that the Company will gen- erate sufficient revenue or operating profits in the future, Asetek’s management estimate that the Company’s capital resources are sufficient to fund operating activities in the foreseeable future, based on financial forecasts. To the extent necessary to fund expansion or other liquidity needs, management will consider offerings of debt, eq- uity, or a combination thereof, depending on the cost of capital and the status of financial markets at that time. Asetek’s Direct-to-chip liquid cooling enables power savings and CO2 emission reductions from the reuse of data center waste heat. Significant long-term revenue growth is expected, though public standards are needed to trigger wider data center adoption of liquid cooling. Asetek continues to participate in targeted campaigns to influence and educate politicians and support wider un- derstanding of the significant environmental and circular economy benefits enabled by liquid cooling. LIQUID COOLING DONE RIGHT 16 We can speculate about the reason for the growth and whether it’s due to Corona alone or whether it’s a natural “comeback” from a relatively weak 2019 CORONA OR NOT: 25% GROWTH IN G&E SEGMENT THE PANDEMIC HAS PROVEN TO BE BOTH A CHAL- LENGE AND A DRIVER FOR ASETEK IN DENMARK, THE USA, CHINA AND OTHER COUNTRIES “Fortunately, as an international player in a fast-paced and quickly-evolving sector, we were well trained in working from home and at varying times of day. We therefore haven’t seen our development momentum slow down. We implemented the necessary measures around physical distancing and infection containment and were therefore able to maintain our manufacturing in Denmark, for example.” As soon as you enter the headquarters in Aalborg you are met with bottle of hand sanitizer and a temperature scanner that can show if you have a fever. At Asetek, the challenge of Corona and the risk of spreading infection have of course been taken very seriously over the last many months. Besides a personal encouragement to get tested regularly, the dedicated staff have also been offered antibody tests at the company. And a few who became infected were immediately sent home to isolate and get treatment. As for sales, Asetek has seen its G&E (Gaming & PC Enthusi- ast) segment grow by 25% from 2019 to 2020. “We can’t help but be very satisfied with that, of course. But we were concerned in April 2020 when we watched a world-wide crisis unfold, without being sure of the long-term consequences”, explains Peter Dam Madsen, adding: Asetek CFO Peter Dam Madsen says that the pandemic has had a big impact on the in-house routines: “We can speculate about the reason for the growth and whether it’s due to Corona alone or whether it’s a natural “comeback” from a relatively weak 2019. Our feeling is that it is a combination. We also began selling a relatively large number of exciting new products in 2020, and they have been very well received. Looking at it over a 10-year period, growth has also been a very nice 15% per year on average.” “To begin with, our China department in Xiamen – only 600 miles from Wuhan – was “down” for some weeks. And, before we knew it, the problems had spread to the rest of the world. Fortunately, our supply chain and production systems coped without major problems thanks to a peerless effort from our staff, manufacturing partners and subcontractors.” Peter Dam Madsen recounts how people in both the Danish and US branches have been working from home and showing great pioneering spirit. LIQUID COOLING DONE RIGHT ASETEK A/S - ANNUAL REPORT 2019 17 Corona has been and still is a challenge that Asetek has had to deal with, says CFO Peter Dam Madsen. Here, he makes sure one of Asetek’s employees checks her temperature. LIQUID COOLING DONE RIGHT 18 LIQUID COOLING DONE RIGHT MANAGEMENT REPORT - GOVERNANCE 19 Dialogue between the Company and its shareholders. The communication between Asetek and shareholders primarily takes place at the Company’s Annual General Meeting and via company announcements. Asetek share- holders are encouraged to subscribe to the e-mail service to receive company announcements, interim manage- ment statements, interim reports and annual reports as well as other news via e-mail. the CEO and defining his or her work instructions as well as setting of his or her compensation. The Board period- ically reviews the Company’s policies and procedures to ensure that the Group is managed in accordance with good corporate governance principles, upholding high ethics. The Board members also regularly receive operations re- ports and participate in strategy reviews. The Company's business plan, strategy and risks are regularly reviewed and evaluated by the Board. The Board Members are free to consult the Company's senior executives as needed. Ordinarily, the Chairman of the Board proposes the agenda for each Board meeting. Besides the Board Members, Board meetings are attended by the Executive Board. Other participants are summoned as needed. The Board approves decisions of particular importance to the Compa- ny including the strategies and strategic plans, the approval of significant investments, and the approval of business acquisitions and disposals. CORPORATE GOVERNANCE Asetek’s management model and organization are adapt- ed continuously to ensure the Company is equipped to manage all obligations to shareholders, customers, em- ployees, authorities and other stakeholders to the utmost. In this process, Asetek uses the corporate governance recommendations from NASDAQ Copenhagen as an im- portant source of inspiration. The recommendations can be found at http://www.nasdaqomx.com/listing/europe/ surveillance/copenhagen/corporategovernance Financial reporting. The Board of Directors receives regular financial reports on the Company's business and financial status. The general meeting. The General Meeting has the final authority over the Company. The Board of Directors em- phasize that shareholders are given detailed information and an adequate basis for the decisions to be made by the General Meeting. Notification of meetings and discussion of items. The Board schedules regular meetings each year. Ordinarily, the Board meets eight to ten times a year, of which four are quarterly update teleconferences. The meetings are typically conducted at either the facility in Aalborg, Den- mark or in San Jose, California or via telephone. Additional meetings may be convened on an ad hoc basis. The Board of Directors is fundamentally in full agree- ment with Danish Committee on Corporate Governance recommendations for good company governance. Asetek endeavors to follow the relevant recommendations for the Company, which support the business and ensure val- ue for the Company’s stakeholders. The statutory report on Corporate Governance, cf. section 107b of the Danish Financial Statements Act, is available on the Company’s website: Conflicts of interest. In a situation involving a member of the Board personally, this member will exclude him or herself from the discussions and voting on the issue. The General Meeting elects the Board of Directors, which currently consists of five members. The board members are elected for one year at a time with the option for re-election. Board of Directors meetings: Amendment of Articles of Association. Unless other- wise required by the Danish Companies Act, resolutions to amend the Articles of Association must be approved by at least 2/3 of the votes cast as well as at least 2/3 of the voting share capital represented at the General Meeting. Meetings held during the year 8 http://www.asetek.com/media/2681/scgs2020.pdf Participation: Jukka Pertola (chair) Chris Christopher Jørgen Smidt 100% 100% 100% 88% Danish Recommendation for Corporate Governance 2020 2019 Board responsibilities. The Board of Directors’ 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 exec- utive management. The Board reviews and adopts the Company's plans and budgets. Items of major strategic or financial importance for the Company are items pro- cessed by the Board. The Board is responsible for hiring Complies with recommendations 45 1 44 1 Maria Hjorth Partially complies with recommendations Does not comply with recommendations Erik Damsgaard 100% 1 2 All Board members receive regular information about the Company's operational and financial progress in advance of the scheduled Board meetings. LIQUID COOLING DONE RIGHT 20 MANAGEMENT REPORT - GOVERNANCE Use of Committees. Currently, the Company has a Nomi- nation Committee, an Audit Committee and a Compensa- tion Committee. Audit Committee meetings: ed. All of the members elected by the 2020 General Meeting are independent persons, and none of the Board members participates in the day-to- day operation of the Company. Additional information about the Board members, including other management positions held, can be found in Note 25. REMUNERATION OF THE BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT Meetings held during the year 4 Participation: // The Nomination Committee is elected directly by the General Meeting. The Committee consists of three members and must be independent from the Board of Directors and the management, however, it is recom- mended that the chairman of the Board of Directors is a member. The tasks include proposing candidates for the Board of Directors, propose remuneration for theBoard of Directors as well as perform the annual assess- ment of the Board of Directors. Members: Ib Sønderby (chair- man), Claus Berner Møller and Jukka Pertola. For 2020, the Company will publish its executive remuner- ation principles and practices in a separate report issued in compliance with the Danish Companies Act, section 139b. The report will be issued together with the notice of the annual general meeting. Maria Hjorth (chair) Chris Christopher Erik Damsgaard 100% 100% 100% Risk management. Refer to the Risk Management section of the Management Report as well as Note 3 of the consoli- dated financial statements. // The Compensation Committee has responsibilities related to developing proposals for the applicable remuneration policy and remuneration of the Manage- ment Board. Members: Jukka Pertola (chairman), Chris Christopher and Jørgen Smidt. The 2020 Remuneration Report will be available on the Company's website: https://ir.asetek.com/share-information/ general-meetings Compensation Committee meetings: Nomination Committee meetings: Meetings held during the year 4 Meetings held during the year 3 Participation: Jukka Pertola (chair) Chris Christopher Jørgen Smidt 100% 100% 100% Participation: Ib Sønderby (chair) Claus Berner Møller Jukka Pertola 100% 100% 100% The Board’s self-evaluation. The Board's composition, competencies, working methods and interaction are dis- cussed on an ongoing basis and evaluated formally on an annual basis. In this connection, the Board also evaluates its efforts in terms of corporate governance. // The Audit Committee is elected among the members of the Board of Directors and has responsibilities relat- ed to financial reporting, the independent auditor, in- ternal reporting and risk management, including cyber- security risks. The Committee consists of at least two shareholder elected Board members. Members: Maria Hjorth (chairman), Chris Christopher, Erik Damsgaard. The composition of the Board is considered appropriate in terms of professional experience and relevant special competences to perform the tasks of the Board of Directors. The Board of Directors continuously assesses whether the competencies and expertise of members need to be updat- LIQUID COOLING DONE RIGHT MANAGEMENT REPORT - GOVERNANCE 21 BOARD OF DIRECTORS SHARE AUTHORIZATION Meeting Date April 23, 2014 August 12, 2014 August 11, 2015 April 29, 2016 April 25, 2017 July 7, 2017 Meeting Type Action Shares 118.210 32.970 700.000 600.000 509.687 106.999 - Nominal Value DKK 0.10/share DKK 0.10/share DKK 0.10/share DKK 0.10/share DKK 0.10/share DKK 0.10/share - Price Board Board Board Board Board Board General Board Board issues warrants to employees and Board members NOK 40.10 NOK 33.90 NOK 10.50 NOK 19.50 NOK 76.25 NOK 113.00 - Board issues warrants to employees and Board members Board issues warrants to employees and Board members Board issues warrants to employees and Board members Board issues warrants to employees and Board members Board issues warrants to employees April 25, 2018 October 31, 2018 Board authorized to acquire the Company's own shares Board introduces employee stock option program to replace warrant program and issues options to employees 378.500 - DKK 0.10/share - NOK 46.30 - April 10, 2019 General Board Board authorized to acquire the Company's own shares Board issues options to employees September 8, 2019 494.900 DKK 0.10/share NOK 24.70 April 23, 2020 April 22, 2020 Board Board issues options to employees 320.300 - DKK 0.10/share - NOK 38.33 - General Board authorized to acquire the Company's own shares LIQUID COOLING DONE RIGHT 22 MANAGEMENT REPORT - GOVERNANCE COVID-19 pandemic.In December 2019, a novel strain of coronavirus (SARS-CoV-2) causing the COVID-19 disease surfaced in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic. The U.S., Denmark and other countries have enacted temporary closures of businesses, issued quarantine orders and taken other restrictive measures. The Company’s operating sites are complying with regulations and recommendations imposed by local governments for minimizing the virus’ spread. If production must be stopped or a critical number of employees become too ill to work, business operations could be adversely affected. If suppliers experience closures or reductions in capacity utilization, Asetek may have difficulty sourcing materials needed to fulfill production requirements. If customers experience adverse business consequences, demand for Asetek’s products could decline. The impact of the COVID-19 pandemic is fluid; after appearing to ease in the middle of 2020, its spread worsened in the fourth quarter. As a result, management cannot predict the extent to which Asetek’s future results of operations or financial condition will ultimately be impacted. Company. The newly acquired assets may be challenging to develop into successful products and integrate into the Company’s core lines of business. initiated. Such cases may proceed for an extended period and could potentially lead to an unfavorable outcome to Asetek. Asetek has historically incurred significant legal costs associated with litigation and may continue to do so in the future to the extent management believes it is necessary to protect intellectual property. RISK MANAGEMENT Asetek’s potential to realize the Company’s strategic and operational objectives are subject to a number of commer- cial and financial risks. Asetek is continuously working on identifying risks that can negatively impactthe Company’s future growth, activities, financial position and results as well as CSR-related risks. Asetek conducts its business with significant focus on continuous risk monitoring and manage- ment. The overall goal of risk management is to ensure that the Company is run with a level of risk, which is in a sensible ratio to the activity level, the nature of the business, and the Company's expected earnings and equity. To the largest extent possible, Asetek tries to accommodate and limit the risks which the Company can affect through its own actions. Customer concentration. In 2020, two customers ac- counted for 41% and 14% of total revenue. In the event of a decline or loss of either of these customers, replacement of the revenue stream would be difficult for Asetek to achieve in the short term. The Company is actively working with its other Enthusiast/DIY customers to grow their respective market shares and order volumes. Manufacturing supply. Asetek relies upon suppliers and partners to supply products and services at competitive prices. Asetek’s Gaming and Enthusiast products have been historically assembled in Xiamen, China by a single contract manufacturer which may be difficult to substi- tute in the short term if the need should arise. Suppliers are proactively managed by the Company's operations teams based in Xiamen and Aalborg. Competition. The markets in which the Company operates are competitive, the technological development is rapid, and the Company may in the future also be exposed to increased competition from current market players or new entrants. U.S. import tariffs. The U.S. has imposed a 25% tariff on imports of goods manufactured in China, which include Asetek products. The existence of the tariff has contrib- uted to the uncertainties in the Gaming & Enthusiast market. The Company continues to work to minimize the impact of the tariff on Asetek and its customers. Insurance. It is the Company’s policy to mitigate significant risk areas with commercially available insurance products. This currently includes insurance for product liability, oper- ating material and inventory as well as compulsory coverage, which varies from country to country. Management assess- ments indicate that the necessary and relevant precautions have been taken to thoroughly cover insurance issues. Asetek’s insurance policies and overall coverage approach are reviewed at least annually. Credit risk. Credit risk is the risk of a counterpart neglecting to fulfill its contractual obligations and in so doing imposing a loss on Asetek. The Group’s credit risk originates mainly from receivables from the sale of products as well as deposits in financial institutions. Receivables from the sale of products are split between many customers and geographic areas. Two customers represented 47% and 17% of trade receiva- bles at December 31, 2020. A systematic credit evaluation of all customers is conducted, and the rating forms the basis for the payment terms offered to the individual customer. Credit risk is monitored centrally. Foreign exchange rates. Substantially all of Asetek’s revenue is billed in USD. However, many customers resell Asetek products to end users in countries where USD is not the transactional currency. As a result, there is a risk that fluctuations in currency will affect the cost of product to the end user and negatively impact market demand for Asetek products. Asetek estimates that about one third of its sold products ultimately are delivered in Europe or Japan, which are the two geographical areas which could have the largest potential impact due to USD fluctua- Business combinations. In November 2020, The Company acquired JMH