CD Projekt - Management Reports 2023

MANAGEMENT BOARD REPORT ON CD PROJEKT GROUP ACTIVITIES IN THE PERIOD BETWEEN 1 JANUARY AND 31 DECEMBER 2022 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 2 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE This report on the activities of the CD PROJEKT Group and CD PROJEKT S.A., in its key aspects contains infor- mation related to the separate ﬁnancial statement of CD PROJEKT S.A. Due to the fact that the activities and separate ﬁnancial statement of CD PROJEKT S.A. have a dominant inﬂuence on the activities and consolidated ﬁnancial statement of the CD PROJEKT Group as a whole, information presented in subsequent sections of this report will refer to consolidated ﬁnancial statement of the Group, whose scope covers the activities and ﬁnancial result of CD PROJEKT S.A. Disclaimer This English language translation has been prepared solely for the convenience of English-speaking readers. Despite all the eorts devoted to this translation, certain discrepancies, omissions or approximations may exist. In case of any dierences between the Polish and the English versions, the Polish version shall prevail. CD PROJEKT, its representatives and employees decline all responsibility in this regard. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 3 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Esteemed Shareholders, It is my pleasure to hand over to you our annual report, which summarizes key business events and our earnings in 2022. In the past year we focused on laying the foundation for the future of the Cyberpunk franchise. We continued with our intensive work on the game, releas- ing successive updates and the next-gen console edition of the game. Among the highlights of the period was the premiere of Cyberpunk: Edgerunners – the anime series was highly praised and attracted many newcomers to the game, while also convincing others to revisit Night City. It also proved that betting on transmedia synergy – that is, increasing involvement in our franchises and expanding their reach to new ﬁelds of digital entertainment – is the right direction for us. The Cyberpunk franchise will be further strengthened this year with the release of Phantom Liberty , a large-scale expansion for the game. Speaking of directions – in October 2022 we unveiled our product vision for the coming years. This is the most ambitious strategy in the Group’s history, and we believe it will take us to a new level. Given that we are a global market player and want to beneﬁt from the knowledge and expertise of top talents in the industry, our strategy – in addition to a series of new releases – also envisions the creation of a new CD PROJEKT RED studio in North America. In 2022 we also carried on with our internal transformation. We feel we’re operating more eciently, while entering into a strategic partnership with Epic Games and being able to use Unreal Engine in our future prod- ucts will help us deliver on our future publishing plans. By developing products set in two fantastic universes, and – in the future – adding a third, internally devel- oped franchise – we believe that our Group faces a bright future. Of course, achieving these goals calls for engagement on the part of our employees as well as trust and support from gamers and shareholders – for which I’m very thankful. I promise we will continue with our eorts to increase the value of CD PROJEKT. Respectfully, Adam Kiciński Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCECD PROJEKT GROUP4 Spis Treści 5 Key events in 2022 6 Brief outline of the CD PROJEKT Group 7 Activity proﬁle 11 Values and ethics 12 CD PROJEKT S.A. on the capital market 15 CD PROJEKT Group activity proﬁle 19 Organizational structure of the CD PROJEKT Group 21 Disclosure of business segments, products and services, outlets, suppliers and clients 44 Disclosure of external and internal factors aecting further growth of the CD PROJEKT Group 47 Disclosure of signiﬁcant achievements in the scope of research and development 48 Disclosure of signiﬁcant agreements 48 Risk management at the Group 59 Results of operation of the CD PROJEKT Group 60 Discussion of the key economic and ﬁnancial ﬁgures disclosed in the consolidated and separate ﬁnancial statements 91 Corporate governance 92 Entity contracted to audit ﬁnancial statements 92 Shareholders controlling at least 5% of the vote at the General Meeting 94 Information regarding the control system of employee share programs 94 Disclosure of the purchase of own shares 95 Company shares held by members of the Management Board and the Supervisory Board 95 Management structure 96 Composition of the Management Board of CD PROJEKT S.A. 97 Changes in the composition of the Management Board of CD PROJEKT S.A. 98 Composition of the Supervisory Board of CD PROJEKT S.A. 98 Changes in the composition of the Supervisory Board of CD PROJEKT S.A. 99 Gross remuneration of members of the Management Board and Supervisory Board of CD PROJEKT S.A. 101 Compensation paid out in the framework of share-based incentive schemes 103 Remuneration of Supervisory Board members 104 Changes in basic management practices at the Company and its Group 104 Corporate governance policies 104 Disclosure of signiﬁcant legal proceedings Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 5 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Key events in 2022 ■ On 15 February CD PROJEKT RED released the dedicated next-gen console edition of Cyberpunk 2077, along with Patch 1.5 – a large update for all sup- ported platforms ■ On 21 March the Company announced that it had entered into a strategic part- nership with Epic Games, thanks to which CD PROJEKT RED will be able to use Unreal Engine in its future game development projects ■ On 13 September Netﬂix premiered Cyberpunk: EDGERUNNERS – a 10-epi- sode anime series created by CD PROJEKT RED in collaboration with the Japanese Studio Trigger. The series was enthusiastically received by fans of the Cyberpunk universe worldwide ■ On 28 September CD PROJEKT RED announced that over 20 million copies of Cyberpunk 2077 had been sold ■ On 4 October the Group published its Strategy Update which focuses on long-term development of key projects. In the coming years the Studio intends to publish a range of titles in the framework of The Witcher and Cyberpunk franchises, and carry out internal development work on its third proprietary IP codenamed Hadar ■ In its Strategy Update the Management Board of the Company also announced the launch of a new studio – CD PROJEKT RED North America, which will consist of hubs located in Vancouver and Boston ■ On 26 October the Studio revealed that one of the previously announced Witch- er-themed projects would be The Witcher Remake – a retelling of the ﬁrst part of Geralt’s saga, developed in collaboration with Fool’s Theory ■ On 14 December CD PROJEKT RED released the next-gen console edition of The Witcher 3: Wild Hunt , along with a major update for the game’s PC edition 01 BRIEF OUTLINE OF THE CD PROJEKT GROUP Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 7 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Activity profile CD PROJEKT S.A. (also referred to as CD PROJEKT or the Company), headquartered in Warsaw, conducts business activities in the dynamically growing global digital entertainment segment. These activities have been ongoing on the domestic market for nearly 30 years under the CD PROJEKT brand name, and began by distrib- uting foreign games in Poland. Pivotal moments in the Group’s history came in 2002 with the establishment of the CD PROJEKT RED studio, which initiated work on the Company’s ﬁrst major RPG – The Witcher – as well as in 2008, with the launch of GOG.COM. The CD PROJEKT Group currently conducts operating activities in two key segments: CD PROJEKT RED and GOG.COM. 1 Role Playing Game – a storyline-driven game based on a consistent narrative. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 8 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE CD PROJEKT RED Developing and publishing videogames and tie-in products which exploit the commercial appeal of brands owned by the Company. GOG.COM Digital distribution of videogames via the Company’s proprietary GOG.COM platform and the GOG GALAXY application. During the reporting periods 97.0% of the CD PROJEKT Group’s sales revenues were generated by exports. Throughout 2022 North America and Europe accounted for 71.1% and 17.6% of the Group’s sales respectively. 89.3% of the Group’s sales were carried out via digital distribution channels, including GOG.COM as well as external platforms such as Steam, PlayStation Store, Xbox Games Store, Amazon, Humble Bundle, Epic Games Store and App Store. ● Headquarters (CD PROJEKT RED, GOG.COM and Spokko) ● CD PROJEKT RED dev studio ● Branch oces ● Media and community managers ● Local subsidiaries of the Group ● The Molasses Flood São Paulo Perugia Dubai Wrocław Kraków Warszawa Berlin Los Angeles Boston Shanghai Tokyo Seoul Paris Vancouver Map 1 The CD PROJEKT Group around the world Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 9 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Own IP and full control over the creation process. Focus on two widely recognizable franchises and limited number of products. International team of experienced developers who constantly prioritize quality. Three development studios: CD PROJEKT RED Europe, CD PROJEKT RED North America and The Molasses Flood. Own toolset and know-how required in the process of developing captivating open-world role-playing experiences. Strategic partnership with Epic Games enabling us to base our games on Unreal Engine. Gamers-ﬁrst business philosophy enabled by independent publishing activities. Direct digital distribution of games. Global reach – collaboration with handpicked distributors of box editions of videogames. Honest and direct communication with gamers. Full control over message. BACK OFFICE, INCLUDING HR, ACCOUNTING, FINANCES, LEGAL DEPT., ADMINISTRATION, TAXES, INVESTOR RELATIONS, IT DEVELOPMENTCREATION TECHNOLOGY PUBLISHING DISTRIBUTION PRIORITY: GAMERS GROWTH STRATEGY Strategic directions related to talent acquisition, expansion and support for the team, as well as transformation of the game development process, are presented in the CD PROJEKT Group Strategy Update published in 2021 (including in the accompanying video presentation). On 4 October 2022 the CD PROJEKT Group published another Strategy Update, which builds upon the plans unveiled in 2021 and focuses on long-term development of key products. In the coming years the studio intends to release a number of games within The Witcher and Cyberpunk 2077 franchises, as well as to carry out internal development work on its third proprietary IP codenamed Hadar. The CD PROJEKT Group also announced the launch of a new hub in Boston (distinct from The Molasses Flood), which, together with the Vancouver team, will comprise a new studio – CD PROJEKT RED North America, enabling the Group to access the North American talent pool. CD PROJEKT announced that it intends to add multiplayer elements to most of its future products, and to carry on with the franchise ﬂywheel concept, expanding the ecosystem of mutually supporting products based on the commercial potential of the Group’s franchises. The Group also declared openness to cooperation with external teams in the scope of creating new, exciting ways to experience the Group’s brands while enabling its internal team to focus on developing groundbreaking role-playing games. Chart 1 Videogame development business model at CD PROJEKT RED * CD PROJEKT RED North America is expected to begin operating in 2023 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 10 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE In future years the Group perceives the following directions of strategic growth: ■ further ramp-up of production capabilities in order to deliver more content to gamers without sacriﬁcing quality; ■ enriching experiences provided by CD PROJEKT RED games by adding multiplayer features; ■ further development of franchises. A thorough presentation of the assumptions underpinning the CD PROJEKT Group’s Strategy can be found on the Company website. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 11 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Compliance with the law, internal and external regulations, and ethics principles Attitudes promoted among team members Professionalism Honesty Fair playTolerance Creativity Involvement Values and ethics The Group’s organizational culture is based on fair treatment of all stakeholders. In our dealings with sharehold- ers, gamers and team members, we strive to be as transparent and ethical as possible. Core values which guide the Group in its activities are as follows: ■ Quality is our priority ■ A talented and passionate team is our strength ■ We stand for tolerance, honesty and openness ■ We regard independence as a cornerstone of creative freedom ■ Gamers are always in our focus In our daily work, we promote the following attitudes among team members: These values are an important aspect of our organizational culture. They support us in pursuing our goals, and they help make CD PROJEKT unique. Further information about the CD PROJEKT organizational culture can be found in the CD PROJEKT Group Sustainability Report for 2022. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 12 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE CD PROJEKT S.A. on the capital market The CD PROJEKT brand has been present on the Warsaw stock exchange since 2010. A total of 100 770 800 Company shares are traded on the Main Market of the Warsaw Stock Exchange under the continuous trading system. Key shareholders of CD PROJEKT S.A. are its co-founders – Marcin Iwiński (incumbent Chairman of the Supervisory Board) and Michał Kiciński. Other major shareholders who are also members of the Company’s Management Board are Adam Kiciński – President of the Board, and Piotr Nielubowicz – Vice President and CFO. Chart 2 Company shareholding structure as of the publication date of this report Remaining shares 66.0% Adam Kiciński 4.0% Piotr Nielubowicz 6.8% Michał Kiciński 10.4% Marcin Iwiński 12.8% Founders and Management Board members According to a notice filled on 26 May 2021 * According to a notice ﬁlled on 26 May 2021. ** As disclosed in Current Report no. 4/2023 of 15 February 2023, the aggregate percentage share of votes controlled by The Goldman Sachs Group, Inc. as a result of holding shares (1.70%) and other ﬁnancial instruments (4.70%) was 6.39% as of 10 February 2023. Ac- cording to the relevant notiﬁcation obtained by the parent Company, The Goldman Sachs Group, Inc. controls 1 708 240 votes from shares, 2 122 503 votes which may be gained in the exercise or conversion of a ﬁnancial instrument comprising securities on loan, and 2 613 546 votes from other types of ﬁnancial instruments. Since March 2018 CD PROJEKT has belonged to the WIG20 index which represents 20 of the largest and most liquid companies listed on the Warsaw Stock Market. As of 6 March 2023 the Company contributes 4.2% to the value of this index. CD PROJEKT belongs to the WIG.GAMES5 sectoral index which covers ﬁve largest videogame developers listed on the Warsaw market. Due to its signiﬁcantly larger market capitalization compared to other companies whose stock makes up the index, the contribution of CD PROJEKT S.A. to WIG.GAMES5 has been restricted – as of 6 March 2023 it stands at 36.8%. A new index, WIG-Gry, was launched on 21 March 2022, representing videogame developers traded on the main market of the Warsaw Stock Exchange. As of 6 March 2023 the Company contributes 64.6% to this index. CD PROJEKT is also part of the WIG-ESG index launched in September 2019. WIG-ESG aggregates companies regarded as socially responsible, i.e. those which adhere to social responsibility principles particularly with regard to environmental, social, economic and corporate governance issues. As of 6 March 2023, CD PROJEKT contributes 4.0% to the WIG-ESG index. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 13 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Chart 3 CD PROJEKT S.A. stock price and the WIG20 index between 1 January and 31 December 2022 30 40 50 60 70 80 90 100 110 CD PROJEKT WIG20 01.2022 02.2022 03.2022 04.2022 05.2022 06.2022 07.2022 08.2022 09.2022 10.2022 11.2022 12.2022 Between 1 January and 31 December 2022 the Company stock price ﬂuctuated between 77.89 PLN (7 September 2022) and 204.00 PLN (5 January 2022). During this period the stock price decreased by 32.8%, to 129.64 PLN at the end of trading on 30 December 2022. Over the same period the WIG20 index lost 20.9% while the main WIG index lost 17.1%. At the end of 2022 the Company’s market capitalization was 13.1 billion PLN. Chart 4 Average daily value of trade in CD PROJEKT S.A. shares (by month) between 1 January and 31 December 2022 (PLN millions) 0 50 100 150 200 250 300 350 400 450 500 550 January March May July September November 2021 2022 Average daily value of trade; 2021 - 137 million PLN Average daily value of trade; 2022 - 64 million PLN In 2022 the liquidity of CD PROJEKT S.A. stock, measured in terms of value of trade, decreased. The aggregate value of trade for 2022 was 16.0 billion PLN compared to 34.5 billion PLN the year before. The average daily value of trade was 64 million PLN, compared to 137 million PLN in 2021. A decrease was also observed in the average number of transactions per trading day – from 10 732 to 6 861. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 14 CD PROJEKT GROUP BUSINESS ACTIVITY FINANCIAL RESULTS CORPORATE GOVERNANCE Chart 5 Market capitalization of CD PROJEKT S.A. at the end of the year and aggregate value of trade in CD PROJEKT S.A. stock between 1 May 2010 and 31 December 2022 (PLN billions) 0 10 20 30 40 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Value of trade Market capitalization between 01.05.2010 and 31.12.2010 Table 1 Key indicators of CD PROJEKT S.A. stock 2022 2021 Change Net earnings per share (PLN) . . .% Quantity of shares in trading (in thousands) at end of period       .% Highest closing price during ﬁscal year (PLN) . . -.% Lowest closing price during ﬁscal year (PLN) . . -.% Price at beginning of period (PLN) . . -.% Price at end of period (PLN) . . -.% Average price during period (PLN) . . -.% P/E ratio at end of period . . -.% Market capitalization at end of period (PLN thousands)       -.% Average number of transactions per trading day     -.% Average daily value of trade (PLN thousands)     -.% Average daily trading volume (shares)     -.% As of the publication date of this report 23 brokerage houses, both foreign and domestic, issue recommendations concerning Company stock. A full list of analysts and brokerage houses which issue recommendations concerning Company stock can be found on the CD PROJEKT website at https://www.cdprojekt.com/en/investors/analysts/. 02 CD PROJEKT GROUP ACTIVITY PROFILE Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 16 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP CD PROJEKT Group activity profile MARKET ENVIRONMENT AND GROWTH PROSPECTS OF THE CD PROJEKT GROUP The CD PROJEKT Group conducts its business in the global videogame market which – despite having lost volume in 2022 – remains one of the most dynamic branches of the global economy. Newzoo – respected analysts of the videogame and e-sports markets – estimate that by 2025 the volume of the global videogame market will reach 211.2 billion USD, which implies a cumulative annual growth rate (CAGR) of 4.6% for the 2022–2025 period. According to PWC’s “Global Entertainment & Media Outlook 2022–2026” report, the videogame and e-sports market is expected to grow by 8.0% annually during this period. The growth outlook of the Group is aected not only by the increasing popularity of this form of entertainment as an approachable and attractive mass market oering, but also by the increasing sophistication and realism of products oered, increasing availability and aordability of gaming hardware, further development of digital means of reaching potential gamers and new game distribution channels. GLOBAL VIDEOGAME INDUSTRY Newzoo estimates the volume of the global videogame market at 184.4 billion USD at the end of 2022, which corresponds to a 4.3% decrease compared to the 2021 year-end value, and a 3.0% increase compared to the end of 2020. This ﬁrst-ever decrease in global market volume reported by Newzoo is linked, among others, to the elevated baseline values from the past two years, which were driven by the COVID-19 pandemic. Newzoo also points to unfavorable global economic conditions, which resulted in a decrease in disposable household income, and therefore in videogame-related spending. In the past year only the PC gaming segment was reported as having grown – by 1.8% y/y, reaching 38.2 billion USD at the end of 2022. In contrast, both the mobile and console gaming segments shrank. According to estimates the former lost 6.4% y/y, with a year-end ﬁgure of 92.2 billion USD, while the latter lost 4.2% y/y, shrinking to 51.8 billion USD. 2 Newzoo’s Games Market Estimates and Forecasts, Newzoo, 20 January 2023, accessed on 26 January 2023; newzoo.com/insights/ articles/the-latest-games-market-size-estimates-and-forecasts 3 Perspectives from the Global Entertainment & Media Outlook 2022–2026, PwC, accessed on 26 January 2023; summary available at pwc.com/gx/en/industries/tmt/media/outlook/outlook-perspectives.html Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 17 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Chart 6 Global videogame market in 2021 by device type (%) Estimates published by ESA (Entertainment Software Association) concerning the US market, which is the most important region from the point of view of the Group’s activities, conﬁrm the domination of smartphones in this area, followed by consoles and PCs. 70% of American gamers include smartphones among their most frequently used gaming devices, with consoles and PCs coming in at 52% and 43% respectively. GAMERS The global gaming community continues to grow each year, both quantitatively and in terms of involvement (time spent playing). Newzoo estimates that at the end of 2022 there were 3.2 billion gamers worldwide. 2.7 billion of them accessed mobile games, while the PC and console gaming communities numbered 1.0 billion and 0.6 billion people respectively. In 2025 the total ﬁgure is expected to top 3.5 billion. Given that in 2020 there were fewer than 2.9 billion gamers, the cumulative annual growth rate for 2020–2025 may reach 4.2%. 55% of gamers – over 1.7 billion – reside in the Asia-Paciﬁc region. This is followed by Middle East and Africa (488 million gamers) and Europe (430 million gamers). Middle East and Africa reported the strongest growth in 2022, having increased by 8.2% compared to 2021. Latin America and North America accounted for 315 million and 219 million gamers respectively in 2022. 4 Newzoo’s Games Market Estimates and Forecasts, Newzoo, 20 January 2023, accessed on 26 January 2023; newzoo.com/insights/ articles/the-latest-games-market-size-estimates-and-forecasts 5 2022 Essential Facts About the Video Game Industry, accessed on 26 January 2023; theesa.com/resource/2022-essential-facts- about-the-video-game-industry/ 6 The Games Market Will Show Strong Resilience in 2022, Growing by 2.1% to Reach $196.8 Billion, Newzoo, 26 July 2022; accessed on 26 January 2023; newzoo.com/insights/articles/the-games-market-will-show-strong-resilence-in-2022 PC - browser games 1% PC - box and digital editions 21% Consoles 28% Smartphones 50% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 18 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Chart 7 Global gaming community in 2022 by region (%) According to ESA, 65% of US residents past age 18 and 71% of under-18s play videogames. 