Gallows Pound Technologies Ltd., a UK- based developer of hardware and software technology and owners of the UltimateGameTech brand. In January 2021, Asetek announced the acquisition of intellectual property from Granite Devices Inc. These acquisitions are expected to support the continuing development of the Company’s Gaming and Enthusiast product offerings. To date, Asetek has principally developed its products internally. Acquiring technology externally represents a new avenue for the Below, some of the risk factors management considers as being of special importance to the Group are described in no specific order. Intellectual property defense. Asetek has filed and defended lawsuits against competitors for patent infringement. While some of the cases have been settled or dismissed, some may continue, and new cases may be CSR-related risks. Please see the separate Asetek Sus- tainability Report 2020 for identified risks and remedies. LIQUID COOLING DONE RIGHT MANAGEMENT REPORT - GOVERNANCE 23 improved efficiency and noise-reduction. Providing new and innovative applications for Asetek’s cooling technol- ogy is also a focus, as evidenced by the cooling products released during 2020. has entered into an information security risk insurance policy. This area is actively monitored by the Board of Directors' Audit Committee. however, such reform is not certain. The Company con- tinues to work with its tax advisors to clarify and address these matters. tion. Asetek believes that other factors in the end users’ buying decision play a larger role than price fluctuation on the liquid cooling component. During 2020, the USD weakened against both the DKK and EUR by 9%, and weakened 5% against the Japanese yen. Taxation. The tax situation of the Company is complex. In connection with its initial public offering in 2013, Asetek moved its Parent company from the U.S. to Denmark. However, USA – in a unilateral tax treaty override – still considers Asetek A/S a U.S. tax subject, effectively cre- ating a double taxation situation. Asetek has approached both countries’ tax authorities with the aim of resolving the double tax situation as per the double taxation treaty. However, a determination may take several years, and the authorities are not obligated to resolve the problem. The Company has made progress in 2020 in working with the tax authorities of Denmark and U.S. to possibly resolve this issue. Employee relations. Asetek is a knowledge-intensive Projects and contracts. It is important to Asetek’s overall success that development projects are executed at high quality and at predetermined timeframes and cost prices. Risks are attached to the sale, analysis and design, develop- ment and initial manufacturing phases. Asetek has carefully defined the individual phases and the activities contained therein, with a view to active risk management and efficient implementation. Through project reviews and ongoing analyses before, during, and after initiation, Asetek works to ensure that agreements are adhered to and that revenue and margins are as planned. Company and in order to continuously offer optimal solutions, develop innovative products, and ensure satis- factory financial results, it is necessary to attract, develop and retain the right employees. Asetek has the goal of being an attractive workplace and achieves this through various programs including an option incentive program, attractive working conditions, and corporate social re- sponsibility (CSR) policies described in the Asetek Sus- tainability Report 2020. The Company seeks to support a Company culture founded on individual responsibility and performance as well as team accomplishment. Asetek’s raw materials are predominantly purchased with USD, from vendors whose underlying currency is CNY. The USD value versus the CNY fluctuated during 2020, appreciating mid-year, while ending the year down by ap- proximately 6%. Asetek recognizes that USD appreciation can result in sales price pressure for its suppliers. Histori- cally, the Company has not seen significant reaction from its markets. In addition, Asetek believes that competing products are prone to the same exchange rate scenarios as Asetek. A significant portion of Asetek's overhead costs are incurred in DKK. As a result, fluctuations in USD vs. DKK will continue to have an influence on results of operations and financial position. The Group has not entered into any forward exchange instruments. IT security. Asetek continuously implements measures to monitor and respond to data breaches and cyberat- tacks. Management ensures that security assessments, including vulnerability assessments and assumed breach tests are performed on a regular basis. Additional security measures to mitigate phishing and spam mails are deliv- ered to employees and password policies are maintained to mitigate the risk of password dictionary attacks or other forms of brute force hacking of individuals. The Company maintains ongoing efforts to continuously improve and strengthen the IT Infrastructure security. Mandatory training in cybersecurity is carried out for all employees, and the knowledge level of cybersecurity is thus being changed from awareness-based to training- and com- pliance-based. Asetek has not experienced any security breaches within the most recent 5 years. The Company In June 2019, the U.S. released regulation for its Global Intangible Low-Taxed Income (GILTI) inclusion for U.S. taxation, effective beginning with tax year 2018. The GILTI regulation requires U.S. companies to report foreign corporation intangible income that exceeds 10% return on foreign invested assets. Under prior law, U.S. owners of foreign corporations were able to defer recognizing taxable income until there was a distribution of earnings back to U.S. owners. The impact of the GILTI regulation caused incremental utilization of the Company's available deferred tax assets of approximately $0.4 million in 2020 and $1.1 million in 2019 and 2018 combined. Because of Asetek’s U.S. tax status as described above, management believes that the impact of the GILTI regulation as it applies to the Company could be reformed in the future; CORPORATE SOCIAL RESPONSIBILITY Asetek seeks to be a good corporate citizen in everything that it does, and therefore has combined its operating principles into one framework policy. Please refer to the Asetek Sustainability Report 2020, available here: https://www.asetek.com/media/2755/asetek-sustainabil- ity-report-2020.pdf Research and development, product innovation, market development. The Company’s future success, including the opportunities to ensure growth, depends on the ability to continue developing new solutions and products adapted to the latest technology and the clients’ needs as well as improving existing solutions and market position. As such, the Company develops new releases on a regular basis, with emphasis on higher performance, Pursuant to section 107d of the Danish Financial State- ments Act, the Company must report on its diversity policy. Asetek's diversity policy is available here: https://ir.asetek.com/media/2756/diversity-policy-2021.pdf LIQUID COOLING DONE RIGHT 24 MANAGEMENT REPORT - GOVERNANCE OWNERSHIP INVESTOR RELATIONS This statement of Asetek's diversity policy is a component of the Management's Report in the Annual Report for 2020 and covers the financial period 1 January - 31 December 2020: SHAREHOLDER INFORMATION At the end of 2020, Asetek A/S had 871 shareholders, some of whom are nominee accounts covering several individual investors. Members of Asetek A/S’s Board of Directors and Executive Board owned or represented a total of 8.2% of the share capital at the end of 2020. Asetek aims to provide a consistent, high level of information to its shareholders and other interested parties. Asetek’s shares are listed on Oslo Børs. As of December 31, 2020, a total of 26,432,957 shares are issued, each with a nominal value of DKK 0.1. Asetek believes that diversity among employees and man- agement, including an even distribution of age, nationality and educational background, contributes positively to the work environment and strengthens the company's competitiveness and performance. It is Asetek’s intention to conduct an active dialogue with shareholders, analysts, the press and the public as a whole. Communication with interested parties takes place via the ongoing publication of notifications, investor presentations and individual meetings. The share is classified in the “Information Technology” sector by the stock exchange, and the ticker mark is ASTK (the previous ticker mark was ‘ASETEK’ until December 2020). 1 JANUARY 2020 Historically, Asetek has been a diverse workplace, where employees have very different backgrounds, competencies and living conditions. Not only in relation to gender, age and origin, but equally in relation to education, experi- ence and personality. It is therefore Asetek's goal that the management should equally reflect the diversity among our employees. In order to promote diversity among the company's management and board of directors, there is a focus on this in recruiting new managers. In 2020, Asetek has therefore sought to ensure broad diversity among applicants when recruiting and promoting. Asetek shares opened the year 2020 at NOK 30.40. The website www.asetek.com is the primary source of information for interested parties. It is updated regularly with information about Asetek’s activities and strategy. Sharehold- ers, analysts, investors, stockbrokers as well as other interested parties who have questions regarding Asetek are requested to inquire via the email address [email protected], which is monitored by the CFO. The total market capitalization value at the end of 2020 was NOK 2,770 million (approximately USD 322 million) which was an increase of 258% from the market value at the beginning of 2020. Asetek is thus classified as a MidCap company on Oslo Børs. 31 DECEMBER 2020 At the last trading day of the year, Asetek shares closed at NOK 108.80, which was an increase of 258% from the beginning of the year. The Oslo Stock Exchange (OSE) Benchmark Index increased 3% in 2020. The OSE Infor- mation Technology Index increased by approximately 60% in 2020. 931,281 shares were held by the Company on December 31, 2020 as treasury shares, primarily to support an em- ployee stock option program. Dividends. Asetek continues to invest its capital in the devel- opment and marketing of its cooling products. Asetek’s policy allows for distribution of a dividend to its shareholders of up to 50% of the previous year’s net income (after tax profits), after taking into consideration the Company’s growth plans, liquidity requirements and necessary financial flexibility. Each share provides one vote. The shares are marketable securities and no restrictions have been set for the shares’ negotiability. The share register is maintained by DNB Bank ASA - Verdipapirservice, Postboks 1600 Sentrum, 0021 Oslo, Norway. According to Asetek’s registrations, the following share- holders possessed 5% or above of the share capital as per December 31, 2020: The board members of Asetek cover a wide range of experiences from both the Danish and international business community and the high-tech industry. This composition is considered appropriate, as it ensures a breadth in the members' approach to the tasks, and thus helps to ensure qualified considerations and decisions. At the end of the financial year, 30% of the Executive Board and Board of Directors are of a nationality other than Danish. In terms of age composition, 0% of management is under 40 years old, 57% are between 40 and 60 years old, and 43% of management is over 60. Shareholder Number of Shares % REPORTING CALENDAR FOR 2021: Skandinaviska Enskilda Banken AB Annual General Meeting: Q1 2021 Report: April 22, 2021 2,880,905 2,722,415 10.9% 10.3% April 22, 2021 The ATP Group HSBC Trinkaus & Burkhardt AG Q2 2021 Report: August 12, 2021 October 28, 2021 March 4, 2022 2,444,560 1,586,341 9.3% 6.0% Q3 2021 Report: Sunstone Technology Ventures Fund 2021 Annual Report: LIQUID COOLING DONE RIGHT 25 LIQUID COOLING DONE RIGHT 26 In 2020, a number of important milestones were achieved on the way toward EU regulations matching Asetek’s potential ASETEK LIQUID COOLING WILL MAKE SUBSTANTIAL CONTRIBUTION TO EU’S GREEN DEAL 2020 WAS A YEAR WHEN ASETEK’S GOAL OF MEANINGFUL CLIMATE REGULATION FOR EUROPE MOVED CLOSER, SAYS ASETEK’S EU PUBLIC AFFAIRS ADVISOR. FOR EXAMPLE, ASETEK CON- TRIBUTED TO A HOLISTIC DATA CENTER EFFICIENCY ANALYSIS CARRIED OUT BY THE INFLUENTIAL GERMAN ENVIRONMENT AGENCY BY DELIVERING REAL-WORLD DATA FROM OUR TEST INSTALLA- TION THROUGHOUT THE YEAR. “Although, as a company, Asetek is dwarfed in comparison with other stakeholders, we actually garner lot of interest and understanding that results in positive reports. In 2020, the Green Deal really made the reuse of waste heat in data centers a focus of the EU’s circular economy strat- egy toward carbon neutrality,” says Jan Gütter, Asetek’s Public Affairs advisor, referring to both the EU and key member state stakeholders like the German Environment Agency, the UBA (Umweltbundesamt). supports Asetek’s direct-to-chip Liquid Cooling technol- ogy as “best practice” – a memo that attracted attention in Brussels. for Energy System Integration” and the JRC Report on the “Development of the EU Green Public Procurement (GPP) Criteria for Data Centers, Server Rooms and Cloud Services.” IMPORTANT MILESTONES ACHIEVED “These publications”, he underlines, “call specifically for action to implement measures on the reuse of residual heat from data centers. Similarly, the EU commission has also initiated a hearing and subsequent review of the Energy Efficiency Directive (EED), which is expected to be adopted in 2021”. As Asetek has stated before, the potential is huge. If “dirty” power is used, the carbon footprint of the World’s data centers is bigger than that of worldwide road traffic, and on par with that of worldwide air traffic. Though the goal is to produce the power needed for all data centers by green methods, even efficient use of only the EU data centers’ residual heat as offered by Asetek would add enough district heating for 11 European capitals, with London, Paris and Berlin top of the list, to be heated carbon-neutrally. This could save significant capital investment, scarce resources, plus the energy required to build an army of wind turbines, solar heating systems etc. that would otherwise have to meet this need. DAs the world’s leading manufacturer of on-processor liq- uid cooling for data centers and other purposes, in recent years Asetek has also – in a move unusual for the company – been taking political action to draw attention to the huge climate policy gains the world can make if hyperscale data centers, for example, use its technology in the future. In this respect, he describes 2020 as a year when Asetek’s viewpoint made significant advances in Europe. In a nut- shell, the idea is that the EU will make it a requirement for data center operators to design their facilities and choose their technology so that optimum use is made of the surplus heat they generate. Asetek’s technology offers circular reuse of up to 80% of inbound power in the form of 60°C hot water without the need for artificial heating by additional power-hungry and costly heat pumps. A solution that is readily and widely available and has been proven successful by Asetek, which connected its own test data center to the district heating network in its home city of Aalborg in early 2020. Jan Gütter also emphasises that, in the second half of 2020, the German EU presidency delivered a strong foundation for its future adoption, with a digital agenda on the environment containing several of Asetek’s pro- posed measures to improve the efficiency of data centers by utilising waste heat. This political investment that Asetek has chosen to make is primarily focusing on EU regulation and legislation. With its Green Deal, which is about to be fleshed out in the near future, the EU is widely expected to begin setting strict environmental standards for member states that will pave the way to make the European Union climate neutral by 2050. Recently, more and more European politicians and officials have been waking up to the enormous potential of the greening of data centers as shown in the documenta- tion supplied by Asetek. “In 2020, a number of important milestones were achieved on the way toward EU regulations matching Asetek’s potential,” adds Jan Gütter confidently, and he points to the publication of the EU’s Circular Economy Action Plan1, the Commission’s Communication on “Powering a Climate-Neutral Economy: An EU Strategy During the year, internationally recognised climate thinktank Concito, headed by former EU commissioner Connie Hedegaard, also produced a memo that strongly LIQUID COOLING DONE RIGHT 27 ASETEK A/S - ANNUAL REPORT 2019 27 Asetek’s Public Affairs Consultant in Brussels, Jan Gütter, believes the EU Commission is moving in a meaningful direction for Asetek when it comes to future climate re- quirements for data centres. Gütter (right) is pictured here before the Commission with Asetek CEO André Sloth Erik- sen (centre) and Mads Stenstrup, the company’s Project Manager, Public Affairs & Communications in Denmark. LIQUID COOLING DONE RIGHT 28 LIQUID COOLING DONE RIGHT 29 CONSOLIDATED FINANCIAL STATEMENTS Profit & Loss ......................................................................................................... 30 Balance Sheet.......................................................................................................31 Equity.......................................................................................................................32 Cash Flows ............................................................................................................33 Notes........................................................................................................................34 FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS Profit & Loss ......................................................................................................... 58 Balance Sheet......................................................................................................59 Equity...................................................................................................................... 60 Cash Flows .............................................................................................................61 Notes........................................................................................................................62 MANAGEMENT STATEMENT.................................................................... 65 INDEPENDENT AUDITOR’S REPORTS .................................................66 OTHER INFORMATION Stock exchange releases.................................................................................69 Definitions of ratios and metrics..................................................................70 LIQUID COOLING DONE RIGHT 30 FINANCIAL STATEMENT S - PROFIT & LOSS ASETEK A/S CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the years ended December 31, 2020 and 2019 (USD 000’s) Revenue Cost of sales GROSS PROFIT Note 2020 72,750 2019 54,334 (31,329) 23,005 4 8 (38,556) 34,194 Research and development Selling, general and administrative Other income (5,718) (17,548) - (4,889) (17,821) 753 TOTAL OPERATING EXPENSES 8 (23,266) (21,957) OPERATING INCOME Foreign exchange gain (loss) Finance income 10,928 (1,361) 51 1,048 218 9 9 9 359 Finance costs (192) (171) 406 TOTAL FINANCIAL INCOME (1,502) INCOME BEFORE TAX Income tax (expense) benefit INCOME FOR THE YEAR 9,426 (231) 1,454 (2,082) (628) 10, 11 9,195 Other comprehensive income items that may be reclassified to profit or loss in subsequent periods: Foreign currency translation adjustments 2,392 (444) TOTAL COMPREHENSIVE INCOME 11,587 (1,072) INCOME PER SHARE: (IN USD) Basic 12 12 0.36 0.35 (0.02) (0.02) Diluted All operations are continuing. The Notes on the following pages are an integral part of these consolidated financial statements. LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - BALANCE SHEET 31 ASETEK A/S CONSOLIDATED BALANCE SHEET As of December 31, 2020 and 2019 (USD 000’s) Note 2020 2019 ASSETS NON-CURRENT ASSETS Intangible assets 15 16 11 3,217 7,049 6,421 605 1,920 6,115 Property and equipment Deferred income tax assets Other assets 5,521 307 TOTAL NON-CURRENT ASSETS 17,292 13,863 CURRENT ASSETS Inventory 18 17 2,531 24,471 27,099 54,101 1,657 14,080 24,505 40,242 Trade receivables and other Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS 71,393 54,105 EQUITY AND LIABILITIES EQUITY Share capital 19 433 50,681 (3,589) 47,525 423 38,197 388 Retained earnings Translation and other reserves TOTAL EQUITY 39,008 NON-CURRENT LIABILITIES Long-term debt 20 20 2,604 2,774 TOTAL NON-CURRENT LIABILITIES 2,604 2,774 CURRENT LIABILITIES Short-term debt 1,525 2,429 1,518 1,022 Accrued liabilities Accrued compensation and employee benefits Trade payables 3,193 1,526 14,117 8,257 TOTAL CURRENT LIABILITIES TOTAL LIABILITIES 21,264 23,868 12,323 15,097 TOTAL EQUITY AND LIABILITIES 71,393 54,105 The Notes on the following pages are an integral part of these consolidated financial statements. LIQUID COOLING DONE RIGHT 32 FINANCIAL STATEMENT S - EQUITY ASETEK A/S CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the years ended December 31, 2020 and 2019 (USD 000’s) Share capital Translation reserves Treasury share reserves Retained earnings Total EQUITY AT DECEMBER 31, 2018 Total comprehensive income for 2019 Income for the year 422 836 (4) 37,704 38,958 - - - - (444) (444) - - - (628) - (628) (444) Foreign currency translation adjustments Total comprehensive income for 2019 Transactions with owners in 2019 Shares issued (628) (1,072) 1 - - - - - 65 1,056 1,121 66 1,056 Share based payment expense Transactions with owners in 2019 EQUITY AT DECEMBER 31, 2019 Total comprehensive income for 2020 Income for the year 1 - - 1,122 423 392 (4) 38,197 39,008 - - - - 2,392 2,392 - - - 9,195 - 9,195 2,392 11,587 Foreign currency translation adjustments Total comprehensive income for 2020 Transactions with owners in 2020 Shares issued 9,195 10 - - - (6,369) - 2,371 - 2,381 (6,369) 918 Shares repurchased - Share based payment expense Transactions with owners in 2020 EQUITY AT DECEMBER 31, 2020 - - - 918 10 433 (6,369) (6,373) 3,289 50,681 (3,070) 47,525 2,784 The Notes on the following pages are an integral part of these consolidated financial statements. LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - CASH FLOWS 33 ASETEK A/S CONSOLIDATED CASH FLOW STATEMENT For the years ended December 31, 2020 and 2019 (USD 000’s) Note 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) for the year 9,195 3,754 (51) (628) 4,057 (359) 171 Depreciation and amortization 15, 16 Finance income recognized 9 9 Finance costs recognized 192 Finance income, cash received 51 359 Finance costs, cash paid (112) 231 (84) Income tax expense (income) 10, 11 7 2,082 (172) 1,056 2,234 154 Cash receipt (payment) for income tax Share based payments expense Changes in trade receivables, inventories, other assets Changes in trade payables and accrued liabilities NET CASH PROVIDED IN OPERATING ACTIVITIES 10 918 (10,121) 7,363 11,430 8,870 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of business 14 14, 15 16 (1,316) (1,571) - (1,441) (713) Additions to intangible assets Purchase of property and equipment NET CASH USED IN INVESTING ACTIVITIES (1,929) (4,816) (2,154) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of borrowings (269) (6,369) 2,381 22 - Repurchase of common shares Proceeds from issuance of share capital 19 64 Principal payments on leases (831) (734) (648) (190) 5,878 18,627 24,505 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES Effect of exchange rate changes on cash and cash equivalents NET CHANGES IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD (5,088) 1,068 2,594 24,505 27,099 SUPPLEMENTAL DISCLOSURE - NON-CASH ITEMS Assets acquired under leases 21 668 413 The Notes on the following pages are an integral part of these consolidated financial statements. LIQUID COOLING DONE RIGHT 34 FINANCIAL STATEMENT S - NOTES Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiar- ies are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transac- tions, balances, income and expenses on transactions between Group companies are eliminated. Profits and losses resulting from the intercompany transactions that are recognized in assets are also eliminated. Accounting policies of subsidiaries are consistent with the policies adopted by the Group. 2.3. Foreign currency // All resulting exchange differences are recognized in NOTES Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity oper- ates (‘the functional currency’). The functional currency of the Company’s operations in the United States of America, Denmark and China are the U.S. dollar, Danish kroner, and Chinese Yuan Renminbi, respectively. The consolidated financial statements are presented in U.S. dollars, which is the Group’s presentation currency. other comprehensive income 1. GENERAL INFORMATION 2.4. Property and equipment Asetek A/S (‘the Company’), and its subsidiaries (together, ‘Asetek Group’, ‘the Group’ or ‘Asetek’) designs, develops and markets liquid cooling solutions used in personal computers, servers and data centers. The Group’s core products utilize liquid cooling technology to provide im- proved performance, acoustics and energy efficiency. The Company is based in Aalborg, Denmark with offices in USA, China and Taiwan. The Company’s shares trade on the Oslo Stock Exchange under the symbol ‘ASETEK’. Property and equipment are stated at historical cost less accumulated depreciation. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized as operating expense in the income statement in foreign exchange (loss)/gain. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the prepara- tion of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consid- eration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the total consideration transferred, value of non-controlling interests and the fair value of any equity investments previously held in the acquiree over the total identifiable net assets measured at fair value are recognized as goodwill. Depreciation is provided over the estimated useful lives of the depreciable assets, generally three to five years, using the straight-line method. The assets’ useful lives and residual values are reviewed, and adjusted if appropriate, at the end of each reporting period. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized as other income or expense in the consolidated income statement. Property and equipment is grouped as follows: Group companies that have a functional currency differ- ent from the presentation currency are translated into the presentation currency as follows: 2.1. Basis of preparation The consolidated financial statements have been pre- pared on a historical cost convention, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the supple- mentary Danish information requirements for class D publicly listed companies. // Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; Group Estimated Useful Life Leasehold improvements Lesser of 5 years or lease term 5 years // Income and expenses for each income statement are Plant and machinery translated at average exchange rates; 2.2. Consolidation Tools, equipment, fixtures 3 to 5 years The consolidated financial statements comprise the Company and its consolidated subsidiaries. Subsidiaries are all entities (including structured entities) over which the LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 35 2.6. Impairment of non-financial assets the income statement, or for certain debt instruments that qualify, through other comprehensive income. // ‘Financial liabilities at fair value through profit or loss’ are liabilities entered into that do not meet the hedge accounting criteria as defined by IFRS 9. Gains or losses on liabilities held for trading are recognized in profit and loss. At December 31, 2020, the Company has no liabilities measured at fair value through profit and loss. 2.5. Research and development Research costs are expensed as incurred. Costs directly attributable to the design and testing of new or improved products to be held for sale by the Group are recognized as intangible assets within development projects when all of the following criteria are met: Assets that are subject to amortization are reviewed for impairment annually, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of 1) an asset’s fair value less costs to sell or 2) its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that previously suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Goodwill is tested for impairment annually and whenever there is indication that the goodwill may be impaired. If an impair- ment loss on goodwill is identified, it is recognized as an expense and is not reversed in a subsequent period. For all years presented, the Group’s financial assets are all classified as ‘amortized cost’. Impairment of financial assets. For financial assets carried at amortized cost, the Group measures at the end of each reporting period the expected credit losses to be incurred for a financial asset or group of financial assets. The Company utilizes historical experience, evaluation of possible outcomes, current conditions and forecasts of future economic conditions to determine expected credit losses. Evidence may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. // ‘Other liabilities’ – After initial recognition, interest bearing debt is subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the amortization process. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. // It is technically feasible to complete the product so that it will be available for sale; // management intends to complete the product and use or sell it; // there is an ability to use or sell the product; // it can be demonstrated how the product will generate probable future economic benefits; // adequate technical, financial and other resources to complete the development and to use or sell the product are available; and Offsetting of financial instruments. Financial assets and financial liabilities are offset, and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simulta- neously. // the expenditures attributable to the product during its 2.7. Financial assets development can be reliably measured. Recognition and Measurement. The Group determines the classification of its financial assets at initial recogni- tion. Financial assets within the scope of IFRS 9 Financial Instruments are classified as follows: 2.8. Financial liabilities Directly attributable costs that are capitalized as part of the product include the employee costs associated with development. Other development expenditures that do not meet these criteria are recognized as expense when incurred. Development costs previously recognized as ex- pense are not recognized as an asset in a subsequent period. Development costs recognized as assets are amortized on a straight-line basis over their estimated useful lives, which generally range between three and forty-eight months. Amortization expense related to capitalized development costs is included in research and development expense. Recognition and measurement. Financial liabilities within the scope of IFRS 9 are classified as financial liabilities at fair value through profit or loss, or other liabilities. The Group determines the classification of its financial liabilities at initial recognition. Financial liabilities are recognized initially at fair value less, in the case of other liabilities, directly attributable transaction costs. The measurement of financial liabilities depends on their classification as follows: // ‘Amortized cost’ are financial assets representing con- tractual cash flows held for collection, where such cash flows solely represent payment of principal and interest. // ‘Fair value’. All other financial assets, representing other debt and equity instruments that do not meet the ‘am- ortized cost’ criteria, are recognized at fair value. All fair value movements on financial assets are taken through LIQUID COOLING DONE RIGHT 36 FINANCIAL STATEMENT S - NOTES 2.13. Share-based payments 2.14. Current and deferred income tax Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. 2.9. Inventories Inventories are stated at the lower of actual cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is the esti- mated selling price in the ordinary course of business less estimated costs necessary to make the sale. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence, or impaired balances. The Company issues options (or warrants) that allow management and key personnel to acquire shares in the Company. Through equity-settled, share-based compensation plans, the Company receives services from employees as consideration for the granting of equity op- tions to purchase shares in the Company at a fixed exercise price. 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, excluding the impact of any non-market service and performance vesting conditions. The grant date fair value of options granted is recognized as an employee expense with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the options (vesting period). The fair value of the options grant- ed 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, weighted average expected life of the instruments (based on historical experience and general option holder behavior), expected dividends, and the risk- free interest rate. Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. At each reporting date, the Company revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. The impact of the revision to original estimates, if any, is recognized in the Statement of Comprehensive Income, with a corresponding adjustment to equity. The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The current income tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Management establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 2.10. Trade receivables Trade receivables are amounts due from customers for product sold in the ordinary course of business. Trade receivables are recognized initially at fair value and sub- sequently measured at amortized cost using the effective interest method, less any provision for expected credit losses. If collection is expected in one year or less, trade receivables are classified as current assets. Expected credit losses are determined utilizing the simplified ap- proach allowed under IFRS 9 Financial Instruments. 2.15. Revenue recognition and other income Revenue represents sale of the Group’s products to customers which are principally resellers and original equipment manufacturers. Revenue is measured at the- fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, sales tax, returns and after eliminating sales within the Group. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combi- nation that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. 2.11. Cash and cash equivalents The Group’s revenue is predominantly comprised of shipment of Asetek products in fulfillment of customer purchase orders. As such, the Company recognizes revenue when a valid contract is in place and control of the goods have transferred to the customer. Customer purchase orders and/or contracts are used as evidence of an arrangement. Delivery occurs and control of the goods is deemed to transfer when products are shipped to the specified location and the risks of obsolescence and loss have been transferred to the customer. For certain cus- tomers with vendor-managed inventory, delivery does Cash and cash equivalents includes cash on hand, deposits with banks, overdrafts and other short-term highly liquid investments with original maturities of three months or less. 2.12. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 37 Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to reflect a constant periodic rate of interest on the remaining balance of the liability for each period. 2.18. Contingent liabilities Geographical segmentation. Each of the Group’s offices in its three principal geographies fulfills a particular func- tion that serves the Asetek Group as a whole. The majority of costs incurred in each of the geographies are generally incurred for the benefit of the entire Group and not to generate revenue in the respective geography. not occur until product is acquired by the customer from the vendor-managed inventory location. The Company assesses collectability based primarily on the creditwor- thiness of the customer as determined by credit checks and customer payment history. Customers do not gener- ally have a right of return. Contingent liabilities are not recognized in the financial statements. Significant contingent liabilities are disclosed, with the exception of contingent liabilities where the probability of the liability occurring is remote. From January 1, 2019, the associated right-of-use assets for the leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as of December 31, 2018. Leased assets are recognized as a right-of-use asset at the date at which the leased asset is available for use by the Group, initially measured on a present value basis and included in Property and equipment on the balance sheet. 