48% of gaming com- munity members identify as female. The most populous age group is the 18–34 bracket, accounting for 36% of the nearly 216 million-strong US gaming community. Chart 8 US gamers by age bracket (%) 7 The Games Market Will Show Strong Resilience in 2022, Growing by 2.1% to Reach $196.8 Billion, Newzoo, 26 July 2022; accessed on 26 January 2023; newzoo.com/insights/articles/the-games-market-will-show-strong-resilence-in-2022 8 2022 Essential Facts About the Video Game Industry, accessed on 26 January 2023; theesa.com/resource/2022-essential-facts- about-the-video-game-industry/ over 65 6% 55-64 9% 45-54 12% 35-44 13% 18-34 36% below 18 24% over 65 6% 55-64 9% 45-54 12% 35-44 13% 18-34 36% below 18 24% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 19 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Organizational structure of the CD PROJEKT Group As of 31 December 2022 the CD PROJEKT Group consists of the parent entity – CD PROJEKT S.A. – and seven subsidiaries: GOG sp. z o.o., CD PROJEKT Inc., Spokko sp. z o.o., CD PROJEKT RED STORE sp. z o.o., CD PROJEKT RED Vancouver Studio Ltd., The Molasses Flood LLC and CD PROJEKT SILVER Inc. Scheme 1 CD PROJEKT Group at the end of 2022 (capital and voting share) Consolidated companies CD PROJEKT S.A. GOG sp. z o.o. CD PROJEKT STORE sp. z o.o. CD PROJEKT RED Vancouver Studio Ltd. Spółki objęte konsolidacją Spokko sp. z o.o. CD PROJEKT Inc. 100% 100% 100% 100% 88% CD PROJEKT SILVER Inc. The Molasses Flood LLC 60% 100% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 20 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Table 2 Basic activity proﬁle of each member company of the CD PROJEKT Group as of 31 December 2022 Company Scope of activity CD PROJEKT S.A. The principal scope of activity of the company, carried out through its CD PROJEKT RED studio, involves development and publishing of videogames, selling the associated distribution rights, as well as manufacturing, selling or licensing tie-in products which exploit the popularity of brands owned by the Group. CD PROJEKT S.A. also serves as the holding company of the CD PROJEKT Group, and coordinates the activities of subsidiaries which comprise the Group. GOG sp. z o.o. The company distributes videogames through online channels to customers from around the world. The company also owns the GOG.COM proprietary global digital distribution platform and the GOG GALAXY application. CD PROJEKT Inc. The company coordinates publishing and promotional activities related to products marketed by CD PROJEKT S.A. and GOG.COM, and manages sales of merchandise through the CD PROJEKT RED GEAR online store throughout North America (with an oce in Los Angeles). CD PROJEKT RED Vancouver Studio Ltd. This gamedev studio, based in Vancouver, develops videogames within the framework of CD PROJEKT RED. CD PROJEKT RED STORE sp. z o.o. This entity managed the CD PROJEKT RED GEAR merch store and marketed tie-in products associated with CD PROJEKT RED videogames to customers throughout the EU. On  February  a merger by acquisition, carried out between CD PROJEKT S.A. (as the acquirer) and CD PROJEKT RED STORE sp. z o.o. (as the acquiree), was ocially registered. Spokko sp. z o.o. Developers of The Witcher: Monster Slayer – a mobile game. The Molasses Flood LLC This gamedev studio, based in Boston, is working on the project codenamed Sirius. CD PROJEKT SILVER Inc. This company participates in developing entertainment products tied to CD PROJEKT brands. The above member companies of the CD PROJEKT Group, with exception of CD PROJEKT Co. Ltd., Spokko sp. z o.o., CD PROJEKT RED Vancouver Studio Ltd., The Molasses Flood LLC and CD PROJEKT SILVER Inc. were subject to full consolidation as of 31 December 2022. Detailed information can be found in the Consolidated Financial Statement of the CD PROJEKT Group for 2022. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 21 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Disclosure of business segments, products and services, outlets, suppliers and clients In 2022 the Group conducted business activities in two segments: ■ CD PROJEKT RED, ■ GOG.COM. SEGMENT CD PROJEKT RED Target and scope of business activities Developing and publishing videogames is carried out by the CD PROJEKT RED studio. This activity focuses on brands owned by the Company – The Witcher and Cyberpunk. The segment concerns itself with creation and publication of videogames, licensing the associated distribution rights as well as manufacturing, distributing or licensing tie-in products which exploit the commercial appeal of brands owned by the Company. In the scope of its publishing activities the Company also assumes responsibility for its promotional and adver- tising campaigns, and maintains direct relations with the player base via electronic and social media channels (see the Communications section) as well as through participation in trade fairs. This segment also used to include the online merch store at gear.cdprojektred.com, established in order to market products to fans of CD PROJEKT RED brands. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 22 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Key products Videogame development commenced in 2002 and initially focused on the studio’s RPG debut: The Witcher. This game, set in Andrzej Sapkowski’s fantasy world, was released in 2007 to global acclaim, garnering over 100 awards and accolades. As of the publication date of this report, key releases in the Company’s portfolio include The Witcher, The Witcher 2: Assassins of Kings, The Witcher 3: Wild Hunt, two expansion packs for the latter (Hearts of Stone and Blood and Wine) as well as Cyberpunk 2077 released on 10 December 2020. In 2018 the Company released GWENT: The Witcher Card Game (PC. iOS, Android) – an online game – as well as a single-player game – Thronebreaker: The Witcher Tales (PC, iOS, Nintendo Switch, Xbox One, PlayStation 4), built around similar gameplay mechanics. On 15 February 2022 CD PROJEKT RED released the dedicated next-gen console edition of Cyberpunk 2077. On 7 July 2022 GWENT: Rogue Mage was released for PC, iOS and Android – this is a single-player expansion for GWENT: The Witcher Card Game. On 14 December 2022 the studio released the next-gen console edition of The Witcher 3: Wild Hunt, along with a major update for the game’s PC version. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 23 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Scheme 2 CD PROJEKT RED releases; 2007–2022 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 17.05.2011 The Witcher 2: Assassins of Kings (PC) 30.10.2007 The Witcher (PC) 17.04.2012 The Witcher 2: Assassins of Kings (X360) 19.05.2015 The Witcher 3: Wild Hunt (PC, Xbox One, PS4) 13.10.2015 The Witcher 3: Wild Hunt – Hearts of Stone (PC, Xbox One, PS4) 31.05.2016 The Witcher 3: Wild Hunt – expansion pack: Blood and Wine (PC, Xbox One, PS4) 15.10.2019 The Witcher 3: Wild Hunt Complete Edition (Nintendo Switch) 23.10.2018 Thronebreaker: The Witcher Tales (PC) GWENT: The Witcher Card Game (PC) 29.10.2019 GWENT: The Witcher Card Game (iOS) 4.12.2018 Thronebreaker: The Witcher Tales (Xbox One, PS4) GWENT: The Witcher Card Game (Xbox One, PS4) 24.03.2020 GWENT: The Witcher Card Game (Android) 10.12.2020 Cyberpunk 2077 (PC, Xbox One, PS4, Stadia) 15.02.2022 Cyberpunk 2077 (Xbox Series X|S, PS5) 28.01.2020 Thronebreaker: The Witcher Tales (Nintendo Switch) 9.07.2020 Thronebreaker: The Witcher Tales (iOS) 17.06.2021 Thronebreaker: The Witcher Tales (Android) 2022 15.02.2022 7.07.2022 GWENT: Rogue Mage (PC, iOS, Android) 14.12.2022 The Witcher 3: Wild Hunt Complete Edition (Xbox Series X|S, PS5) Key sources of revenue Sales of CD PROJEKT RED games are carried out under the following core business models: ■ sales of territorial distribution rights (for box and digital editions), settled post factum on the basis of monthly or quarterly sales reports / licensing reports submitted by the Company’s business partners; ■ supplies of physical box editions to the Company’s business partners for retail resale; ■ supplies of batches of activation codes which permit the game to be downloaded and installed; ■ sales carried out through optional microtransactions in GWENT: The Witcher Card Game. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 24 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Digital distribution agreements concluded by the Company are typically settled in monthly cycles, while distri- bution of physical videogame editions follows quarterly reporting cycles. Depending on the speciﬁc partner or contract, the Company also collects licensing reports – these are submitted 30, 45 or 60 days following the end of each reporting period (typically each month or quarter). In 2022 the most important CD PROJEKT RED products from the point of view of revenues were: ■ Cyberpunk 2077, ■ The Witcher 3: Wild Hunt, together with its expansions – Hearts of Stone and Blood and Wine Revenues were also generated – to a lesser degree – by micropayments in GWENT: The Witcher Card Game and Thronebreaker: The Witcher Tales. Additionally, the Company oered earlier instalments in The Witcher franchise, including The Witcher and The Witcher 2: Assassins of Kings, both of which continue to attract players and generate revenues. 2022 saw an increase in licensing revenues related to tie-in products, including the Cyberpunk: Edgerunners anime series co-produced by the Japanese Studio Trigger. Cyberpunk 2077 The bulk of CD PROJEKT RED revenues in 2022 came from Cyberpunk 2077 – in fact, sales revenues generated by this game during the reporting period were 18% higher than in 2021. On 15 February 2022 the Studio published the dedicated next-gen console edition of the game, while on 28 September it announced that sales of Cyberpunk 2077 had topped 20 million units. The sell-through ﬁgures for Cyberpunk 2077 shown below represent the Company’s estimates concerning purchases of the game by retail clients in retail outlets. In 2022 94% of Cyberpunk 2077 units sold were digital editions of the game. Chart 9 Cyberpunk 2077 – retail sales to gamers (sell-through) by distribution type (units sold; source: Company estimates based on information collected from distributors) 2020 2021 2022 Physical distribution Digital distribution 42% 58% 96% 4% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 25 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Much like in earlier years, the PC edition accounted for the largest share of Cyberpunk 2077 sales in 2022. Chart 10 Cyberpunk 2077 – retail sales to gamers (sell-through) by platform type (units sold; source: Company estimates based on information collected from distributors) 2020 2021 2022 PC PlayStation Xbox 28% 17% 56% 22% 58% 29% 52% 18% 22% In order to maintain uniformity between the presented data and the corresponding sales ﬁgures for The Witcher 3: Wild Hunt, in future year the Company will report sales of Cyberpunk 2077 using the sell-in ﬁgure (i.e. physical sales by distributors to retail outlets aggregated with purchases of digital editions by end customers). Chart 11 Cyberpunk 2077 – sales by distribution type (units sold; sell-in ﬁgures) 2020 2021 2022 Physical distribution Digital distribution 42% 58% 96% 4% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 26 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Chart 12 Cyberpunk 2077 – sales by platform type (units sold; sell-in ﬁgures) North America 37.0% South America 6.4% Europe 34.5% Asia 19.1% Africa 0.3% Australia 2.8% Negative values reported for 2021 are due to returns of the game from distributors. Map 2 Purchases of Cyberpunk 2077 by region (2022) 2020 2021 2022 PC PlayStation Xbox 37% 18% 46% 29% 54% 18% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 27 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP The Witcher 3: Wild Hunt The Witcher 3: Wild Hunt continued to sell well in 2022. On 14 December 2022 the Studio released the dedicated next-gen console edition of the game, along with a large update for the PC version. This release had a positive eect on sales revenues, and will support sales on next-gen hardware platforms in future years. Digital channels accounted for 96% of The Witcher 3 sales in the reporting period. Chart 13 Sales of The Witcher 3 by hardware platform (units sold; sell-in ﬁgure) The observed growth in the share of digital distribution in total sales is due to the global shift towards digital purchases among consumers, and also due to the comparatively longer shelf life of digital releases compared to physical (box) editions. In 2022, much like in the preceding years, most purchases of The Witcher 3: Wild Hunt involved the PC edition of the game. Chart 14 Sales of The Witcher 3 by hardware platform (units sold; sell-in ﬁgure) 2015 2016 2017 2018 2019 2020 2021 2022 Physical distribution Digital distribution 61% 68% 75% 80% 32% 39% 25% 20% 83% 16% 