2.19. Segment reporting As a result, the financial results of the Group are not divided between multiple geographical segments for key operating decision-making. Revenue and assets by geog- raphy is measured and reported in Note 4, Geographical information. Income received as a result of patent litigation settlement is recorded as other income as an offset to operating ex- pense in the period the award is granted. Estimated costs for future product returns under warranty are charged to cost of sales and included in accrued liabilities. Business segmentation. The Group is reporting on two segments, Gaming and Enthusiast, and Data center. The two segments are identified by their specific sets of products and specific sets of customers. The splitting of operating expenses between segments is based on the Company’s best judgment and done by using the Com- pany’s employee/project time tracking system to capture total hours charged by project code. Operating expenses that are not divisible by nature (rent, telecommunication expenses, etc.) have been split according to actual time spent on the two businesses, and the Company’s best estimate for attribution. Costs incurred for intellectual property defense and headquarters administration have been classified separately as headquarters costs and excluded from segment operating expenses. The CEO is the Group’s chief operating decision-maker. The CEO assesses the performance of the Group principally on measures of revenue and adjusted EBITDA. 2.20. Cash flow statement The cash flow statement is prepared using the indirect method. 2.16. Leases On January 1, 2019, the Group adopted IFRS 16 Leases on a modified retrospective basis without restatement of the prior year, as permitted under the standard. Upon adoption of IFRS 16, Asetek recognized lease liabilities for leases which had previously been classified as operating leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate. Lease liabilities include the net present value of: fixed lease payments, amounts expected to be payable under residual value guarantees, any purchase options that are reasonably expected to be exercised, and any penalties for termination reflected in the lease term. The corresponding rental obligations, net of finance charges, are included in other long-term debt. Amounts due within one year are included in short-term debt. 2.17. Provisions 2.21. Critical accounting estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Areas where significant judgment has been applied are: A provision is recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. If the impact of time value is significant, the provision is calculated by discounting anticipated future cash flow using a discount rate before tax that reflects the market’s pricing of the present value of money and, if relevant, risks specifically associated with the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. // Valuation of deferred tax assets: deferred income tax assets are recognized to the extent that the realization of the tax benefit to offset future tax liabilities is con- sidered to be probable. In prior years, the Company incurred net operating losses which are eligible to offset future taxable income. In 2020, the Company generat- ed net income and therefore recorded deferred LIQUID COOLING DONE RIGHT 38 FINANCIAL STATEMENT S - NOTES Asetek’s Quality Director, Magnus Hakanen (left) says that his most important goal has been to get all of Asetek’s dedicated employees to feel a responsibility for quality and prioritise it proactively, not reactively as before. tax assets representing the estimated amount of net operating losses that will be utilized to offset future taxable income, based on income projections for the next five years. In future periods, management will continue to assess the probability of realization of the assets’ value and adjust the valuation in accordance with IAS 12. of the board of directors. In the year ended December 31, 2020, the Company made matching contributions totalling $21,000 (none in 2019). 2.23 ESEF Regulation The Company's Annual Report is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Elec- tronic Format (ESEF Regulation) which includes require- ments related to the preparation of the Annual Report in XHTML format and iXBRL tagging of the Consolidated Financial Statements. // Capitalization of development costs: the Group’s business includes a significant element of research and development activity. Under IAS 38, there is a require- ment to capitalize and amortize development spend to match costs to expected benefits from projects deemed to be commercially viable. The application of this policy involves the ongoing consideration by management of the forecasted economic benefit from such projects compared to the level of capitalized costs, together with the selection of amortization periods appropriate to the life of the associated revenue from the product. If customer demand for products or the useful lives of products vary from management estimates, impairment charges on intangibles could increase. 2.24. Changes in accounting policy and disclosures Applied new standards and amendments included in Annual Report for 2020. Certain new standards, amendments to standards, and annual improvements to standards and interpretations are effective for annual periods beginning after January 1, 2020 and have been applied in preparing these consolidated financial state- ments. These applications did not materially impact the Group’s consolidated financial statements. 2.22. Defined contribution plan In 2008, the Company established a defined contribu- tion savings plan (the “Plan”) in the U.S. that meets the requirements under Section 401(k) of the U.S. Internal Revenue Code. This Plan covers substantially all U.S. employees who meet the minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the Plan may be made at the discretion LIQUID COOLING DONE RIGHT 39 RELIABILITY AND QUALITY AS GOOD AS IN THE SPACE INDUSTRY BY TAKING A PROACTIVE APPROACH RATHER THAN A REACTIVE ONE, ASETEK’S QUALITY ASSURANCE HAS RAISED THE RELIABILITY OF LIQUID COOLING PRODUCTS TO A LEVEL CLOSE TO PERFECTION. But such a degree of perfection is a necessity if Asetek wants to be the world’s leading manufacturer in the rapidly growing market in water cooling for PCs, servers and data centers – and to deliver, as Asetek does, to world-renowned OEM’s such as HP, Dell, Intel, Fujitsu and many others. Above all, it raises our credibility with partners who have to be able to guarantee to the end-customer that their PC or server isn’t going to fail, for example.” TWO DIFFERENT CHALLENGES “Asetek’s products need reliability matching the re- quirements set in the space industry, and now they have achieved it. For us, it’s just not enough for the unit to work almost all the time or only cost a little now and then. Many of our products actually have to work 24/7, all year round, for at least 10 years running. It’s a question of credibility and money,” explains Asetek Vice President of Global Quality Magnus Hakanen. The 51-year-old Swedish civil engineer started working in quality assurance 20 years ago with an automotive parts supplier to Volvo, and went on to accumulate extensive know-how from similar quality assurance work with international players such as Vestas and Grundfos, before coming to Asetek 3 years ago. Hakanen describes slightly different challenges relating to the two main areas of on-processor liquid cooling that Asetek works in: the well-established PC market, and the growing data center market, where more and more peo- ple are noticing the energy-saving and climate-friendly alternative offered by Asetek. Data centers sometimes total thousands of servers that could cool more efficiently with direct on-processor liquid cooling than with tradi- tional air cooling for the same power consumption. Fur- thermore, Asetek’s technology also makes climate-friend- ly use of the enormous total quantity of residual heat, for example through circular reuse by connecting to local district heating networks. ALL EMPLOYEES HAVE A RESPONSIBILITY Magnus heads the quality assurance department at Asetek’s headquarters. He also leads Asetek’s quality team in China which has an equivalent role in respect of Asetek’s carefully selected 25-30 sub-suppliers in Asia. But his most important goal, says Hakanen, has been to get all of Asetek’s dedicated employees to feel a strong responsibility for quality and prioritise it proactively, not re- actively. Now, from the time the engineers create drawings and calculations for future products on their computers through the design, development and manufacturing, the entire workflow is geared towards foreseeing potential problems and risks and mitigating them long before the products have arrived anywhere near mass production or even prototype status. And Magnus Hakanen has a statistical basis for his re- markable goals and vision. He is happy to present graphs and figures on his screen showing, from every imaginable angle, how Asetek’s margin of error has moved in recent years from what he describes as “really good” to “space industry super good.” As Magnus Hakanen says: “Of course, it saves a lot of mon- ey when the product is built just right the first time. LIQUID COOLING DONE RIGHT 40 FINANCIAL STATEMENT S - NOTES New standards and amendments not applied in the Annual Report for 2020. There are some new standards and amendments to standards and interpretations that have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group: Standard Content Effective date EU ENDORSED AS OF DECEMBER 31, 2020 Amendments to IFRS 3 Business Combinations The amendment assists entities in determining whether a transaction should be accounted for as a business combination or as an asset acquisition. 1-Jan-2020 Amendments to IFRS 9, IAS 39, IFRS 7: Interest Rate Benchmark Reform The amendments relate to the issues affecting financial reporting in the periods before replacement of an existing interest rate benchmark with an alternative interest rate. 1-Jan-2020 1-Jan-2021 Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform - Phase 2 These amendments address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. NOT ENDORSED BY EU AS OF DECEMBER 31, 2020 Amendments to IFRS 3 Business Combina- tions; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets; Annual Improvements 2018-2020 The small amendments will: update a reference in IFRS 3 without changing accounting requirements; 1-Jan-2022 1-Jan-2023 require proceeds received from sale when preparing PP&E for its intended use to be recorded in profit and loss instead of as a reduction to cost; specify which costs a company includes when assessing whether a contract will be loss-making; make minor amendments to IFRS 1, IFRS 9, IAS 41 and IFRS 16. Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current and Classification of Liabilities as Current or Non-current – Deferral The amendments specify that the conditions which exist at the end of the reporting period are those which will be used to determine if a right to defer settlement of a liability exists. Management expectations about events after the balance sheet date are not relevant to the determination. LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 41 Liquidity risk. The Group incurred losses from operations and negative cash flows from operations from inception through 2015; positive cash flows and operating income were first generated in 2016 and have continued through 2020. Asetek will continue to invest its capital principally in the development and marketing of its products. In 2016, the Board of Directors implemented a policy under which it may declare and distribute dividends to shareholders. At the Annual General Meeting in April 2020, the Board was authorized to acquire the Company’s own shares and subsequently initiated a share buyback program. In 2020, the Company repurchased a total of 844 thousand common shares on the open market for a total cost of $6.4 million. When considering payment of dividends or Asetek share purchases, the Board takes into consid- eration the Company’s growth plans, international tax implications, liquidity requirements and necessary financial flexibility. The following are contractual maturities of financial liabilities, including estimated interest payments on an undiscounted basis. 3.RISK MANAGEMENT AND DEBT The Group’s activities expose it to a variety of risks: liquidi- ty risk, market risk (including foreign exchange risk and interest rate risk) and credit risk. The primary responsi- bility for Asetek’s risk management and internal controls in relation to the financial reporting process rests with executive management. To facilitate ongoing operations, Asetek has secured bank lines of credit and trade receivables financing. The Group’s corporate finance team monitors risk of a short- age of funds through regular updates and analysis of cash flow projections and maturities of financial assets and liabilities. The finance teams also review liquidity, balance sheet ratios (such as days’ sales outstanding, inventory turns) and other metrics on a regular basis to ensure compliance both on a short- and long-term basis. Asetek’s internal control procedures are integrated in the accounting and reporting systems and include pro- cedures with respect to review, authorization, approval and reconciliation. All entities in the Asetek Group report financial and operational data to the executive office on a monthly basis, including commentary regarding financial and business development. Based on this reporting, the Group’s financial statements are consolidated and reported to executive management. Management is in charge of ongoing efficient risk management, including the identification of material risks, the development of systems for risk management, and that significant risks are routinely reported to the board of directors. DEBT MATURITIES AS OF DECEMBER 31, 2020 (USD 000’s) On Demand Less than 3 3 to 12 months 1 to 5 years months Total Line of credit (536) - (247) - (837) - (2,639) - (536) (3,723) Leases - - Trade payables and accrued liabilities (18,927) (19,174) (812) (19,739) (23,998) (536) (1,649) (2,639) The need for an internal audit function is considered reg- ularly by the Audit Committee. However, due to the size of the Company and the established control activities, the Audit Committee so far considers it unnecessary to establish an independent internal executive audit board. As part of risk management, Asetek has a whistle-blower function for expedient and confidential notification of possible or suspected wrongdoing. AS OF DECEMBER 31, 2019 (USD 000’s) On Demand Less than 3 months 3 to 12 months 1 to 5 years Total Line of credit (746) - (211) - (619) - (2,903) - (746) (3,733) Finance leases - - Trade payables and accrued liabilities (10,048) (10,259) (757) (10,805) (15,284) (746) (1,376) (2,903) LIQUID COOLING DONE RIGHT 42 FINANCIAL STATEMENT S - NOTES Market risk factors. The Group’s current principal financial liabilities consist of short-term debt on revolving lines of credit and amounts owed on facilities and equip- ment leases. The Group’s financial assets mainly comprise trade receivables, cash and deposits. The Group’s operations are exposed to market risks, principally foreign exchange risk and interest rate risk. (b) Interest rate risk. As of December 31, 2020, Asetek had the following debt outstanding that is subject to interest rate risk: Trade receivables that are deemed uncollectible are charged to expense with an offsetting allowance record- ed against the trade receivable. Historically, bad debt expense has not been significant. Certain customers have accounted for a significant portion of the Company’s revenues in the years presented, as follows. In 2020, the Company’s two largest customers accounted for 41% and 14% of revenue (31% and 27% in 2019), respectively. The Company mitigates risk with its largest customer by requiring two remittances per month as well as frequent monitoring and communicating regarding invoices coming due. 4.GEOGRAPHICAL INFORMATION The Group operates internationally in several geographi- cal areas, principally in Asia, Europe and the Americas. // Line of credit with Sydbank – 5.0 million Danish kroner revolving line of credit available to Asetek A/S. Total line in USD is approximately $825 thousand, of which $536 thousand was outstanding at December 31, 2020. The line carries interest at the Danish CIBOR 3 rate plus 2.25 percentage points, which in total was 2.03% at December 31, 2020. Based on the line’s revolving, short-term nature, interest rate risk is not significant. The following table presents the Group’s revenue and assets in each of the principal geographical areas: (USD 000’s) Revenue 2020 (a) Foreign exchange risk. With few exceptions, the Group’s inventory purchase and sale transactions are denominated in U.S. dollars. The Group operates inter- nationally and is exposed to foreign exchange risk arising from currency exposures, principally with respect to the Danish kroner. Foreign exchange risk arises from operat- ing results and net assets associated with Denmark-based operations where the Danish krone is the functional currency. Translation of the Denmark entity balance sheet accounts from Danish kroner to U.S. dollars affect the equity balances of the Group. The Company’s Denmark entity has a revolving line of credit available totaling 5.0 million Danish kroner ($0.8 million) as of December 31, 2020. The Group does not enter into derivatives or other hedging transactions to manage foreign exchange risk. Management mitigates this exposure through timely settlement of intercompany operating liabilities. Current Non-current assets 23,074 10,091 20,936 54,101 assets Asia 62,383 5,440 4,927 96 Americas Europe TOTAL 2,035 15,161 17,292 Capital and debt management. To date the Company’s primary focus has been to support its product devel- opment initiatives, maintain liquidity through use of financing alternatives, and maximize shareholder value. The Group manages its capital and debt structure with consideration of economic conditions. In 2013 and 2015, the Company raised capital through the offering of its common stock on the Oslo Stock Exchange. With regard to future capital needs, the Company will continue to consider both equity and debt financing strategies. At December 31, 2020 two customers represented 47%and 17% of outstanding trade receivables (38% and 15% at December 31, 2019), respectively. The reserve for uncollectible trade accounts was $23,000 at December 31, 2020 and $48,000 at December 31, 2019. The aged trade receivables and bad debt reserve balances for all years presented are provided in Note 17. 72,750 (USD 000’s) 2019 Revenue Current Non-current assets 12,435 4,158 assets Asia 47,206 4,716 38 Americas Europe TOTAL 882 The maximum exposure to credit risk at the reporting dates was:dates was: 2,412 23,649 40,242 12,943 13,863 54,334 Credit risk factors. Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group is exposed to credit risk primarily through trade receivables and cash deposits. Management mitigates credit risk through standard review of customer credit-worthiness and maintaining its liquid assets primarily with Wells Fargo Bank in the U.S. and Sydbank in Denmark. The carrying amount of the financial assets represents the maximum credit exposure. (USD 000’s) 2020 27,099 24,471 605 2019 24,505 14,080 307 For the purpose of the above presentation, the informa- tion pertaining to revenue and current assets is calculated based on the location of the customers, whereas infor- mation pertaining to non-current assets is based on the physical location of the assets. The information pertaining to current assets is calculated as a summation of assets such as trade receivables and finished goods inventories reasonably attributable to the specific geographical area. Cash and cash equivalents Trade receivables and other Other assets The ending exchange rate at December 31, 2020 was 6.06 Danish kroner to one U.S. dollar (6.68 to the U.S. dollar at December 31, 2019). The effect of a 10% strengthening weakening) of the Danish kroner against the U.S. dollar for the reporting period would have resulted in an increase (decrease) in pre-tax income for fiscal year 2020 of $1,538,000 (in 2019, increase of the pre-tax income of $926,000). MAXIMUM CREDIT EXPOSURE 52,175 38,892 LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 43 (USD 000’s) Non-current assets Segment operating results - years ended December 31, 2020 2019 2020 15,161 2,035 96 2019 Denmark USA 12,943 882 (USD 000’s) Not allocable to divisions Not Gaming and Enthusiast Gaming and Enthusiast allocable to Datacenter Total Datacenter divisions Total China 38 Revenue 64,719 21,405 8,031 - 72,750 15,600 51,791 2,543 - 54,334 6,161 TOTAL 17,292 13,863 Adjusted EBITDA (1,205) (4,600) 14,606 (4,284) (4,161) (USD 000’s) Revenue 2020 278 Reconciliation of Adjusted EBITDA to Income before tax (USD 000's) 2020 21,405 (1,205) (4.,600) (918) 2019 2019 208 Denmark Hong Kong Taiwan EBITDA, adjusted - Gaming and Enthusiast EBITDA, adjusted - Data center Headquarters costs 14,606 (4,284) (4,161) (1,056) (4,057) 406 3,083 46,610 5,181 16,970 21,817 4,527 USA Share based compensation All others TOTAL 17,598 72,750 10,812 54,334 Depreciation and amortization Total financial income (expenses) Consolidated income before tax (3,754) (1,502) 9,426 1,454 Disaggregation of revenue 5. SEGMENT INFORMATION (USD 000's) 2020 2019 Gaming and Enthusiast: Enthusiast/DIY Gaming/Performance PC Data center market: OEM The Company reports on two segments, Gaming and Enthusiast and Data center. The two segments are iden- tified by their specific sets of products and specific sets of customers. The CEO is the Group’s chief operating deci- sion-maker. The CEO assesses the performance of each segment principally on measures of revenue and adjusted EBITDA. The following tables represent the results by operating segment in 2020 and 2019. Disaggregation of revenue is also presented for the major markets within each segment. 54,889 9,830 43,312 8,479 8,031 - 2,233 310 Government TOTAL REVENUE 72,750 54,334 LIQUID COOLING DONE RIGHT 4 4 FINANCIAL STATEMENT S - NOTES The figures listed include incentive based compensation for management and staff. Incentive based compensation is based on a combination of quarterly cash-based re- wards and periodic grants of options (or warrants) to buy the Company’s common shares. The above remuneration for Officers includes $76,000 and $72,000 in pension payments in 2020 and 2019, respectively. The bonus plan for the CEO is approved by the Board of Directors at the beginning of the year and the bonus payments for the CEO and the upper management are reviewed by the Board of Directors on an annual basis. All bonus plans are structured to include an absolute dollar cap. Share Ownership of Officers at December 31, 2020: 6. SALARY COSTS AND REMUNERATIONS 7. SHARE BASED PAYMENT André S. Eriksen Peter D. Madsen Asetek’s Equity Incentive program is a share compensa- tion program where the employees and other parties that deliver services to the Group have been granted share options (or warrants). The options, if vested and executed, will be settled in common shares of the Company. Common shares 334,816 96,406 61,750 42,075 26.500 (USD 000’s) 2020 10,841 433 2019 9,268 382 Options at NOK 24.70 106,800 Salaries Options at NOK 38.33 Options at NOK 46.30 Warrants at: 68,500 53,300 Retirement fund contributions Social cost 1,279 918 1,188 1,056 117 Share based payment Other expenses NOK 10.50 - 50,875 49,837 10,313 44,215 The options are granted at the time of employment and, at the discretion of the Board of Directors, under other circumstances. The options are granted with exercise prices equaling the fair market value of the underlying se- curity. The exercise prices of option grants are determined based on the closing market price of the shares on the day of the grant. Share-based compensation expense was $918,000 and $1,056,000 for the years ended December 31, 2020 and 2019, respectively. (40) NOK 19.50 - - TOTAL PERSONNEL EXPENSES BEFORE CAPITALIZATION NOK 40.10 13,431 12,011 NOK 76.25 132,981 Capitalized as development cost (958) (1,000) TOTAL SHARES CONTROLLED TOTAL PERSONNEL EXPENSES IN STATEMENT OF INCOME 696,397 381,971 The Company’s CEO has an agreement of twelve months’ severance pay in case of termination or termina- tion in connection with change of control. The Compa- ny’s CFO has an agreement of seven months’ severance pay in case of termination or termination in connection with change of control. Except for the Company’s CEO and CFO and other members of the executive group, no member of the administrative, management or supervi- sory bodies has contracts with the Company or any of its subsidiaries providing for benefits upon termination of employment. 12,473 110 11,011 97 AVERAGE NUMBER OF EMPLOYEES Options granted in 2020: Group Options Granted - The staff costs are specified as follows: Board of directors Officers The program was adopted by the Board of Directors in 2008 and has the following purpose: (USD 000’s) 2020 3,476 9,955 2019 2,768 9,243 110,575 Research and development Selling, general and administrative Other executives Other employees TOTAL GRANTED 73,962 // To attract and retain the best available personnel 135,763 Total personnel expenses before capitalization for positions of substantial responsibility; 320,300 13,431 12,011 // To provide additional incentive to employees, directors and consultants, and Compensation to the Board of Directors, Officers and Other Executives // To promote the success of the Company’s business. 2020 Other 2019 As of December 31, 2020, there is a total of 2,358,141 common shares authorized under the Plan. Other (USD 000’s) Salary Directors Officers Executives Total 1,805 1,196 559 Directors Officers Executives Total 1,938 566 - - 868 501 937 - - 837 231 1,101 335 395 84 The Company’s shares trade on the Oslo Stock Exchange, at prices denominated in Norwegian krone (NOK). Bonus 695 Share based Other - 285 181 274 - 314 709 The exchange rate at December 31, 2020 of NOK to USD was 8.59. 217 217 150 548 201 201 239 1,621 524 TOTAL 1,835 2,056 4,108 1,915 3,737 Other Executives includes the Chief Operating Officer and other members of the executive team who are leaders of the key functions (Engineering, Sales & Marketing, Operations) LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 45 In April 2020, the Company granted 320,300 options with exercise prices of NOK38.33 per share. In April 2019, the Company granted 494,900 options with exercise prices of NOK24.70 per share. Movements in the number of share options outstanding and their related weighted average exercise price are as follows: The composition of options and warrants out- standing at December 31 is as follows: Number of shares Exercise price per share NOK 10.60 NOK 19.50 NOK 24.70 NOK 33.90 NOK 36.50 NOK 38.33 NOK 40.10 NOK 46.30 NOK 76.25 NOK 113.00 TOTAL 2020 263,253 255,504 469,865 - 2019 395,973 412,957 494,900 7,170 Weighted Average Exercise - Price (NOK) Weighted Average Exercise - Price (NOK) Activity for exercise prices of: NOK 10.60 to NOK 24.70 Outstanding on January 1 2020 1,303,830 - Price 18.77 - 2019 884,283 494,900 (64,461) Price 14.68 24.70 5.41 - 333,295 - 313,617 48,800 328,128 416,571 96,999 2,192,737 Options/warrants granted 84,550 366,569 433,649 96,999 2,626,062 Options/warrants exercised (308,408) (6,800) 988,622 664,037 15.98 24.70 19.60 17.11 Options/warrants forfeited (10,892) 1,303,830 814,195 19.16 18.77 15.43 OUTSTANDING ON DECEMBER 31 EXERCISABLE ON DECEMBER 31 The weighted average market price per share on the date of exercise for the above shares was NOK 68.73 in 2020 and NOK 32.71 in 2019 Weighted Average Exercise - Price (NOK) Weighted Average Exercise - Price (NOK) Total outstanding options and warrants represents 8.3% of total common shares issued at December 31, 2020 (10.1% in 2019). Activity for exercise prices of: NOK 33.90 to NOK 113.00 Outstanding on January 1 2020 1,322,232 320,300 (425,222) (13,195) Price 58.08 38.33 38.61 57.79 59.71 67.81 2019 1,369,938 - Price 58.70 - Options/warrants granted Options/warrants exercised - - Options/warrants forfeited (47,706) 1,322,232 921,427 67.23 58.08 56.06 OUTSTANDING ON DECEMBER 31 EXERCISABLE ON DECEMBER 31 1,204,115 756,790 The weighted average market price per share on the date of exercise for the above shares was NOK 71.27 in 2020 LIQUID COOLING DONE RIGHT 46 FINANCIAL STATEMENT S - NOTES The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model, which requires subjective assumptions, including future stock price volatility and expected time to exercise. The expected volatility was based on the historical volatility of the Company’s stock price. The weighted average remaining contractual term of options outstanding is 4.1 years. The options granted in April 2020 have an estimated total value of $0.5 million. The options granted in September 2019 have an estimated total value of $0.6 million. The following weighted average assumptions were used for the period indicated. 8. EXPENSES BY NATURE (USD 000’s) Note 18 2020 38,556 13,431 3,754 2019 31,329 12,011 4,057 4,087 782 Inventories recognized as cost of sales Personnel expenses 6 Depreciation and amortization Legal, patent, consultants and auditor Facilities and infrastructure 4,619 1,221 Other expenses 2,256 3,214 TOTAL OPERATING EXPENSES BEFORE CAPITALIZATION Less: capitalized costs for development projects TOTAL EXPENSES 63,837 (2,015) 61,822 55,480 (1,441) 54,039 14 Valuation assumptions Total operating expense in the consolidated statement of comprehensive income includes a separate component of other income totaling $0 and $753,000 for 2020 and 2019, respectively, which represents net awards received from patent litigation. 2020 2019 Risk-free interest rate 0.26% - 0.37% 0.0% 1.42% - 1.44% 0.0% Dividend yield Expected life of options (years) Depreciation and amortization expense by classification on the income statement is as follows: 3.50 - 5.50 57% - 61% 3.50 - 5.49 53% - 57% Expected volatility (USD 000’s) 2020 2019 Depreciation and amortization included in: Research and development Selling, general and administrative TOTAL 1,529 2,225 3,754 1,746 2,311 4,057 LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 47 Losses of the U.S. parent company and U.S. subsidiary will begin to expire in 2028 for carryforward purposes. Losses of the Denmark subsidiary do not expire. 9. FINANCE COSTS AND INCOME (USD 000’s) 11. DEFERRED INCOME TAX 2020 (1,361) (7) 2019 218 (USD 000’s) 2020 2019 Foreign exchange gain (loss) Interest cost on line of credit Interest cost on leases Interest income Potential tax assets from prior year losses 7,340 8,597 (7) Expiration of the carryforward of losses is summarized as follows: Potential tax assets resulting from timing differences between book and tax (107) 51 (115) 359 (49) 406 881 724 Other banking and finance fees TOTAL FINANCE INCOME (78) Tax assets not recognized (1,800) (3,800) 6,421 5,521 (USD 000’s) Tax effected loss 1,881 (1,502) DEFERRED INCOME TAX ASSETS Expire in years 2028 to 2034 Do not expire 4,540 TOTAL 6,421 At December 31, 2020, potential income tax assets totaled $7.3 million (2019: $8.6 million) in respect of 10. INCOME TAXES (USD 000’s) 2020 9,426 2019 INCOME (LOSS) BEFORE TAX 1,454 The tax expense on the group’s income before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: remaining losses to be carried forward amounting to $29.6 million that should be applied to different tax rates. The losses can be carried forward against future taxable income. In 2020, the Group recorded deferred tax assets totaling $6.4 million ($5.5 million in 2019), which represents the net tax benefit that the Company considers probable to be realized in the future, based on Company budget for the following year and estimates for the subsequent years. Tax calculated at domestic rates applicable to profits/losses in respective countries (2,328) (351) Tax effects of: R&D credit 183 1,600 732 20 (563) (126) Asetek A/S, the Group's parent company, moved fromU.S. to Denmark in 2013 and is currently subject to income tax in both U.S. and Denmark. The Company is working with the U.S. and Danish tax authorities to nego- tiate a resolution in accordance with international double taxation treaties. Net benefit (expense) of tax losses recognized Other timing differences between book and tax Effect of U.S. GILTI regulation applied to foreign corporation income In accordance with IAS 12, the Company recognizes deferred tax assets arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing oth- er evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilized by the Company. The estimated tax ben- efit is calculated considering historical levels of income, expectations and risks associated with estimates of future taxable income. The calculation utilizes the statutory tax rates that are expected to apply to taxable income for the years in which the asset is expected to be realized. (418) (1,062) In June 2019, the U.S. released regulation for its Global Intangible Low-Taxed Income (GILTI) inclusion for U.S. taxation, effective beginning with tax year 2018. The GILTI regulation requires U.S. companies to report foreign corporation intangible income that exceeds 10% return on foreign invested assets. Under prior law, U.S. owners of foreign corporations were able to defer recognizing taxable income until there was a distribution of earnings back to U.S. owners. The impact of the GILTI regulation caused incremental utilization of the Company's available deferred tax assets of approximately $0.4 million in 2020 and $1.1 million for 2018 and 2019 combined. TAX (EXPENSE) BENEFIT (231) (2,082) LIQUID COOLING DONE RIGHT 4 8 FINANCIAL STATEMENT S - NOTES As of December 31, 2020 12. EARNINGS PER SHARE 13. FINANCIAL INSTRUMENTS CATEGORY AND FAIR VALUE ESTIMATION Liabilities at fair value through profit and loss Other financial liabilities at amortized cost Basic earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Compa- ny by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the number of common shares outstanding used in the Basic calculation for the effect of dilutive equity instruments, which include options and warrants to the extent their inclusion in the calculation would be dilutive. (USD 000’s) Total Liabilities as per balance sheet: Long-term debt The Company uses the following valuation methods for fair value estimation of its financial instruments: - - - - 2,604 1,525 2,604 1,525 Short-term debt // Quoted prices (unadjusted) in active markets (Level 1). Trade payables and accrued liabilities 19,739 23,868 19,739 23,868 // Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2). As of December 31, 2019 (USD 000’s) Amortized cost Assets as per balance sheet: Trade receivables and other Cash and cash equivalents // Inputs for the asset or liability that are not based on 2020 2019 14,080 24,505 38,585 observable market data (unobservable inputs) (Level 3). Income attributable to equity holders of the Company (USD 000’s) All of the Company’s financial assets as of December 31, 2020 are classified as ‘amortized cost’ having fixed or determinable payments that are not quoted in an active market (Level 3). As of December 31, 2020, all of the Company’s financial liabilities are carried at amortized cost. $9,195 $(628) Weighted average number of common shares outstanding (000’s) As of December 31, 2019 25,547 25,582 BASIC EARNINGS PER SHARE $0.36 $(0.02) Liabilities at fair value through profit and loss Other financial liabilities at amortized cost (USD 000’s) Total Weighted average The Company believes that book value approximates fair value for all financial instruments as of December 31, 2020. The values of the Group’s assets and liabilities are as follows: number of common shares outstanding (000’s) Liabilities as per balance sheet: Long-term debt 25,547 566 25,582 - - - - - 2,774 1,518 2,774 1,518 Instruments with potentially dilutive effect: Warrants and options (000’s) Short-term debt Trade payables and accrued liabilities 10,805 15,097 10,805 15,097 Weighted average number of common shares As of December 31, 2020 outstanding, diluted (000’s) 26,113 25,582 (USD 000’s) Amortized cost DILUTED EARNINGS PER SHARE $0.35 $(0.02) Assets as per balance sheet: Trade receivables and other Cash and cash equivalents Rationale and synergies. As a