17% 84% 93% 7% 96% 4% 2015 2016 2017 2018 2019 2020 2021 2022 PC PlayStation Xbox Nintendo Switch 43% 48% 36% 33% 21% 42% 49% 54% 32% 14% 15% 13% 11% 10% 27% 52% 9% 7% 31% 52% 6% 11% 19% 64% 6% 13% 17% 64% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 28 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Map 3 Map 3 Purchases of The Witcher 3 by region (2022) Key suppliers and clients Within the CD PROJEKT RED activity segment, the Group carries out active distribution of its games for various hardware platforms, through leading digital distribution platforms (e.g. Steam, PlayStation Store, Xbox Games Store, Epic Games Store, Nintendo, Apple App Store, Google Play and Humble Bundle, along with its own proprietary GOG.COM platform) as well as traditional distribution channels, in cooperation with leading global distributors (such as BANDAI NAMCO Entertainment Europe S.A.S., Warner Bros. Home Entertainment, Epicsoft Asia PTE LTD, Bandai Namco Entertainment Australia PTY LTD, Cenega S.A., Spike Chunsoft Co., Ltd., Soft Club LLC). In 2022 sales to three clients exceeded 10% of the Group’s consolidated sales revenues and totaled 317 116 thousand PLN, 157 570 thousand PLN and 114 505 thousand PLN respectively (33.3%, 16.5% and 12.0% of the Group’s sales revenues respectively). These clients are not aliated with CD PROJEKT S.A. or any of its subsidiaries. No other client accounted for more than 10% of the Group’s consolidated sales revenues. The videogame development process relies on certain bought-in tools and technical solutions; however, these do not result in signiﬁcant concentration of supply. No CD PROJEKT RED supplier accounted for more than 10% of the consolidated revenues of the Group in 2022. Communication CD PROJEKT RED prides itself on direct and honest communication with the global gaming community under the “Gamers ﬁrst” policy. Player relations are carried out primarily through social media channels. CD PROJEKT RED actively manages over 90 social media proﬁles in over a dozen languages, both global and local (such as the BILIBILI and Weibo platforms in China, and the Naver Cafe platform in Korea). North America 20.5% South America 10.7% Europe 36.2% Asia 30.6% Africa 0.3% Australia 1.7% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 29 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Scheme 3 Followers and subscribers of CD PROJEKT RED social media proﬁles as of 1 March 2023 Key product and marketing events Cyberpunk 2077 For Cyberpunk 2077 the year 2022 began with new awards. The game was recognized, among others, in Steam Awards 2021, carrying the Outstanding Story-Rich Game category. On 15 February 2022 CD PROJEKT RED’s ocial Twitch channel hosted a stream devoted to key new fea- tures and changes introduced by Patch 1.5 for Cyberpunk 2077. As the stream was drawing to a close, studio representatives surprised the audience by announcing that the patch had just been released on all supported hardware platforms, including next-gen consoles, alongside the new edition of Cyberpunk 2077 targeting Playstation 5 and Xbox Series X|S. A ﬁve-hour trial version of the game was made available free of charge to all gamers, for a period of one month. The launch of the game’s next-gen edition was also accompanied by a reinvigorated marketing campaign titled “Love it, or burn it”, which encouraged gamers to return to Night City and see for themselves how Cyberpunk 2077 had changed since its original release in December 2020. On 7 June 2022 CD PROJEKT RED, in collaboration with Netﬂix and the Japanese Studio Trigger presented new promotional content for the upcoming Cyberpunk: Edgerunners anime series, including a poster, a teaser and a behind-the-scenes look at the production process. The Studio also conﬁrmed that the series would premiere in September 2022. On 4 September, at PAX West in Seattle (USA) CD PROJEKT RED held pre-release screenings of Cyberpunk: Edgerunners for key media representatives and inﬂuencers. An audience of over 500 had the opportunity to watch the ﬁrst two episodes of the series. On 6 September CD PROJEKT RED held a special edition of its Night City Wire series. Following a segment devoted to Cyberpunk: Edgerunners, a representative of the Studio discussed plans concerning further devel- opment of the game and the franchise. A gameplay trailer of the upcoming expansion (titled Phantom Liberty) was presented, along with a statement by Keanu Reeves where the actor conﬁrmed he would be returning to bilibili 885 thousand followers YouTube 264 thousand followers Instagram 802 thousand followers Twitch 466 thousand followers Weibo 256 thousand followers Twitter 1.4 million followers Facebook 544 thousand followers LinkedIn 294 thousand followers Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 30 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP the Cyberpunk 2077 universe and reprising his role in the expansion. This was followed by a live stream session where Studio representatives showcased key updates awaiting gamers in Patch 1.6 for Cyberpunk 2077, which launched on the same day. Together with the patch, a free arcade game titled Roach Race – transplanted from Cyberpunk 2077 directly to mobile devices – was released in mobile storefronts (Google Play and Apple Store). On 13 September 2022 the Cyberpunk: Edgerunners anime series – a 10-episode series co-produced by CD PROJEKT RED and the Japanese Studio Trigger – was released on Netﬂix. The series received rave reviews from critics and widespread acclaim among viewers – with an average Metacritic user score of 8.9 and a 100% recommended rating among Rotten Tomatoes reviewers. In its release week the anime series ranked 8th on the “Netﬂix Top 10” global popularity chart (non-English category), and remained on the list over four successive weeks. Cyberpunk: Edgerunners also garnered a range of awards and accolades, including Best Anime Series of 2022 from IGN, Anime of the Year from the Crunchyroll Anime Awards 2023, and a Game Awards 2022 nomination in the Best Adaptation category. On 4 October 2022, in the CD PROJEKT Group Strategy Update the Studio conﬁrmed further development of the Cyberpunk franchise by announcing, among others, the project codenamed Orion – a Cyberpunk 2077 sequel. On 9 December 2022 at The Game Awards 2022 gala event, the Studio premiered a new trailer of Phantom Liberty – the upcoming expansion for Cyberpunk 2077. The video content prepared especially for this occasion featured new characters, the most important of which is Solomon Reed voiced by Idris Elba. This popular British actor is known, among others, from starring in such productions as Luther, Fast & Furious Presents: Hobbs & Shaw, or Suicide Squad. The ocial trailer was published on YouTube, and has already attracted more than 2 million views. On 4 January 2023, after the close of the reporting period, Steam published its annual Steam Awards, with Cyberpunk 2077 carrying the “Labor of Love” category. In a popular poll Cyberpunk 2077 was recognized by the gaming community for its ongoing support and development. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 31 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Scheme 4 Followers and subscribers of Cyberpunk 2077 social media proﬁles as of 1 March 2023 Events related to The Witcher videogame series On 21 March 2022 CD PROJEKT RED announced that it was working on a new saga within The Witcher videogame series. The corresponding social media announcement teased a new medallion. The Studio also announced that the next big game set in The Witcher universe would be based on Unreal Engine 5. On 13 April 2022 the Management Board of CD PROJEKT announced that, based on recommendations submit- ted by persons in charge of development, it had decided that further development of the next-gen version of The Witcher 3: Wild Hunt would be handled by an internal team. In conjunction with this change, the Management Board decided to postpone the game’s release, previously scheduled for the second quarter of 2022. On 19 May the Company announced that the game was scheduled for release in Q4 2022. On 17–19 June, at the Pyrkon 2022 event in Poznań, participants of the gaming and pop-culture festival had the opportunity to try their own hand at The Witcher: Old World , a new board game funded on Kickstarter. The game is scheduled for release in the second quarter of 2023. Instagram 773 thousand followers Steam Community 1.3 million followers Reddit 1.1 million followers Facebook 1.1 million followers YouTube 1.6 million followers Discord 160 thousand followers Twitter 1.8 million followers Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 32 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP On 7 July 2022 a single-player expansion for GWENT – Rogue Mage – was released. This instalment combines elements of roguelikes, card games and strategy games, incorporating GWENT gameplay mechanics. The game is available as a standalone product for the PC (on GOG.COM and Steam) as well as on iOS and Android devices. On 4 October 2022 at a conference dedicated to the CD PROJEKT Group Strategy Update, the Studio announced that it was further developing The Witcher franchise, among others by announcing a new Witcher trilogy (the ﬁrst installment of which is codenamed Polaris) along with two other projects set in The Witcher universe (codenamed Sirius and Canis Majoris). On 6–8 October 2022 the Game Industry Conference took place. This is the most important video gaming industry event in Poland, and CD PROJEKT RED is its Gold Sponsor. At the conference, which was accompanied by the Poznań Games Arena 2022 fair, GWENT: Rogue Mage received the CEEGA (Central & Eastern European Game Awards) award for the best mobile game of the year. On 26 October 2022, at an event marking the 15th anniversary of The Witcher series, CD PROJEKT RED announced that it was working on a remake of the ﬁrst game presenting the adventures of Geralt of Rivia (codenamed Canis Majoris). The new game will be based on Unreal Theory 5 and is being developed by the Fool’s Theory studio which specializes in RPGs. CD PROJEKT RED retains full creative control over the project, which is currently at an early stage. On 28 November a hand-on campaign focusing on the next-gen console release of The Witcher 3: Wild Hunt – Complete Edition began at CD PROJEKT RED. Representatives of key global gaming media had the opportunity to play the game ahead of its ocial release. As a result, over 17 gameplay review articles appeared in key gaming media outlets, including Digital Foundry, IGN and PC Gamer. The ﬁnal of the fourth edition of the GWENT Masters e-sports competition took place on 3–4 December 2022. 6 December 2022 marked the start of the global review campaign for The Witcher 3: Wild Hunt – Complete Edition. Several hundred media outlets from around the world were invited to try out and review the game ahead of its release. Initial reviews of the next-gen console release of The Witcher 3: Wild Hunt appeared on 12 December 2022. Favorable impressions enabled the game to rank high on Metacritic, with an average rating of 94 on next-gen Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 33 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP consoles (Xbox Series X and Playstation 5), along with a “must play” accolade and a place among the top Playstation 5 games of 2022. Key global media conﬁrmed that the game, which focuses on Geralt of Rivia and was originally published by CD PROJEKT RED back in 2015, remains one of the top RPGs of all time, and that its next-gen edition provides another enticing reason to try it out. On 14 December 2022 The Witcher 3: Wild Hunt was released for next-gen devices throughout the world. The launch was accompanied by a number of events, both global and local. During the release week Twitch streams devoted to the game attracted over 4.5 million hours of views, with more than 20 thousand streamers. The launch of the console edition was also accompanied by a large update for the PC. Among the highlights of early 2023 is the collaboration between CD PROJEKT RED and Amazon Games, announced on 18 January. Lost Ark players from Europe and both Americas were given the opportunity to play as Geralt of Rivia, and to undertake several unique Witcher-inspired Arcana quests. On 26 January 2023 the studio released the box version of The Witcher 3: Wild Hunt – Complete Edition for next-gen consoles. On 7 February 2023 Geralt of Rivia debuted in Fortnite, owing to collaboration between CD PROJEKT RED and Epic Games. Fortnite players can now unlock the Geralt skin, which is accompanied by several unique quests, events and items inspired by The Witcher videogame series. Scheme 5 Number of followers and subscribers of The Witcher social media proﬁles as of 1 March 2023 YouTube 405 thousand followers Facebook 1.6 million followers Twitter 1.5 million followers Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 34 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP GOG.COM Target and scope of business activity The GOG.COM platform was launched in August 2008. Its initial mission was to revitalize major PC cult classics and oer them for sale to international customers with particular focus on English-speaking countries, i.e. United States, Canada, United Kingdom and Australia. In 2022 the platform was oered in English, French, German, Russian, Chinese and Polish – this includes full game localizations as well as dedicated customer support and integration with locally popular payment channels, accepting payments in thirteen currencies. GOG.COM also carries releases for the macOS and Linux operating systems. Activities carried out in the GOG.COM segment focus on digital distribution of videogames via the Company’s proprietary GOG.COM distribution platform and the GOG GALAXY application. The platform enables customers to purchase games, remit payment and download game ﬁles to their personal devices, while the GOG GALAXY application provides – among others – automatic updates, cloud saves, online and cross-play features. It is also responsible for the online features of GWENT, as well as for processing in-game sales and payments within the PC edition of the game. Payments collected by GOG sp. z o.o. from customers are split with the Company’s suppliers as agreed upon in distribution contracts. Typical contracts require the Company to submit sales reports to its suppliers in monthly or quarterly cycles, not later than 30 days following the close of the given reporting period. With regard to certain older products the company may be contractually permitted to adapt them to the requirements of modern oper- ating systems, or to enable multiplayer gameplay if such features were originally provided by the given game. Scheme 6 Number of followers and subscribers of GOG.COM social media proﬁles as of 1 March 2023 Key products As of the publication date of this report, the GOG.COM digital distribution platform oers over 7000 products from more than 1000 partners. This includes both timeless classics and fresh releases from such well-known brands as Bethesda, Disney, Electronic Arts, Ubisoft, Konami and Warner Bros. The key dierence between GOG.COM and its competition is its strong customer focus and the “gamers ﬁrst” approach. This is evidenced, among others, by supporting the concept of ownership by striving to ensure that Other 112 thousand followers Facebook 434 thousand followers Twitch 71 thousand followers Twitter 434 thousand followers YouTube 68 thousand followers Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 35 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP single-player gamers are distributed in the DRM-free model, free of restrictions which might otherwise prevent customers from enjoying their purchases. Products oered on GOG.COM are also richly featured and usually include bonus content such as soundtracks, maps and wallpapers. All games bought on GOG.COM can be returned within 30 days of purchase – the GOG.COM returns policy is among the most customer-friendly on the digital distribution market. In addition to the above, GOG.COM ensures compatibility of its games with current versions of MS Windows, macOS and popular distributions of Linux, which is a particular advantage in the case of classic games and contributes to preservation of videogame history. The Group uses GOG.COM to market its own products directly to end users – this includes games set in The Witcher universe, as well as Cyberpunk 2077. Key sources of revenue Revenues obtained in the GOG.COM segment are directly dependent on the popularity of the oered games and their respective sales volumes. The Company continuously expands the scope of its cooperation with suppliers and seeks access to new, attractive products. GOG.COM is also home to seasonal and one-o sales campaigns, including summer, fall and Christmas bargain packages as well as other events which introduce new means of attracting gamers. Key product and marketing events Digital distribution of videogames As of the publication date of this report, the GOG.COM catalog of products numbers over 7000 items. In 2022 the catalogue grew by more than 700 items, including A Plague Tale: Requiem, Middle-Earth: Shadow of War, Scorn, Europa Universalis IV, Return to Monkey Island, Blacktail, The Elder Scrolls V: Skyrim, Middle-Earth: Shadow of Mordor, Warhammer 40,000: Space Marine, The Cult of the Lamb, Hard West 2, South of the Circle, Destroy All Humans! 2, ELEX II, Shadow Warrior 3, Alien: Isolation and DOOM64. Sales support With regard to digital distribution sales support focuses primarily on securing distribution rights to new, appealing videogames, and on seasonal sales campaigns. Key promotional campaigns supporting GOG.COM sales in the ﬁrst half of the year included the Winter Sale, the New Year Sale and the Summer Sale. During the latter event, over 3.5 thousand games were oered at bargain prices. The GOG team also organized other promotional events, including an indie game sale, Good Old Games Week (which focused on classic games available on the platform) as well as the We Love Games Sale, celebrating Valentine’s Day. In the second half of 2022, in addition to weekly sales, GOG.COM organized several promotional events: GOG Sale, Find Your Indie Sale, Moon Festival Sale and the GOG birthday sale. Furthermore, to celebrate the 20th anniversary of the founding of CD PROJEKT RED, GOG.COM held a special sale covering all games from The Witcher and Cyberpunk 2077 universes, along with a bonus content giveaway for these games. The end of the year was traditionally marked by the Winter Sale, which covered over 4.5 thousand titles and was Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 36 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP GOG.COM’s biggest promotional event of 2022. Increased customer activity was also observed in conjunction with Black Friday, Cyber Monday and Halloween sales. Key suppliers and clients GOG sp. z o.o. markets games via online channels directly to millions of individual users worldwide. As such, the segment does not have key clients in the usual sense of the term. Chart 15 Sales of products and goods by GOG.COM in 2022 and 2021, by territory. In terms of territorial breakdown, sales in 2022 followed the pattern established in the preceding years. In 2022 the largest group of GOG.COM customers came from the United States (35%), followed by Germany (13%), Poland (10%) and the United Kingdom (5%). As of 31 December 2022 no single supplier in the GOG.COM segment accounted for more than 10% of the Group’s consolidated revenues. KEY CORPORATE EVENTS On 26 January 2022 the Supervisory Board of the Company adopted a resolution appointing Mr. Paweł Zawodny and Mr. Jeremiah Cohn to the Management Board of CD PROJEKT S.A. eective on 1 February 2022. As Management Board Member, Mr. Paweł Zawodny is responsible for the technological and organizational transformation of CD PROJEKT RED, while Mr. Jeremiah Cohn coordinates the activities of the Group’s marketing and communication departments, and supervises franchise development. On 21 March 2022 the Company announced that it had concluded negotiations and signed a licensing and partnership agreement with Epic Games Epic Games International S.à r.l. Under the agreement the Company and its subsidiaries gain the right to develop and publish games powered by Unreal Engine 4, 5 and subsequent versions. Epic Games will also provide dedicated technical support for games published by the Company and its subsidiaries. The agreement was concluded for a period of 15 years with a prolongation option. It places no restriction on the number of games created with the use of the licensed technology. Other territories 26% Australia 3% Canada 4% France 4% United Kingdom 5% Poland 10% Germany 13% USA 35% Other territories 21% Russia 3% Australia 3% Canada 4% France 5% Poland 6% United Kingdom 7% Germany 14% USA 37% 2021 2022 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 37 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP On 25 March 2022 the Management Board of the Company announced changes in its policy concerning diversiﬁcation of surplus current cash. The updated policy speciﬁes that debt instruments held by the Com- pany may account for not more than 80% (up from 50%) of the Company’s current ﬁnancial assets, which are deﬁned as the sum of the following: cash and near-cash, bank deposits with maturity periods longer than 3 months, Polish State Treasury bonds, other bonds guaranteed by the Polish State Treasury and bonds issued by foreign governments, estimated at the price speciﬁed in the corresponding forward contract hedges. The updated policy also includes rating criteria for foreign bonds, and allows for up to 15% of total ﬁnancial assets to be allocated to unhedged securities denominated in USD or EUR. On 9 May 2022 the Extraordinary General Meeting of CD PROJEKT RED STORE sp. z o.o. voted to increase the company’s share capital by issuing 380 new shares, to be taken up by CD PROJEKT S.A. The newly issued shares were fully paid up in cash, in the amount of 1 900 PLN. This increase in share capital enabled the com- pany to repay the loan previously granted to it by CD PROJEKT S.A. On 9 May 2022, as a result of decisions undertaken by the Board of Directors of CD PROJEKT Inc. and the Man- agement Board of CD PROJEKT S.A. – the company’s sole shareholder – the share capital of CD PROJEKT Inc. was increased by 450 thousand USD. The increased value of existing shares was fully paid up in cash by CD PROJEKT S.A., for a total of 450 thousand USD. This increase in share capital enabled the company to repay the loan previously granted to it by CD PROJEKT S.A. On 24 May 2022 the Extraordinary General Meeting of Spokko sp. z o.o. voted to increase the company’s share capital by issuing 589 new shares. 