result of this acquisition, the Company is expecting to strengthen its intellectual property and product offerings in the Gaming and Enthu- siast market. The combination of JMH technology with Asetek’s brand and marketing resources is also expected to provide development synergies and key competitive advantages in the marketplace. The Company expects 14. ACQUISITION OF BUSINESS 24,471 27,099 51,570 Business combination. In November 2020, the Company acquired 100% of the voting shares of JMH Gallows Pound Technologies Ltd. (”JMH”), a UK-based developer of hardware and software technology and the owner of the UltimateGameTech brand, for a sum of GBP 1 million ($1.4 million). LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 49 that the acquisition will enable accelerated growth in Asetek’s Gaming and Enthusiast revenue as well as pro- vide additional breadth to the Company’s product lines. Fair value measurement. Material net assets acquired for which significant estimates have been applied in the fair value assessment have been recognized using the following valuation techniques: (USD 000’s) 2020 605 2019 - Goodwill Capitalized development costs Other assets 2,356 256 1,920 - Consideration, transaction costs, earnings impact. The acquisition of JMH was for cash consideration, paid in three installments over one year. In closing this trans- action, the Company incurred $40,000 of transaction costs which are included in operating expense in 2020. If the acquisition had occurred on January 1, 2020, the Group's pro forma consolidated revenue and operating income would have been $72.8 million and $10.7 million, respectively. TOTAL INTANGIBLE ASSETS 3,217 1,920 // Customer contracts. Customer contracts have been measured using a discounted cash flow model in which the present value of estimated future cash flows is computed for JMH’s largest contracts. The principal input drivers of the valuation model used are estimated future retention rate, net contribution margin and discount rate. These inputs have been estimated based on management’s professional judgment from analysis of the contracts acquired. The value of the customer contracts acquired is being amortized over 24 months. Capitalized development costs. The Group routinely incurs costs directly attributable to the design and testing of new or improved products to be held for sale. These costs are capitalized as intangible assets and amortized over the estimated useful lives of the products, typically three to forty-eight months. The following table presents a summary of these development projects. in development regardless of whether there have been indications for write downs. If the value of expected future free cash flow of the specific development project is lower than the carrying value, the asset is written down to the lower value. The booked value includes capitalized salary and related expenses for the cash flow producing project. Expected future free cash flow is based on budgets and an- ticipations prepared by management. The main parameters are the development in revenue, EBIT and working capital. Impairment losses represent principally assets which are no longer associated with a future income stream. Fair value of acquired assets and recognition of goodwill. The acquisition is accounted for according to IFRS 3 Business Combinations. The fair value of the assets acquired is allocated as follows: Impairment tests are performed annually on developed assets and assets under construction. Impairment tests are also performed on completed assets whenever there are indications of a need for write-offs and for assets still // Developed technology. Developed technology is valued based on management’s best estimate of the costs that would have been incurred if Asetek were to internally develop the technologies that were acquired. Significant inputs to these valuations were approxi- mate labor hours and associated costs as estimated by Asetek’s product development professionals.The value of the acquired technology is recorded as capitalized development costs. Refer to Notes 15 and 2.5 regarding the Company’s accounting for capitalized development costs. (USD 000’s) Net assets and goodwill recognized: Fair value at date of acquisition Capitalized development costs Customer contracts 256 444 11 Developed technology Other, net (USD 000’s) 2020 2019 COST: Net assets acquired 711 Balance at January 1 9,529 2,015 8,424 1,441 Fair value of consideration transferred Goodwill recognized (1,316) 605 Additions Deletions - completion of useful life Impairment loss (765) (46) (436) (290) 9,529 Goodwill recognized pertains to the expected syner- gies associated with combining the Asetek brand and marketing resources with the acquired technologies.The goodwill is not deductible for tax purposes. Goodwill is not amortized but reviewed for impairment once a year and also if events or changes in circumstances indicate the carrying value may be impaired. If impairment is es- tablished, goodwill is written down to its lower recoverable amount. BALANCE AT DECEMBER 31 ACCUMULATED AMORTIZATION AND IMPAIRMENT LOSSES: Balance at January 1 10,343 15. INTANGIBLE ASSETS Refer to Note 14. for information regarding intangible assets acquired associated with business combinations. The Company’s intangible assets at December 31 are comprised as follows: (7,609) (1,579) 765 (6,010) (1,935) 46 Amortization for the year Amortization associated with deletions Amortization associated with impairment losses BALANCE AT DECEMBER 31 CARRYING AMOUNT 436 290 (7,987) 2,356 (7,609) 1,920 LIQUID COOLING DONE RIGHT 50 FINANCIAL STATEMENT S - NOTES The trade receivables of Asetek Danmark A/S carry a general lien of 6 million Danish krone ($ 1.0 million), representing collateral on Sydbank’s engagement with the Company. The carrying amount of trade receivables is approximately equal to fair value due to the short term to maturity. Regarding credit risks, refer to Note 3. 16. PROPERTY AND EQUIPMENT 17. TRADE RECEIVABLES AND OTHER The following table presents total property and equipment, including Right-of-use assets presented in Note 21. Also refer to Note 2.16 regarding lease accounting policy. Trade receivables are non-interest bearing and are generally on payment terms of Net 30 days. (USD 000’s) 2020 23,166 13,235 (23) (48) 23,143 13,187 1,328 893 2019 Other fixtures, fittings, tools equipment Gross trade receivables Leasehold improvements (USD 000’s) COST: Machinery Properties Total Provision for uncollectible accounts NET TRADE RECEIVABLES Other receivables and assets Balance at January 1, 2019 1,363 - 5,066 - 2,261 34 - 3,204 34 8,690 3,238 1.127 Impact of accounting change Additions TOTAL TRADE RECEIVABLES AND OTHER 24,471 14,080 52 629 412 Disposals - (46) (41) (72) (159) Exchange rate difference BALANCE AT DECEMBER 31, 2019 Balance at January 1, 2020 Additions (29) 1,386 1,386 421 (106) 5,543 5,543 892 (50) 2,616 2,616 739 (59) (244 The aging of trade receivables as of the reporting date is as follows: 3,107 3,107 545 12,652 12,652 2,597 (1,091) 1.215 Past due: (USD 000’s) Total 23,166 13,235 Not yet due 19,915 1 to 30 days 2,450 31 to 60 days Over 60 days Disposals (106) 149 (740) 518 (62) 266 (183) 282 December 31, 2020 December 31, 2019 723 414 78 46 Exchange rate difference BALANCE AT DECEMBER 31, 2020 10,468 2,307 1,850 6,213 3,559 3,751 15,373 ACCCUMULATED DEPRECIATIONS: Balance at January 1, 2019 Credit Loss Provision Matrix (519) - (3,060) 46 (1,008) 36 - - (4,587) 82 Past due Disposals (USD 000’s) Total Not yet due 19,915 1 to 30 days 2,450 31 to 60 days Over 60 days Depreciations for the year (229) 10 (896) 59 (470) 21 (527) - (2,122) 90 Gross carrying amount Expected credit loss rate Lifetime expected credit loss 23,166 723 1.0% (7) 78 15.0% (12) Exchange rate differences 0.01% 0.10% BALANCE AT DECEMBER 31, 2019 Balance at January 1, 2020 Disposals (738) (738) 106 (3,851) (3,851) 740 (1,421) (1,421) 61 (527) (527) 103 (6,537) (6,537) 1,010 (23) (2) (2) Depreciations for the year (256) (73) (860) (343) (4,314) 1,692 1,899 (491) (152) (2,003) 1,195 1,556 (556) (66) (2,163) (634) (8,324) 6,115 A summary of the activity in the provision for uncollectible accounts is as follows: Exchange rate differences BALANCE AT DECEMBER 31, 2020 CARRYING AMOUNT AT DECEMBER 31, 2019 (961) 648 (1,046) 2,580 2,705 (USD 000’s) 2020 2019 (64) (48) 64 Balance at January 1 Additions (48) (23) 48 CARRYING AMOUNT AT DECEMBER 31, 2020 889 7,049 Reversals BALANCE AT DECEMBER 31 (23) (48) LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 51 The following table summarizes common share activity in the years presented: 18. INVENTORIES (000's) 2020 25,604 (836) 2019 25,540 - (USD 000’s) 2020 1,875 1,093 2,968 (437) 2,531 2019 1,051 1,228 2,279 (622) 1,657 Common shares outstanding - January 1 Common shares repurchased, net Raw materials and work-in-process Finished goods Options and warrants exercised and shares issued COMMON SHARES OUTSTANDING - DECEMBER 31 734 64 Total gross inventories 25,502 25,604 Less: provision for inventory reserves The Company does not cancel shares that are repurchased, but maintains them in treasury to fulfill option exercises. Refer to ‘Shareholder information’ in this report for information on the composition of Asetek shareholders. TOTAL NET INVENTORIES (USD 000’s) Inventories recognized as cost of sales during the period 2020 (38,556) (437) 2019 (31,329) (622) 20. NET DEBT Write-down of inventories to net realizable value The following is a summary of the Company’s outstanding and net debt: (USD 000’s) Line of credit 2020 (536) 2019 (746) A summary of the activity in the provision for inventory reserves is as follows: Leases - amounts due within one year DEBT INCLUDED IN CURRENT LIABILITIES Leases - amounts due after one year TOTAL DEBT (989) (772) (USD 000’s) 2020 (622) (437) 622 2019 (199) (622) 199 (1,525) (2,604) (4,129) 27,099 22,970 (1,518) (2,774) (4,292) 24,505 20,213 Balance at January 1 Additions Write-offs Less: cash and equivalents BALANCE AT DECEMBER 31 (437) (622) NET DEBT Asetek A/S Danmark line of credit. In September 2012, the Company entered into a revolving line of credit agreement with Sydbank. The line is collateralized by the trade receivables of Asetek Danmark A/S and is payable on demand. At December 31, 2020, the total line was 5.0 million Danish kroner, which equates to $825 thousand at December 31, 2020. Interest on the line is payable monthly at the Danish CIBOR 3 rate plus 2.25 percentage points, which in total was 2.03% at December 31, 2020. As of December 31, 2020, the Company had 3.25 million Danish kroner ($ 536 thousand) outstanding on the line. (4.98 million Danish kroner outstanding at December 31, 2019). Reconciliation of liability for line of credit: resulting in $2,381,000 received by the Company. In 2019, a total of 64 thousand options (0.2% of total shares, nominal value DKK6.4 thousand) were exercised resulting in $66,000 received by the Company. 19. SHARE CAPITAL (USD 000’s) 2020 2019 During 2020, the Company repurchased 844 thousand of its common shares on the open market for a total cost of $6.4 million. The Company’s existing share buyback program authorizes the purchase of up to an additional 194 thousand shares through March 5, 2021. Shares purchased under the program are used to fulfill obliga- tions under Asetek’s employee stock option plan. Beginning balance (746) 269 (741) (22) 17 Net paid (drawn) on line of credit Foreign exchange impact ENDING BALANCE (59) As of December 31, 2020, there are 26,433 thousand common shares outstanding with a nominal value of 0.10 DKK per share and 931 thousand shares (3.5% of total shares, nominal value DKK 93.1 thousand) held in treasury. Included in equity is a reserve for treasury shares of ap- proximately $6,373,000 at December 31, 2020. (536) (746) In 2020, a total of 734 thousand options (2.8% of total shares, nominal value DKK 73.4 thousand) were exercised LIQUID COOLING DONE RIGHT 52 FINANCIAL STATEMENT S - NOTES Reconciliation of lease liability Future minimum lease payments are as follows as of the balance sheet date: 21. LEASES 22. TRANSACTIONS WITH RELATED PARTIES (USD 000’s) 2020 3,546 - 2019 879 Asetek leases certain equipment, its principal office fa- cilities and certain motor vehicles. Contracts are typically for fixed periods of five years or more for office facilities, five years for equipment, and two years or less for motor vehicles. The leased asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight- line basis. (USD 000’s) 2020 2019 Beginning balance The Company’s CEO serves as Chairman of the Board for a vendor that supplies information technology services to the Company. In 2020, the Company purchased services totaling $0.7 million ($0.5 million in 2019) from this vendor. At Decem- ber 31, 2020 and 2019, the Company had outstanding paya- bles to this vendor of $30,000 and $45,000, respectively. Accounting change on January 1 Additions to lease liabilities Payments of lease liabilities Adjustments/reductions to leases Foreign exchange impact ENDING BALANCE 3,238 413 Minimum lease payments as of December 31 3,632 91 3,732 76 668 (831) (80) 290 Asset residual at end of lease (734) (95) Less: amount representing interest (130) (262) (155) TOTAL OBLIGATIONS UNDER FINANCE LEASES 3,593 3,546 3,593 3,546 The Company’s office space in Aalborg, Denmark is under lease through July 2025. The Company’s office in San Jose, California is under lease through December 2023, with an available option to terminate without penalty beginning in January 2021. The Company's office space in Taipei, Taiwan is under lease until August 2025. The Company provides sponsorship support for Valdemar Eriksen Racing A/S, an organization partially owned by the Company’s CEO. In the years ended December 31, 2020 and 2019, the Company paid $72,000 and $62,000,respectively to this organization. Obligations under leases due within one year 989 772 Total cash payments for leases was $927,000 and $868,000 in 2020 and 2019, respectively. Obligations under leases due after one year 2,604 2,774 3,593 3,546 On January 1, 2019, the Group adopted IFRS 16 Leases on a modified retrospective basis without restatement of the prior year, as permitted under the standard. Upon adoption of IFRS 16, Asetek recognized lease liabilities for leases which had previously been classified as operating leases. Refer to Note 2.16 for more details regarding lease accounting policy. Right-of-use Assets. The following table presents a summary of the Right-of-use assets under lease, which is a subset of the property and equipment presented in Note 16. Other fixtures, fittings, tools (USD 000’s) COST: Machinery equipment Properties Total Balance at December 31, 2020 1,454 - 147 154 (139) 1 3,107 514 4,708 668 Additions Disposals and transfers (79) 143 (44) 281 (262) 425 Exchange rate differences BALANCE AT DECEMBER 31, 2020 ACCCUMULATED DEPRECIATIONS: Balance at January 1, 2020 1,518 163 3,858 5,539 (608) 79 (43) 59 (527) 44 (1.178) 182 Disposals and transfers Depreciations for the year (285) (75) (45) (1) (556) (65) (886) (141) Exchange rate differences BALANCE AT DECEMBER 31, 2020 CARRYING AMOUNT AT DECEMBER 31, 2019 CARRYING AMOUNT AT DECEMBER 31, 2020 (889) 846 629 (30) 104 133 (1,104) 2,580 2,754 (2,023) 3,530 3,516 LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 53 23. SUBSIDIARIES 24. AUDIT FEES The Group’s principal auditors perform audits for all of Asetek’s entities except for the Xiamen, China subsidiary, which is audited by a local firm. The Group’s principal auditors received a total fee of $168,000 and $299,000 in 2020 and 2019, respectively. Tax services provided by the Company’s principal auditors in 2019 included advisory regarding deferred taxes and transfer pricing. The following entities are included in the consolidated accounts: Company Domicile Denmark USA Stake 100% 100% 100% 100% 100% 100% Voting Share 100% Activity Trading Inactive Trading Trading Trading Trading Asetek A/S Asetek Holdings, Inc. 100% Asetek USA, Inc. USA 100% Asetek Danmark A/S Denmark China 100% Xiamen Asetek Computer Industry Co., Ltd. JMH Gallows Pound Technologies Limited 100% The fee is distributed between these services: United Kingdom 100% (USD 000’s) 2020 92 2019 99 Statutory audit Other assurance services Tax services 13 5 39 168 27 Other consulting TOTAL 24 ASETEK A/S AALBORG, DENMARK 168 299 Fees for services other than statutory audits provided by PricewaterhouseCoopers Statsautoriseret Revisions- partnerselskab to the group amount to $56,000 (2019: $147,000) and consist of accounting advice in relation to an assessment report regarding the purchase of assets from Granite Devices OY, tax advice in relation to US tax matters and other general accounting and tax matters. ASETEK HOLDINGS, INC DELAWARE, USA ASETEK DANMARK A/S AALBORG , DENMARK ASETEK USA, INC SAN JOSE, CA USA JMH GALLOWS POUND TECHNOLOGIES, LTD XIAMEN ASETEK COMPUTER INDUSTRY CO., LTD UNITED KINGDOM XIAMEN, CHINA LIQUID COOLING DONE RIGHT 5 4 FINANCIAL STATEMENT S - NOTES 25. BOARD OF DIRECTORS The members of the Board of Directors have reported the information below as of the date of this filing. For the year 2020, the board members have been compensated as listed below. Age and gender Date appointed to end of current term Independence status Committee participation 2020 Cash Compensation Qualifications Asetek equity holdings Shares Director name and other positions Independent Compensation (chairman) Nomination Owned shares 22,500 $55,500 61, Male April 10, 2019 to April 22, 2021 Former executive at Siemens A/S for 25+ years; Technology, Finance, Corporate governance, Risk manage- ment. Extensive board experience with multiple Chairman roles for 10+ years. JUKKA PERTOLA, CHAIRMAN - Tryg A/S and Tryg Forsikring A/S - Chairman of the Board - COWI Holding A/S - Deputy Chairman - GN Store Nord A/S, GN Hearing A/S, GN Audio A/S- Deputy chairman - Siemens Gamesa Renewable Energy A/S – Chairman of the Board - Monsenso A/S - Chairman of the Board - GomSpace Group AB and GomSpace A/S - Deputy Chairman CHRIS CHRISTOPHER, VICE CHAIRMAN - Rocky Mountain Innosphere - Board member - CloudGen - Board member 77, Male Former Senior VP, Hewlett Packard; 40+ years of leadership, technology, product development, supply chain; former leader of server and hardware business at HP. June 19, 2012 to April 22, 2021 Independent Independent Audit Compensation Owned shares 77,422 15,654 14,757 11,000 4,400 $40,400 Warrants @ NOK 10.50 Warrants @ NOK 19.50 Warrants @ NOK 40.10 Warrants @ NOK 76.25 ERIK DAMSGAARD 56, Male 20+ years of senior positions in electronics & electrical manu- facturing, business development. April 10, 2019 to April 22, 2021 Audit Owned shares 15,660 $40,400 - OJ group of companies - Managing director - Masentia group of companies - Chairman of the board - Tentoma A/S - Member of the board - ED Management Holding ApS - Owner - CRD Invest ApS - Managing director - TRD Invest ApS - Managing director JØRGEN SMIDT 64, Male Former VP at Nokia; 25+ years of senior management, business development, product management, operations. Partner, Sunstone Capital. June 19, 2012 to April 22, 2021 Independent Compensation Owned shares 16,600 $40,400 - Heartcore Capital - Venture Partner - InRiver - Chairman of the Board - Onomondo - Chairman of the Board - Freespee - Chairman of the Board - FlatFrog AB - Board member - Confirmit A/S - Chairman of the Board MARIA HJORTH 48, Female Former CEO Mercer Denmark, 20+ years in finance covering business development, M&A, investor relations. January 14, 2019 to April 22, 2021 Independent Audit (chairman) Owned shares 6,357 $40,400 - Fondsmæglerselskabet Maj Invest A/S - Board member - Maj Invest Equity A/S - Board member - Maj Invest Holding A/S - Board member - Trifork Holding AG - Board member LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 55 In January 2019, Asetek filed a patent infringement law- suit against CoolIT in the Northern District of California seeking judgment that CoolIT infringes Asetek’s U.S. Patent Nos. 8,240,362; 8,245,764; 9,733,681; 10,078,354; and 10,078,355. CoolIT filed counterclaims asserting infringement of four CoolIT patents, which Asetek denies. On September 17, 2020, Asetek filed a related patent infringement lawsuit against Corsair in the Northern District of California seeking judgment that Corsair infringes Asetek U.S. Patent Nos. 10,078,354; 10,078,355; 10,613,601; and 10,599,196. The court consolidated the two cases and set a trial date for February 2022. Asetek also filed review petitions in the U.S. Patent and Trade- mark Office (USPTO) to challenge the validity of two of the CoolIT patents asserted in the above litigation, and CoolIT filed review petitions in the USPTO to challenge the validity of three of the five Asetek patents asserted in the litigation. The USPTO is expected to decide those petitions in 2021. and granted Asetek claims for injunctive relief, rendering of accounts, recall and destruction. Coolergiant appealed the decision and initiated an action to nullify Asetek’s patent. In the nullity proceedings, the German Patent Court revoked the German part of Asetek’s patent in February 2020. In September 2020, Asetek initiated its appeal of the decision to the German Supreme Court. The infringement and enforcement proceedings have been stayed until a final decision on the validity of the patent is rendered by the Supreme Court, which is ex- pected by the end of 2022. 26. POST BALANCE SHEET EVENTS The Company has evaluated the period after December 31, 2020 up through the date of the Management State- ment and determined that there were no transactions that required recognition in the Company’s financial statements, except for the following: On January 1, 2021, the Company announced an agree- ment to acquire intellectual property from Finland-based Granite Devices, Inc. to support the continued develop- ment of the Company's Gaming and Enthusiast offering. The total consideration paid is EUR 6.8 million (approxi- mately $8.3 million), of which EUR 3.4 million was paid in newly issued common shares of Asetek. The Company's offering of 348,003 shares was completed on January 4, 2021. The accounting for this business combination in 2021 is not yet complete as of the date of this filing. 27. CONTINGENT LIABILITIES In April 2016, Asetek initiated patent infringement pro- ceedings against Cooler Master and Coolergiant before the District Court The Hague, pertaining to commerce in The Netherlands. Following two appeal stages, the Dutch Supreme Court has now confirmed the invalidation of the Dutch part of Asetek’s patent in final instance. As a result thereof, Asetek’s claims against Cooler Master remain dismissed, and the claims against Coolergiant will be dismissed by the District Court The Hague. Legal proceedings. In the ordinary course of conducting our business, the Company is involved in various intellec- tual property proceedings, including those in which it is a plaintiff that are complex in nature and have outcomes that are difficult to predict. Asetek records accruals for such contingencies to the extent that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated. The Company’s assessment of each matter may change based on future unexpected events. An unexpected adverse judgment in any pending litigation could cause a material impact on the Group’s business operations, intellectual property, results of oper- ations or financial position. There are no material updates to matters previously reported on the Asetek 2019 Annual Report, except: In 2017, Coolergiant GmbH filed suit against Asetek Danmark A/S in Mannheim District Court requesting declaration of non-infringement in Germany of an Asetek patent. The Company disputed the allegations and filed counterclaim motions. In 2018, the Court ruled that the named Coolergiant products infringe on Asetek’s patent LIQUID COOLING DONE RIGHT 56 ASETEK A/S - ANNUAL REPORT 2019 56 Sales Director Sophie Wu, Technology Evangelist Shawn Sanders, Logistics Supervisor Janice Cheng 57 ANNUAL REPORT 2020, PARENT COMPANY For year ended December 31, 2020 Asetek A/S CVR-number: 3488 0522 LIQUID COOLING DONE RIGHT 58 FINANCIAL STATEMENT S - PROFIT & LOSS ASETEK A/S COMPREHENSIVE INCOME STATEMENT, PARENT COMPANY For the years ended December 31, 2020 and 2019 (USD 000’s) Service fees TOTAL REVENUE Research and development Note 2020 2,778 2019 2,899 13 2,778 (184) 2,899 (232) 3, 4, 5 3, 4, 5 Selling, general and administrative (3,011) (3,195) (3,092) (3,323) TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS) Foreign exchange (loss)/gain Finance income (417) 425 60 (424) 20 6 6 6 402 (13) Finance costs (22) 463 TOTAL FINANCIAL INCOME 409 INCOME BEFORE TAX Income tax 46 152 198 (16) (77) (93) 9 OPERATING INCOME (LOSS) Other comprehensive income items that may be reclassified to profit or loss in subsequent periods: Foreign currency translation adjustments - - TOTAL COMPREHENSIVE INCOME (LOSS) 198 (93) All operations are continuing. LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - BALANCE SHEET 59 ASETEK A/S BALANCE SHEET, PARENT COMPANY As of December 31, 2020 and 2019 (USD 000’s) Note 2020 2019 ASSETS NON CURRENT ASSETS Investments in subsidiaries Property and equipment Receivables from subsidiaries Deferred income tax assets TOTAL NON-CURRENT ASSETS 10 7 20,100 197 20,100 143 11 115 105 155 3 20,567 20,351 CURRENT ASSETS Other assets 266 11,912 21 14,629 14,651 Cash and cash equivalents TOTAL CURRENT ASSETS 12,178 TOTAL ASSETS 32,745 35,001 EQUITY AND LIABILITIES EQUITY Share capital 12 433 37,145 423 33,654 (4) Retained earnings Translation and other reserves TOTAL EQUITY (6,373) 31,204 34,073 NON-CURRENT LIABILITIES Payables to subsidiaries 11 8 430 - 324 10 Long-term debt TOTAL NON-CURRENT LIABILITIES 430 334 CURRENT LIABILITIES Short-term debt 8 104 296 613 78 180 287 49 Accrued liabilities Accrued compensation and employee benefits Trade payables 99 TOTAL CURRENT LIABILITIES TOTAL LIABILITIES 1,111 1,541 594 928 TOTAL EQUITY AND LIABILITIES 32,745 35,001 LIQUID COOLING DONE RIGHT 60 FINANCIAL STATEMENT S - EQUITY ASETEK A/S STATEMENT OF CHANGES IN EQUITY, PARENT COMPANY Share capital Translation reserves Treasury share reserves Retained earnings (USD 000’s) Total EQUITY AT DECEMBER 31, 2018 Total comprehensive income for 2019 Loss for the year 422 - (4) 32,626 33,044 - - - (93) (93) TOTAL COMPREHENSIVE INCOME FOR 2019 Transactions with owners in 2019 Shares issued - - - (93) (93) 1 - - - - - - - 65 1,056 66 1,056 Share based payment expense TRANSACTIONS WITH OWNERS IN 2019 EQUITY AT DECEMBER 31, 2019 Total comprehensive income for 2020 Income for the year 1 - 1,121 1,122 423 (4) 33,654 34,073 - - - 198 198 TOTAL COMPREHENSIVE INCOME FOR 2020 Transactions with owners in 2020 Shares issued - - - 198 198 10 - - - - - - - (6,369) - 2,376 - 2,386 (6,369) 918 Shares repurchase Share based payment expense TRANSACTIONS WITH OWNERS IN 2020 EQUITY AT DECEMBER 31, 2020 - 918 10 433 (6,369) (6,373) 3,294 37,145 (3,065) 31,204 LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - CASH FLOWS 61 ASETEK A/S STATEMENT OF CASH FLOWS, PARENT COMPANY For the years ended December 31, 2020 and 2019 (USD 000’s) Note 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) for the year 198 52 (93) 47 Depreciation and amortization 7 4 9 Share based payments expense 918 1,056 77 Income tax expense (income) (152) (245) 490 1,260 Changes in other assets (8) Changes in trade payables and accrued liabilities NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (386) 692 7 (31) 96 (51) 2,353 2,302 Net receipts from (payments to) subsidiaries NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Lease payments on right-of-use assets 11 65 (59) (6,369) 2,386 (4,042) - (15) - Repurchase of common shares 12 12 Proceeds from issuance of share capital 64 NET CASH PROVIDED BY FINANCING ACTIVITIES Effect of exchange rate changes on cash and cash equivalents NET CHANGES IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD SUPPLEMENTAL DISCLOSURE - NON-CASH ITEMS: Right-of-use assets capitalized under leases 49 - (2,717) 14,629 11,912 3,043 11,586 14,629 154 114 LIQUID COOLING DONE RIGHT 62 FINANCIAL STATEMENT S - NOTES Remuneration of the Group Board of Directors is specified in Note 6 to the Consolidated Financial Statements. The Company’s share-based incentive pay program is described in Note 7 of the Consolidated Financial Statements. 3.TOTAL OPERATING EXPENSES Operating expenses consisted of the following for the year ended December 31, 7. PROPERTY AND EQUIPMENT NOTES (USD 000’s) 2020 2019 1. GENERAL INFORMATION Refer to Note 1 to the Consolidated Financial Statements. Cost: (USD 000’s) 2020 2,576 307 2019 2,594 471 Balance at January 1 Impact of accounting change Additions under leases Other additions 190 - - 25 114 51 - Personnel expenses (Note 4) Legal, consultants and auditor Other expenses 154 31 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The 2020 financial statements for Asetek A/S have been prepared in accordance with International Financial Re- porting Standards (IFRS) as issued by IASB and adopted by the EU. 313 258 5. AUDIT FEES TOTAL EXPENSES 3,195 3,323 Disposals (139) 236 Tax services provided by the Company’s principal auditors includes advisory regarding U.S. domicile, U.S. tax reform and transfer pricing. BALANCE AT DECEMBER 31 Accumulated depreciation: Balance at January 1 Disposals 190 4.PERSONNEL EXPENSES Total personnel costs for the year ended December 31, (47) 59 - - (USD 000’s) 2020 39 2019 47 (USD 000’s) 2020 1,658 918 2019 1,538 1,056 The financial statements are presented in U.S. Dollars (USD), which is the functional currency. Depreciation for the year BALANCE AT DECEMBER 31 (52) (39) (47) (47) Statutory audit Other assurance services Tax services Salaries, pension and other Share based payment 13 5 CARRYING AMOUNT AT DECEMBER 31 39 168 2 The accounting policies for the Parent Company are the same as for the Asetek Group, as per Note 2 to the consolidated financial statements, with the exception of the items listed below. TOTAL PERSONNEL EXPENSES 2,576 2,594 197 143 Other consulting TOTAL 24 115 222 Total personnel costs are specified as follows: Property and equipment represents vehicles and land in use by the Company. (USD 000’s) 2020 184 2019 232 Research and development Selling, general and administrative TOTAL PERSONNEL EXPENSES On January 1, 2019, the Company adopted IFRS 16 Leases on a modified retrospective basis without restatement of the prior year. Refer to Note 21 in the Consolidated Finan- cial Statements. 2,392 2,362 2.1. Dividends on investments in subsidiaries, joint ventures and associates. 6. FINANCIAL INCOME AND COST 2,576 2,594 (USD 000’s) 2020 2019 Dividends on investments in subsidiaries, joint ventures and associates are recognized as income in the income statement of the Parent Company in the financial year in which the dividend is declared. FOREIGN CURRENCY EXCHANGE (LOSS) GAIN The average number of employees in the Parent company is two for both years presented. The figures listed above in- clude a portion of the executive management’s cash com- pensation based on an estimate of the actual resources allocated to the management of the parent company. The figures include incentive-based compensation in the form of share options and warrants granted to employees in the Asetek Group. Refer to Notes 6 and 7 in the Consolidated Financial Statements for information regarding incentive compensation programs and management remuneration. 425 20 As of December 31, 2020 and 2019, carrying value of vehicles under right-of-use leases totalled $132,000 and $100,000, respectively, and their associated leases are for terms of 12 months. Interest income on loans to subsidiaries 24 36 194 208 402 (2) Interest from bank accounts TOTAL FINANCE INCOME Interest on leases 2.2. Investments in subsidiaries, joint ventures and associates. Investments in subsidiaries, joint ventures and associates are measured at the lower of cost or the recoverable amount. An impairment test on the invest- ment in subsidiaries is performed if the carrying amount of the subsidiaries’ net assets is below the carrying value of the Parent Company’s investments in the consolidated financial statements. 60 (4) Other finance expense TOTAL FINANCE COST (18) (22) (11) (13) LIQUID COOLING DONE RIGHT FINANCIAL STATEMENT S - NOTES 63 8. LEASES 9. INCOME TAX 10. INVESTMENT IN SUBSIDIARIES 12. EQUITY Refer to Note 19 to the Consolidated Financial On January 1, 2019, the Company adopted IFRS 16 Leases on a modified retrospective basis without restatement of the prior year. Refer to Note 21 in the Consolidated Financial Statements. At December 31, 2020 and 2019, the tax benefit (provi- sion) for Asetek A/S differed from the statutory tax rate as a result of timing differences associated with share compensation expenses that are treated differently for tax purposes. (USD 000’s) Investment in Asetek Holdings, Inc. Statements. Balance at December 31, 2019 Additions 20,100 - 13. TRANSACTIONS WITH RELATED PARTIES Asetek A/S charges its subsidiaries a management service fee. Reference Notes 6 & 11 regarding transactions with subsidiaries. With regard to transactions with related parties that are not subsidiaries, refer to Note 22 to the Consolidated Financial Statements. Balance at December 31, 2020 20,100 20,100 20,100 Carrying amount at December 31, 2019 Carrying amount at December 31, 2020 (USD 000’s) 2020 2019 (USD 000’s) 2020 46 2019 (16) Minimum lease payments as of December 31 15 91 13 76 INCOME (LOSS) BEFORE TAX Asetek A/S acquired 100% of Asetek Holdings, Inc. through the exchange of shares in February 2013. At the time of acquisition, Asetek Holdings, Inc. had negative net equity, resulting in the initial investment to be valued at zero. Asetek Holdings, Inc. represents Asetek A/S’s only direct investment in subsidiaries. Asset residual value at end of lease Less: amount representing interest Total obligations under leases Tax calculated at domestic rates applicable to profits/losses in respective countries (2) (1) 88 (10) 3 104 The effect of timing differences between book and tax 162 (80) Tax (expense) benefit 152 (77) 14. EVENTS AFTER THE REPORTING PERIOD Refer to Note 26 to the Consolidated Financial Statements Total lease obligations due within one year were $104,000 and $78,000 at December 31, 2020 and 2019, respectively. Asetek A/S has deferred tax assets at December 31, 2020 and 2019 of $155,000 and $3,000, respectively, which represent timing differences between book and tax asso- ciated with the recognition of share based compensation expense. In accordance with IAS 12, the Company recog- nizes deferred tax assets 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 Company. The estimated tax ben- efit is calculated considering historical levels of income, expectations and risks associated with estimates of future taxable income. The calculation utilizes the statutory tax rates that are expected to apply to taxable income for the years in which the asset is expected to be realized. 11. NET RECEIVABLES FROM (PAYABLES TO) SUBSIDIARIES 15. CONTINGENT LIABILITIES The Danish group enterprises are jointly and severally liable for tax on group income subject to joint taxation, as well as for Danish withholding taxes by way of dividend tax, royalty tax, tax on unearned income and any subse- quent adjustments to these. Asetek A/S has executed a guarantee to its Group’s principal bank, Sydbank, for all outstanding matters with its wholly owned subsidiary, Asetek Danmark A/S. As of December 31, (USD 000’s) 2020 (158) (273) 24 2019 (266) (59) 14 Asetek Danmark A/S Asetek USA, Inc. Asetek Xiamen Asetek Holdings, Inc. 92 92 Net receivables from (payables to) subsidiaries (315) 5.5% (219) 7.2% Average effective interest rate Refer to Note 27 to the Consolidated Financial State- ments. The fair value of receivables and payables corresponds in all material respects to the carrying amount. As of December 31, 2020 and 2019, there is no credit loss provi- sion deemed necessary for receivables from subsidiaries. LIQUID COOLING DONE RIGHT 64 LIQUID COOLING DONE RIGHT MANAGEMENT STATEMENT 65 MANAGEMENT STATEMENT EXECUTIVE BOARD: The Executive Board and the Board of Directors have today considered and adopted the Annual Report of Asetek A/S for the financial year January 1 to December 31, 2020. The annual report is prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed companies. André Sloth Eriksen Chief Executive Officer Peter Dam Madsen Chief Financial Officer In our opinion, the Consolidated Financial Statements and Parent Company Financial Statements give a true and fair view of the financial position at December 31, 2020 of the Group and the Parent company and of the results of the Group and Parent company operations and cash flows for 2020. BOARD OF DIRECTORS: In our opinion, Management’s Report includes a true and fair account of the development in the operations and financial circumstances of the Group and the Parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the Parent company. Jukka Pertola, Chairman Chris J. Christopher, Vice Chairman In our opinion, the annual report of Asetek A/S for the financial year 1 January to 31 December 2020 with the file name asetek-2020-12-31.zip is prepared, in all material respects, in compliance with the ESEF Regulation. Maria Hjorth Jørgen Smidt We recommend that the Annual Report be adopted at the Annual General Meeting. Aalborg, Denmark February 23, 2021 Erik Damsgaard LIQUID COOLING DONE RIGHT 66 INDEPENDENT AUDITOR’S REPORT BASIS FOR OPINION KEY AUDIT MATTERS We assessed relevant internal controls and performed sub- stantive audit procedures to verify capitalized amounts. INDEPENDENT AUDITOR’S REPORTS We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional require- ments applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s responsibilities for the audit of the Financial Statements section of our report. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Fi- nancial Statements for 2020. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We evaluated and challenged Management’s assessment of impairment indicators of completed development projects based on the commercial prospects of the projects. For in-progress development projects, we challenged the key assumptions applied in the value-in-use calculations. To the shareholders of Asetek A/S REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS OUR OPINION We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Capitalization of development costs In our opinion, the Consolidated Financial Statements and the Parent Company Financial Statements give a true and fair view of the Group’s and the Parent Company’s financial position at 31 December 2020 and of the results of the Group’s and the Parent Company’s operations and cash flows for the financial year 1 January to 31 December 2020 in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. Our work was based on our understanding of the business cases and key assumptions applied. The Group capitalizes development costs when certain cri- teria according to IFRS are met. The criteria for recognition and measurement of development costs is subject to Man- agement’s judgment and assumptions, which is uncertain by nature. Completed development projects are assessed quarterly for impairment indications. For in-progress devel- opment projects impairment tests are performed quarterly. The impairment tests are based on strategy plan approved by Management and value-in-use calculations based on expected future cash flows. Independence We challenged whether the intent to finalize the projects remain and whether the projects are expected to generate future economic benefits exceeding the carrying values. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the additional requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code. Valuation of deferred tax assets The Group capitalizes deferred tax assets when certain cri- teria are met. The criteria for recognition and measurement is subject to Management’s judgment and assumptions regarding the future taxable income, which is uncertain by nature. The deferred tax assets relate to net operating losses in Denmark and the US. Our opinion is consistent with our Auditor’s Long-form Report to the Audit Committee and the Board of Directors. To the best of our knowledge and belief, prohibited non-au- dit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. We focused on this area because the criteria for recognition and measurement of development projects are subject to Management judgments and assumptions. What we have audited The Consolidated Financial Statements and Parent Com- pany Financial Statements of Asetek A/S for the financial year 1 January to 31 December 2020 comprise statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and notes, including summary of significant accounting policies for the Group as well as for the Parent Company. Collectively referred to as the “Financial Statements”. Appointment We focused on this area due to the size of the deferred tax asset and the size of the total tax losses. Furthermore, there is judgment involved in assessing whether the criteria set out in the accounting standards (IAS 12) for recognizing deferred tax assets have been met, and estimates over the value of deferred tax assets are subjective and uncertain by nature. Following the admission of the shares of Asetek A/S for listing on Oslo Stock Exchange, we were first appointed auditors of Asetek A/S on 24 April 2014. We have been reappointed annually by shareholder resolution for a total period of uninterrupted engagement of 7 years including the financial year 2020. Refer to note 15 in the Consolidated Financial Statements. How our audit addressed the key audit matter We selected a sample of in-progress development projects and considered whether all criteria described in IFRS were met as basis for capitalization. Refer to note 11 in the Consolidated Financial Statements. LIQUID COOLING DONE RIGHT INDEPENDENT AUDITOR’S REPORT 67 How our audit addressed the key audit matter We assessed the management’s valuation of the deferred tax assets and reconciled this to the amounts recorded in the financial statements. responsibility is to read Management’s Review and, in doing so, consider whether Management’s Review is materially inconsistent with the Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrep- resentations, or the override of internal control. We challenged estimates made by management in relation to the deferred tax assets through the following audit procedures: // Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are ap- propriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent Company’s internal control. Moreover, we considered whether Management’s Review includes the disclosures required by the Danish Financial Statements Act. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS // We received the Group’s budgets for the period 2021- 2025. We evaluated and challenged the assumptions made by management by comparing budgets to realized figures and realized growth for 2020. Further, we performed look back testing procedures to evaluate management budget procedures. Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasona- ble assurance is a high level of assurance but is not a guaran- tee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements. Based on the work we have performed, in our view, Man- agement’s Review is in accordance with the Consolidated Financial Statements and the Parent Company Financial Statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement in Management’s Review. // Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. // Conclude on the appropriateness of Management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncer- tainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Compa- ny’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Parent Company to cease to continue as a going concern. // We compared the budgets with the deferred tax asset recognized and challenged management on their plan for utilizing the tax losses. MANAGEMENT’S RESPONSIBILITY FOR THE FINAN- CIAL STATEMENTS // We utilized our tax specialists in order to ensure compli- ance to tax rules in respect of determining the value of the deferred tax asset. Management is responsible for the preparation of consol- idated financial statements and parent company financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act, and for such internal control as Manage- ment determines is necessary to enable the preparation of fi- nancial statements that are free from material misstatement, whether due to fraud or error. As part of an audit in accordance with ISAs and the addi- tional requirements applicable in Denmark, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: STATEMENT ON MANAGEMENT’S REVIEW Management is responsible for Management’s Review. Our opinion on the Financial Statements does not cover Management’s Review, and we do not express any form of assurance conclusion thereon. // Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and ap- propriate to provide a basis for our opinion. The risk of not In preparing the Financial Statements, Management is responsible for assessing the Group’s and the Parent In connection with our audit of the Financial Statements, our LIQUID COOLING DONE RIGHT 68 INDEPENDENT AUDITOR’S REPORT // Ensuring consistency between iXBRL tagged data and the Consolidated Financial Statements presented in human-readable format; and // Evaluate the overall presentation, structure, and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underly- ing transactions and events in a manner that achieves fair presentation. regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. // Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and // Reconciling the iXBRL tagged data with the audited // For such internal control as Management determines necessary to enable the preparation of an Annual Report that is compliant with the ESEF Regulation. Consolidated Financial Statements. In our opinion, the Annual Report of Asetek A/S for the financial year 1 January to 31 December 2020 with the file name asetek-2020-12-31.zip is prepared, in all material respects, in compliance with the ESEF Regulation. // Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Consolidated Financial Statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion. REPORT ON COMPLIANCE WITH THE Our responsibility is to obtain reasonable assurance on whether the Annual Report is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of proce- dures selected depend on the auditor’s judgment, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: ESEF REGULATION As part of our audit of the Financial Statements we per- formed procedures to express an opinion on whether the Annual Report of Asetek A/S for the financial year 1 January to 31 December 2020 with the file name asetek-2020-12-31.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) which includes requirements related to the preparation of the Annual Report in XHTML format and iXBRL tagging of the Consolidated Financial Statements. Aarhus, February 23, 2021 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no 3377 1231 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. // Testing whether the Annual Report is prepared in XHTML format; We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communi- cate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Management is responsible for preparing an Annual Report that complies with the ESEF Regulation. This responsibility includes: // Obtaining an understanding of the company’s iXBRL tagging process and of internal control over the tagging process; Mads Melgaard State Authorised Public Accountant, mne34354 // The preparation of the Annual Report in XHTML format; // Evaluating the completeness of the iXBRL tagging of the Consolidated Financial Statements; // The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchoring thereof to elements in the taxonomy, for all fi- nancial information required to be tagged using judgment where necessary; From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or // Evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified; Henrik Berring Rasmussen State Authorised Public Accountant, mne34157 LIQUID COOLING DONE RIGHT OTHER INFORMATION - STOCK EXCHANGE RELEASES 69 STOCK EXCHANGE RELEASES Issue Date Subject Issue Date Subject December 30, 2020 Transactions carried out under Share Buyback Program December 22, 2020 Transactions carried out under Share Buyback Program December 15, 2020 Transactions carried out under Share Buyback Program August 12, 2020 August 12, 2020 August 12, 2020 August 10, 2020 August 7, 2020 August 3, 2020 July 27, 2020 Mandatory notification of trade: executive management exercises warrants and sells shares Share capital increase upon exercise of warrants Q2 2020: Gross margin increase and raised full-year expectations Transactions carried out under Share Buyback Program Asetek presents second quarter 2020 results on Wednesday, August 12 Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Update to full year 2020 guidance December 8, 2020 December 1, 2020 Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program November 27, 2020 Share capital increase upon exercise of warrants November 24, 2020 Asetek receives order from existing global data center OEM partner November 24, 2020 Transactions carried out under Share Buyback Program November 17, 2020 Transactions carried out under Share Buyback Program November 17, 2020 Asetek receives order from existing global data center OEM partner November 10, 2020 Transactions carried out under Share Buyback Program July 21, 2020 July 20, 2020 July 14, 2020 Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Asetek collaborates with HPE to deliver next-gen HPC server cooling solutions Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Transactions carried out under Share Buyback Program Share capital increase upon exercise of warrants July 7, 2020 November 9, 2020 November 3, 2020 November 3, 2020 October 29, 2020 October 27, 2020 October 22, 2020 October 22, 2020 October 20, 2020 October 20, 2020 October 19, 2020 October 19, 2020 October 7, 2020 October 7, 2020 Asetek receives order from existing global data center OEM partner Transactions carried out under Share Buyback Program Asetek receives order from existing global data center OEM partner Outcome of Extraordinary General Meeting July 6, 2020 June 29, 2020 June 22, 2020 June 15, 2020 June 8, 2020 Transactions carried out under Share Buyback Program Asetek launches share buyback program to cover employee stock options Q3 2020: Record revenue and EBITDA on strong Gaming & Enthusiast demand Asetek receives order from existing global data center OEM partner Asetek presents third quarter 2020 results on Friday, October 23 Financial calendar June 2, 2020 May 26, 2020 May 25, 2020 May 18, 2020 May 18, 2020 May 14, 2020 May 6, 2020 Transactions carried out under Share Buyback Program Asetek receives repeat order from existing global data center OEM partner Asetek launches share buyback program to cover employee stock options Asetek receives order from server OEM partner Update to full year 2020 guidance Asetek receives order from existing global data center OEM partner Notice of Extraordinary General Meeting October 29, 2020 Disclosure of shareholding April 23, 2020 April 22, 2020 April 22, 2020 April 21, 2020 April 17, 2020 March 30, 2020 March 19, 2020 March 18, 2020 March 11, 2020 February 25, 2020 February 19, 2020 February 11, 2020 February 10, 2020 January 30, 2020 Employee stock option grant September 29, 2020 Transactions carried out under Share Buyback Program September 24, 2020 Transactions carried out under Share Buyback Program September 15, 2020 Share capital increase upon exercise of warrants Outcome of Annual General Meeting Q1 2020: Lower revenue and increased gross margin Asetek receives order for new HPC installation from existing global data center OEM partner Asetek presents first quarter 2020 results on Wednesday, April 22 Notice of Annual General Meeting April 22, 2020 September 15, 2020 Transactions carried out under Share Buyback Program September 9, 2020 Asetek receives order for new HPC installation from existing data center OEM partner September 8, 2020 Transactions carried out under Share Buyback Program Mandatory notification of trade: CEO purchases shares Mandatory notification of trade: Board member purchases shares Mandatory notification of trade: CFO purchases shares Q4 2019: Revenue in line with expectations, evolving gaming and enthusiast business model Asetek presents fourth quarter and annual 2019 results on Wednesday, February 26 Supply chain update August 31, 2020 August 25, 2020 August 25, 2020 August 24, 2020 August 19, 2020 August 17, 2020 August 17, 2020 August 14, 2020 Transactions carried out under Share Buyback Program Asetek receives order for new HPC installation from existing data center OEM partner Transactions carried out under Share Buyback Program Asetek receives order for new HPC installation from existing data center OEM partner Share capital increase upon exercise of warrants Update to full year 2020 guidance Financial calendar Transactions carried out under Share Buyback Program Major shareholder announcements Asetek to supply liquid cooling solutions to global server OEM LIQUID COOLING DONE RIGHT 70 OTHER INFORMATION - DEFINITIONS OF RATIOS AND METRICS DEFINITIONS OF RATIOS AND METRICS Asetek uses various metrics, financial and non-financial BUSINESS DRIVERS PROFIT & LOSS BALANCE SHEET ratios which provide shareholders with useful informa- tion about the Group’s financial position, performance and development. Average selling price per unit, Gaming and Enthusiast Adjusted EBITDA Invested capital Operating income + amortization & depreciation + share-based compensation Equity raised from sale of shares and conversion of debt + interest bearing debt Gaming and Enthusiast revenue / Sealed loop units shipped Gross margin Quick ratio Revenue per employee Gross profit / Revenue (Cash and cash equivalents + Trade receivables and other) / Total Current Liabilities Revenue / Number of employees Operating margin Operating income / Revenue Current ratio Total current assets / Total current liabilities Return on Invested Capital (ROIC) Income for the year / Invested capital Days sales outstanding Trade receivables / (Revenue / 365 days) Organic growth (Revenue current year – Comparable revenue prior year) / Comparable revenue prior year Inventory turns per year Cost of sales / (beginning inventory + ending inventory / 2) *Comparable revenue excludes changes in revenue attributable to foreign exchange rates and any acquisi- tions or divestments. Days payable outstanding Trade payables / (Cost of sales / 365 days) Debt to equity Interest-bearing debt / Total equity Stock Market Earnings per share, basic Refer to Note 12 of the Consolidated financial statements Earnings per share, diluted Refer to Note 12 of the Consolidated financial statements Share price to earnings Share price / NOK to USD exchange rate / Earnings per share, diluted Market capitalization (Shares issued – Treasury shares) x (Share price in NOK / NOK to USD exchange rate) LIQUID COOLING DONE RIGHT Asetek A/S Assensvej 2 DK-9220 Aalborg East Denmark Phone: +45 9645 0047 Fax: +45 9645 0048 www.asetek.com [email protected] Web: Mail:
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