584 of these newly issued shares were taken up by CD PROJEKT S.A. in exchange for a cash payment in the amount of 26 010 thousand PLN, while 5 newly issued shares were taken up by one of the company’s existing shareholders – Mr. Maciej Weiss – in exchange for a cash payment in the amount of 223 thousand PLN. As a result of these transactions, CD PROJEKT S.A.’s share in voting rights and share capital of Spokko sp. z o.o. increased from 74.0% to 87.6%. This increase in share capital enabled the company to repay the loan previously granted to it by CD PROJEKT S.A. On 25 May 2022 the Management Board of the Company recommended that 100 738 thousand PLN from 2021 net earnings be allocated towards a dividend at 1 PLN per Company share. On 30 May 2022 the Supervisory Board endorsed this recommendation. Subsequently, on 28 June 2022 the Ordinary General Meeting of the Company voted to set the dividend record date to 5 July 2022 and pay out the dividend on 12 July 2022. On 1 July 2022 the CD PROJEKT RED Studio launched its ﬁrst-ever summer internship program. From among 3 571 applications submitted by prospective candidates (as well as 1 200 additional applications received under the corresponding Ukrainian track) 31 interns were selected to kickstart their gaming industry adventure at the Studio’s branches in Warsaw, Kraków and Wrocław. Following a three-month internship 25 persons decided to remain at the Studio to further develop their professional skills and work on new videogame releases. On 8 August 2022 the Extraordinary General Meeting of CD PROJEKT RED STORE sp. z o.o. voted to increase the company’s share capital by issuing 100 new shares, to be taken up by CD PROJEKT S.A. in exchange for a cash payment in the amount of 500 thousand PLN. On 19 August 2022 GOG the Head of the Małopolska Customs and Tax Oce in Kraków issued a decision with regard to tax liabilities incurred by GOG sp. z o.o. in 2016. Potential liabilities associated with this decision were Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 38 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP aggregated by the GOG.COM segment with its ﬁnancial result for 2021, as well as – where interest on arrears due in 2022 is concerned – with its current calculation of ﬁnancial result for 2022. The management board of GOG sp. z o.o. disagrees with the aforementioned decision and submitted an ocial appeal on 5 September 2022. In August 2022 the Company adopted the CD PROJEKT S.A. Environmental Policy which is part of its sustainable development strategy, whereby the Company commits to undertake certain actions in the scope of environmental protection. Adoption of this document is one of the stated sustainability (ESG) goals in the environmental area for 2022. In September 2022, after a four-year hiatus, the Company organized another edition of the Promised Land festival in Łódź. The festival is targeted at young artists who wish to develop their talents and exchange experiences with renowned gaming and motion picture industry specialists from around the world. This year’s edition, co-organized with EC1 Łódź – Miasto Kultury, attracted nearly 900 participants, oering over 30 hours of workshops and nearly 60 invited talks. On 5 September CD PROJEKT RED launched the second edition of the “Girls in the Game!” scholarship and mentoring program co-organized with Fundacja Perspektywy and honoring Karolina Grochowska. The program targets female high school seniors who are interesting in pursuing a career in the gaming industry. Applications were accepted until 30 September. From among approximately 1 000 applicants, 20 participants were oered the opportunity to develop their professional skills under the tutelage of CD PROJEKT RED experts. Participants enrolled in the program were also assigned annual scholarships. On 17 September 2022 the Company received conﬁrmation that the liquidation of its CD PROJEKT Co., Ltd. subsidiary had concluded. The aforementioned subsidiary was eectively liquidated on 7 June 2022. On 4 October 2022 the CD PROJEKT Group published its Strategy Update which builds upon the plans announced in 2021 and focuses on long-term development of key projects. In the coming years the studio aims to publish several new games within The Witcher and Cyberpunk franchises, and carry out internal development work on Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 39 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP its third proprietary IP codenamed Hadar. Details of the Strategy Update, presented in the form of a slide deck and a video com- mentary, are available on the Company website. On 4 October Mr. Marcin Iwiński tendered his resignation from the position of Vice President of the Management Board for Interna- tional Aairs and Member of the Management Board, eective at end of day on 31 December 2022, and notiﬁed the Company of his intent to seek appointment as Chairperson of the Supervisory Board of the Company on the day immediately following the day on which his membership of the Management Board formally expires. Mr. Iwiński also published an open letter declaring that he wishes to continue on as a major shareholder of the Company, and support the Management Board in his new role. On 4 October Mr. Piotr Pągowski tendered his resignation from the position of Member of the Supervisory Board and Member of the Audit Committee, eective at end of day on 31 December 2022. On 4 December a decision was made concerning the circumstances and conditions of the buy-back of Company shares for voluntary redemption. The Company intended to proceed with buy-back of not more than 2 000 000 shares, for an amount not greater than 100 000 000 PLN, between 5 and 28 October 2022. On 24 October the Company announced that it had concluded the buy-back program, having purchased 860 290 shares which represent 0.854% of its share capital. On 17 November 2022 a merger plan involving the Company (as the surviving company) and its subsidiary – CD PROJEKT RED STORE sp. z o.o. with a registered seat in Warsaw (as the target company) was formally agreed upon and signed. The goal of the merger is to simplify the Group’s structure in light of the intent to continue the business activities of the target company in collaboration with a specialized external entity. On 6 December 2022 the Extraordinary General Meeting of Spokko sp. z o.o. (a subsidiary of CD PROJEKT S.A.) undertook a decision to phase out The Witcher: Monster Slayer. As a result, further development of the proj- ect was suspended, distribution of the game to new players on Google Play and Apple App Store ceased on 31 January 2023, and the game will cease being available to existing players on 30 June 2023, as a result of which the project will come to a close on that date. These decisions are consistent with the basic tents of the CD PROJEKT Group’s strategy update, according to which the Group intends to focus on its core activity and pursue mobile projects in collaboration with external partners. As a follow-up to the above, a reorganization of the CD PROJEKT Group is planned for 2023, whereby CD PROJEKT S.A. (as the surviving company) will merge with Spokko sp. z o.o. (as the target company). Spokko had not heretofore been subject to consolidation in the scope of the CD PROJEKT Group’s ﬁnancial statements. Given the phase-out of The Witcher: Monster Slayer and the anticipated reorganization, there are reasons to suspect impairment of Spokko assets. Following an asset impairment test, the Company decided to recognize an impairment allowance on Spokko sp z. o.o. shares in its possession, with a value of 27 271 thousand PLN. An Extraordinary General Meeting (EGM) was held on 20 December 2022. The meeting approved, among others, Mr. Marcin Iwiński’s appointment to the Supervisory Board of the Company, changes in remuneration of members of the Supervisory Board of the Company, and the merger between CD PROJEKT S.A. and its Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 40 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP subsidiary – CD PROJEKT RED STORE sp. z o.o. The EGM also undertook several decisions concerning the Company’s incentive program – among others, by adopting a resolution canceling the 2020–2025 incentive program. The entry into force of this resolution is, however, contingent on adopting resolutions which insti- tute a new incentive program – which has not occurred as of the publication date of this report. Although the resolution instituting a new Incentive Program for the ﬁnancial years 2023–2027 was formally adopted, the accompanying resolution which authorizes issuance of subscription warrants and approves a conditional increase in the Company’s share capital – and is therefore necessary to implement the new program – did not gain the required supermajority of votes. As a consequence, as of the publication date of this report the Com- pany is not materially capable of implementing the new Incentive Program for the ﬁnancial years 2023–2027; therefore, the preceding incentive program for the ﬁnancial years 2020–2025 remains in force. The full wording of resolutions adopted by the Extraordinary General Meeting of CD PROJEKT S.A. of 20 December 2022 is annexed to Current Report no. 57/2022. On 20 December the Supervisory Board of the Company undertook decisions as a result of which, eective on 1 January 2023: ■ Mr. Marcin Iwiński will serve in the capacity of Chairperson of the Supervisory Board; ■ Ms. Katarzyna Szwarc will serve in the capacity of Deputy Chairperson of the Supervisory Board; ■ The composition of the Audit Committee will be as follows: Michał Bień – Chairperson of the Audit Committee; Maciej Nielubowicz and Jan Łukasz Wejchert – Members of the Audit Committee. EVENTS FOLLOWING THE BALANCE SHEET DATE On 5 January 2023 the Company announced that it had received a notiﬁcation from the law ﬁrm representing the Company in the U.S. class action lawsuit, to the eect that the Court had issued an order regarding the preliminary approval of the settlement. The order approves the provisions of the settlement concerning, in particular, relinquishing any claims against the Company and members of its Management Board, as well as remittance of 1 850 000 USD to the plainti class by the Company and its insurer – Colonnade Insurance S.A. On 23 January 2023 CD PROJEKT RED announced its new initiative – RED Playtesting Program, which encour- ages gamers and community members to take part in the development process of the studio’s games. Playtests will be organized at the Warsaw CD PROJEKT RED campus, giving invited participants the opportunity to try out videogame elements and share feedback with members of the dev team, thus enabling the studio to further adapt its games to the needs of gamers. On 28 February 2023 the District Court for the City of Warsaw in Warsaw, 14th Commercial Department of the National Court Register, registered the merger between the Company and its subsidiary – CD PROJEKT RED STORE sp. z o.o. with its registered seat in Warsaw (“Target Company”) in the register of entrepreneurs. The goal of the merger is to simplify the CD PROJEKT Group’s structure in connection with plans to continue the existing operations of the Target Company in cooperation with a specialized third party – in line with the Long-Term Strategic Growth Outlook of CD PROJEKT Group. On 20–24 March 2023 San Francisco hosted the Game Developer Conference – one of the keystone global events which focuses on the gamedev industry. CD PROJEKT RED was represented by over thirty specialists Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 41 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP who delivered talks and participated in panel discussions, sharing their knowledge and experience gained during development of Cyberpunk 2077. On 20 March 2023 the Management Board of the Company announced its decision concerning recognition, in its accounts, of an impairment allowance on to-date development expenditures related to Project Sirius, which is developed by The Molasses Flood. This decision was based on the outcome of evaluation of the scope and commercial potential of the Project in its original shape. The Company also announced that work was underway to deﬁne a new framework for the Project. Total development expenditures incurred by Project Sirius by the end of 2022 were 33.4 million PLN, and this amount will burden the ﬁnancial result of the Company and the CD PROJEKT Group for the corresponding period. Expenditures incurred in January and February 2023 totaled 9.5 million PLN, which will accordingly burden ﬁnancial results for the ﬁrst quarter of 2023. On 22 March 2023 the Management Board of the Company announced that an Extraordinary General Meeting would be convened on 18 April 2023. Key points of the meeting’s agenda include adoption of resolutions concern- ing institution of new incentive programs at the Company, covering the years 2023–2027, as well as redemption of shares purchased by the Company in the framework of a buy-back program carried out in October 2022, along with the corresponding reduction in the Company share capital. The full wording of proposed draft resolutions is included in Current report no. 10/2023. EFFECT OF THE POLITICAL AND ECONOMIC SITUATION IN UKRAINE ON THE ACTIVITIES OF THE CD PROJEKT GROUP Eect on earnings In response to the Russian armed invasion of Ukraine, on 3 March 2022 the Management Board of CD PROJEKT decided to suspend sales of CD PROJEKT Group products as well as games distributed on the GOG.COM plat- form on the territory of Russia and Belarus. The Company estimates that throughout the 12-month period between March 2021 and February 2022 the aggregate share of Russia and Belarus in revenues from sales of products in the CD PROJEKT RED segment and in GOG.COM sales revenues amounted to 5.4% and 3.7% respectively. At an early stage of hostilities the Polish currency (in which most expenses borne by the Group are denomi- nated) weakened against USD and EUR, i.e. the main currencies in which the Group obtains sales revenues. Given that most of the Group’s sales are exports, this strengthening of foreign currencies against the domestic currency should be viewed as a favorable circumstance. In 2022 Group member companies donated 1 126 thousand PLN to NGOs which provide humanitarian aid to victims of the war in Ukraine. In addition, Group employees were oered opportunities to carry out volunteer work and provide assistance to war victims during paid working hours. Nearly 50 employees took advantage of this oer. Further information can be found in the CD PROJEKT Group Sustainability Report for 2022. Risks associated with the current political and economic situation in Ukraine The Company continually monitors the eects of the current political and economic situation in Ukraine, Russia and Belarus upon the activities of the CD PROJEKT Group. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 42 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP The Company has terminated collaboration with Russian and Belarussian suppliers. At the present time the Company does not intend to initiate any further collaboration with Russian or Belarussian entities. As of the publication date of this report the Group’s operating activities proceed unhindered, and the eect of the Russian armed invasion of Ukraine do not have a signiﬁcant negative impact on the Group’s operations. In the Management Board’s opinion the current political and economic situation in Ukraine does not aect the quantitative data contained in the ﬁnancial statement, does not provide a reason to suspect impairment of assets, should not have a signiﬁcant negative eect on the Group’s earnings in 2023, and does not jeopardize continuation of the Company’s activities within 12 months of the conclusion of the reporting period. Given the unprecedented character of current events and signiﬁcant uncertainty associated therewith – particularly the lack of reliable knowledge concerning the duration of the Russian invasion – as of the publication date of this report it is impossible to accurately predict the long-term eects of the invasion upon the condition and earnings of the Company and its Group. Any assessments and forecasts in this regard are fraught with uncertainty, and will be subject to further monitoring and analysis by the Group. Insofar as possible, the above assessment reﬂects the Company’s knowledge as of the publication date of this report. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 43 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCLOSURE OF SEASONAL OR CYCLICAL ACTIVITIES CD PROJEKT RED The revenues and ﬁnancial result of the CD PROJEKT RED segment are strongly aected by the videogame release schedule. CD PROJEKT RED usually takes between 2 and 5 years to produce a game. Initial develop- ment work occurs before the previous game in the series is complete and ready to be released. Chart 16 Eect of new releases on the quarterly revenues from sales of products, goods and materials by CD PROJEKT RED in 2011–2022 (PLN thousands) CD PROJEKT RED also engages in smaller-scale projects – such as add-ons for its own games or adapting existing products to work on new gaming platforms. Such projects may be carried out directly by the Company or by its external partners, and their implementation usually takes several months (up to about a dozen). With regard to games which have already been released, their yearly sales breakdown is dependent on the schedule of periodic sale campaigns. In most cases, strong sales are reported in the second and fourth quarter, while the ﬁrst and the third quarter (the latter of which overlaps with the summer vacation season) see weaker sales. In addition to pure development activities, the Company also actively manages its franchises in other ﬁelds, working to continually expand its target audience, and exploring new media types and platforms. GOG.COM The digital videogame distribution market, which is the main area of activity of GOG.COM, is characterized by seasonal ﬂuctuations in revenues. On an annual basis, the highest revenues are typically obtained in the fourth quarter while the lowest revenues correspond to the third quarter. Sales in Q2 and Q4 are boosted by promotional activities organized in these periods. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 Q1/2011 "The Witcher 2" (PC) Q2/2011 Q3/2011 Q4/2011 Q1/2012 "The Witcher 2" (X360) Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Q1/2015 "The Witcher 3" Q2/2015 Q3/2015 Expansion: "Hearts of Stone". Q4/2015 Q1/2016 Expansion: "Blood and Wine" Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 Q3/2017 Q4/2017 Q1/2018 Q2/2018 Q3/2018 "GWENT", "Thronebreaker" Q4/2018 Q1/2019 Q2/2019 Q3/2019 "The Witcher 3" (Nintendo Switch) Q4/2019 Q1/2020 Q2/2020 Q3/2020 "Cyberpunk 2077" Q4/2020 Q1/2021 Q2/2021 Q3/2021 Q4/2021 Q1/2022 Q2/2022 Q3/2022 Q4/2022 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 44 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP The sales volume is also strongly dependent on the timing of new releases in each reporting period. Chart 17 Sales of goods and materials in the GOG.COM segment in 2018–2022 (PLN thousands) Disclosure of external and internal factors affecting further growth of the CD PROJEKT Group Future growth of the Company and its Group is critically dependent on the ability to retain world-class creative professionals and experts, and to attract a growing number of specialists, both Polish and foreign, to work on the Group’s future releases. Strategic directions related to talent acquisition, team development and support are presented in the CD PROJEKT Group Strategy Update (including the attached video commentary) and in the CD PROJEKT Group Sustainability Report for 2022. Another important factor which may support the Group’s growth is eective implementation of CD PROJEKT RED’s development plans announced in October 2022 as part of the Group’s Strategy Update, along with further broadening of the recognizability and popularity of the Group’s franchises (including via cooperation with external entities), and enriching games based on the Group’s proprietary IP with multiplayer gameplay elements. Key internal and external factors which, in the Board’s opinion, may prove detrimental to the Group’s activities and growth prospects are listed in the risk assessment section elsewhere in this report. In addition to the above, the activities of CD PROJEKT Group member companies are aected by external factors such as the macroeconomic outlook, legal reforms and changes in taxation. In this sense, CD PROJEKT is in a similar position to many other companies conducting business on domestic and international markets. 0 40,000 80,000 120,000 160,000 200,000 Q1 Q2 Q3 Q4 2018 2019 2020 2021 2022 Cyberpunk 2077 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 45 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP CD PROJEKT RED Key factors which determine the growth of the CD PROJEKT RED segment include ongoing projects, the scale of development work associated with those projects and their perceived popularity among gamers. In this con- text, the most signiﬁcant factors shaping the current results of the CD PROJEKT Group include the popularity of previously published games set in The Witcher and Cyberpunk universe, as well as – in future periods – events surrounding the development and market reception of further development projects. Notable events aecting CD PROJEKT RED in the coming quarters will include the launch of the big expansion for Cyberpunk 2077, along with further organic growth of business activities, including in the framework of the nascent CD PROJEKT RED North America studio. Another notable process at CD PROJEKT RED – in the context of the studio’s development – is the continued deployment of Unreal Engine 5 (based on the licensing and partnership agreement with Epic Games signed in March 2022). Use of this engine should signiﬁcantly streamline the game development process. The Company’s strategic partnership with Epic Games involves further work on UE5 in the scope of support for open-world games, and adaptation and optimization of its elements to match the conceptual framework of future projects. In addition, Epic Games has also committed itself to providing dedicated technical support for CD PROJEKT RED games. Working with UE5 also signiﬁcantly broadens the Studio’s recruitment opportunities given that Unreal Engine is familiar to many game developers. Maintaining the observed growth dynamics of the CD PROJEKT RED segment will depend on further enhance- ment of its world-class videogame development skillset and on the capacity for eective communication with the global gaming community. Both aspects are crucial for Studio’s ongoing transformation – labeled RED 2.0 – which aims, among others, to apply the agile methodology in the videogame development process, thereby improving product quality. The growing team and the increasing number and scale of ongoing projects calls for eective team and development management procedures at CD PROJEKT RED – both in Europe (with branches located in Warsaw, Kraków and Wrocław) as well as in North America (Vancouver, and the newly formed Boston studio), at The Molasses Flood (Boston) and also with respect to publishing activities, which are carried out mainly by teams from Warsaw, Los Angeles, Seoul, Tokyo and local representatives in other coun- tries. Commercial success of the studio’s releases is important from the point of view of the studio’s reputation as a developer of high quality, sought-after entertainment products, and contributes to long-term viability and recognizability of The Witcher and Cyberpunk franchises, the third franchise currently in internal development, as well as the studio itself – which is the cornerstone of further development of the Company and its Group. In project management terms, maintaining two separate major franchises (The Witcher and Cyberpunk), along with several independent development teams, has enabled the Company to conduct parallel work on several projects, starting in 2022. This migration towards a dual franchise model (with a third franchise expected in the future) supported by several independent product lines also permits optimization of manufacturing and ﬁnancial activities, increases the frequency of releases along with the associated revenues, mitigates important risk factors and makes it easier for Company employees to seek professional fulﬁllment. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 46 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP GOG.COM Sales in the GOG.COM segment sales have, in the recent years, beneﬁtted from customers’ increasing tendency to turn to online channels for purchases. GOG.COM growth also depends on raising awareness of the platform among gamers and on seeking additional brand-new products to add to its lineup. Accordingly, GOG sp. z o.o. actively communicates with leading global developers and publishers of videogames, continually expanding its list of business partners and products oered. Each new release on GOG.COM contributes to the platform’s popularity and drives up sales. In addition to adding new products GOG sp. z o.o. also seeks to expand its user base by attracting new gamers – those who have not yet set up a GOG.COM account. During the recent years the Company has been successful in this regard, owing to its PR activities and synergies resulting from cooperation with CD PROJEKT S.A. The GOG.COM customer pool continues to grow at a steady pace. Further growth of activities in the GOG.COM segment, including the potential to acquire unique know-how and experience, and to fully leverage the Company’s technological expertise, will be inﬂuenced by development of features which support sales on the platform, including better integration of GOG GALAXY monetization mechanisms with the GOG.COM storefront, as well as increased focus on expanding the GOG.COM catalogue with classic games. OTHER FACTORS The growth of the CD PROJEKT Group will also be aected by development work carried out by its subsidiary – The Molasses Flood. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 47 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Disclosure of significant achievements in the scope of research and development Research and development work, including the ongoing search for new solutions, evaluating their eectiveness and identifying ways to apply them constitutes a core aspect of CD PROJEKT RED’s business proﬁle and the studio’s daily activities. R&D work related to videogame development begins at the conceptual phase and lasts while successive pro- totypes are made available for testing and optimization, ensuring compatibility, usability and playability – all the way to the ﬁnal product. Development activities In 2022 development activities were carried out in the framework of the following projects: ■ Cyberpunk 2077 for next-gen consoles – project completed; new edition released on 15 February 2022; ■ GWENT: Rogue Mage – project completed; game released on 7 July 2022; ■ The Witcher 3: Wild Hunt for next-gen consoled: work initially carried out in collaboration with Saber Interactive, and later internally at CD PROJEKT RED – project completed; new edition released on 14 December 2022; ■ Cyberpunk 2077: Phantom Liberty – large expansion for Cyberpunk 2077; ■ Project Sirius, carried out by The Molasses Flood, in the framework of The Witcher franchise; ■ Project Polaris – a game set in The Witcher universe – research phase concluded in February 2022; the project has progressed to the development phase (with further costs capitalized as expenditures on development projects). Research activities In 2022 research activities were carried out in the framework of the following projects: ■ Project Polaris – a game set in The Witcher universe – research phase concluded in February 2022; ■ Project Orion – a game set in the Cyberpunk universe; ■ Project Canis Majoris – a game set in The Witcher universe; ■ internal conceptual work on a third franchise upon which future videogame releases will be based (codenamed Hadar); ■ Data, Insights & Experiences – construction of a workspace dedicated to researching game functionality, user experience (UX) and immersion. In addition to the above, there was ongoing work on new technologies, as well as further development and improvements to existing games, mainly Cyberpunk 2077 and GWENT. A dedicated development team is at work on RED Play – a multiplatform framework for managing the Studio’s game portfolio and support communication between CD PROJEKT RED and the gaming community. In 2018 CD PROJEKT gained the status of a Research and Development Center (RDC). On 11 August 2022 the Ministry of Development, Labor and Technology issued a decision conﬁrming that the Company engages in R&D activities and upholding its RDC status. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 48 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Disclosure of significant agreements During the reporting period CD PROJEKT concluded an agreement with Epic Games International S.à r.l. More information about this agreement can be found in the section titled Key corporate events elsewhere in this report. Risk management at the Group Risk management process The CD PROJEKT Group is exposed to a range of risks, both ﬁnancial and non-ﬁnancial, associated with its operating activities. In 2021 a Risk Management Procedure was introduced at the Group, formalizing methods of managing and mitigating strategic risks. Risk management at the Company comprises a clearly deﬁned set of rules which permit identiﬁcation, assessment and analysis of risks, as well as further action in order to achieve an acceptable level of risk given the identiﬁed threats and thereby mitigate the consequences of potential circumstances which may have a negative eect on the activities of the Company, including its ﬁnancial stability. While identifying strategic risks, the Company also works to identify opportunities which may ameliorate the circumstances related to risks under analysis. In order to support the risk management process, a Risk Management Committee has been established, com- prising the so-called risk owners, i.e. top managers and executives who coordinate processes in respective branches of the Company. Risk management at the CD PROJEKT Group’s subsidiaries is the responsibility of their respective management boards. Each risk identiﬁed at the Company is subjected to analysis in order to determine its impact an likelihood of materialization. In determining this likelihood the Company acknowledges existing control systems and their eectiveness, while impact assessment is based on potential consequences for the Company – both ﬁnancial and otherwise. The signiﬁcance of a risk is calculated by multiplying the likelihood of occurrence by the risk’s impact, as listed in the risk value matrix. Following analysis of each risk, the Risk Management Committee submits results for approval by a member of the Management Board responsible for the speciﬁc area to which the risk applies. That Member of the Management Board may then decide on further steps, depending on the signiﬁcance of the risk. The decision may be to accept, mitigate, transfer or avoid the risk. When the given risk exceeds the acceptability threshold, its owner, in collaboration with the Risk Management Committee, develops suitable control mechanisms and remedial actions. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 49 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Signiﬁcant (strategic) risks The following risks have been identiﬁed as signiﬁcant. The description of each risk is accompanied by a list of actions which have been undertaken to mitigate the potential consequences of its materialization. While due diligence was applied in identifying and describing the risks described below, in the course of its daily activities the Group may be exposed to new types of risks which it has not heretofore identiﬁed. BUSINESS MODEL RISKS Risk associated with focusing on a limited number of projects with long investment cycles and unpre- dictable commercial potential Description: CD PROJEKT RED focuses on developing multifaceted role-playing games with nonlinear storylines and based on cutting-edge technological solutions. Given the scope of such projects and their development lifecycles which span multiple years, these games – often referred to as “AAA” – require above-average devel- opment and marketing budgets. A hypothetical unsuccessful release of another AAA game by CD PROJEKT RED may potentially result from e.g. failure to meet gamers’ high expectations with regard to quality, gameplay appeal or content, technical issues associated with the game or negative reviews by journalists and market experts. Sales revenues in the wake of an unsuccessful release may not cover earlier expenditures on development and promotion of the game. Actions taken: CD PROJEKT RED prioritizes developing innovative high-quality products. We believe that ensur- ing high quality of our releases is the best way to mitigate the risk of sales underperformance. Moreover, in line with the Group’s Strategy, in the coming years CD PROJEKT wants to base its growth on successive expansion of its product portfolio. This involves, among others, upscaling our production capabilities to be able to deliver more games while maintaining quality, and to introduce aspects of multiplayer gameplay. The Group also wants to expand its activities to cover new ﬁelds of use, which includes new media and platform types. To mitigate this risk the Company also estimates the commercial potential of future products, tests them at every stage of development and keeps track of emerging technological and market solutions. Risk associated with entering new market segments Description: Entering new market segments, where the Company may not yet possess extensive experience and know-how, provides an opportunity to reach a wider audience, which might then be enticed to take up interest in Company games, but on the other hand carries the risk of project failures and may cause the Com- pany to incur additional costs. Investing in new market segments may call for collaboration with new external partners, which, in turn, might cause diculties in ensuring optimal project management, i.e. making sure that collaborative activities are performed in a timely fashion, that the Company’s IP is appropriately understood, or that the quality expected by the Company is, in fact, maintained. This could ultimately drive up costs or cause harm to the Company’s reputation. Actions taken: When the Group decides to initiate a new project, in order to ensure optimal control, Group member companies take action to develop in-house skills and competences by recruiting experts and spe- cialists who are familiar with the given ﬁeld. In selected cases expansion to new ﬁelds may be carried out in collaboration with external partners who possess greater experience in that context. The Group is diligent in selecting potential contractors and in building relations based on shared values and quality standards. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 50 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Risk of failure to meet production goals Description: Engaging in R&D activities related to development and distribution of top-quality AAA games represents the core business of the CD PROJEKT Group. AAA development is often characterized by complex and iterative development cycles, as well as long production schedules, which requires creators to adapt to the changing market, accurately predict gamers’ preferences and follow up on trends created by competing gamedev studios. The risk of incorrectly scheduling development processes related to a given release is an inherent aspect of innovative R&D work carried out by the Group. The ability to meet production goals is also aected by technological development, i.e. ongoing changes in programming tools, software, available technologies and gaming platforms. Products released on the market are characterized by increasing complexity and sophistication in terms of the underlying technologies as well as artistic merit – which also increases the length and complexity of the associated development processes. Rapid technological progress necessitates fast adaptation through continuous reﬁnement of solutions and retaining the ability to oer ever more sophisticated products. In 2022 the Company decided to enter into a licensing and partnership agreement with Epic Games Interna- tional S.à r.l., which speciﬁes the conditions under which the Company may apply Unreal Engine in its games, and establishes a framework for collaboration on further development and improvements in the engine, so as to adapt it to the requirements of open-world games. Developing and publishing games based on Unreal Engine requires the Company to familiarize itself with, and then successfully deploy, the technology, as well as to develop a range of new tools, or adapt existing tools used by the Studio’s creators. Basing further releases on a licensed engine, i.e. Unreal Engine, may also render the Company’s basic business activities dependent on collaboration with the license provider. Failing to meet development goals, including as relates to production time, quality or entertainment appeal, may result, among others, in additional costs, reduced sales revenues, impairment charges on development expenditures, or a loss of reputation for the Studio. Actions taken: In order to meet its development goals the Company strives to deliver games on time while upholding high quality standards. In the framework of the RED 2.0 transformation process, the Company has introduced the Agile development methodology. In line with the adopted principles, gamers’ experience is prioritized – which is why the Studio works to uniformize and improve its project management to facilitate a more ecient production process. To this end, interdisciplinary teams are being set up, each equipped with the appropriate expertise and skills. Members of such teams can exchange knowledge and experience, and have access to training programs. The Studio continues to expand its gamedev workforce by opening new jobs. The Company also introduces solutions aimed at enhancing communication and transparency in collaboration between teams, providing a clear deﬁnition of roles and responsibilities in the decision-making process, and instituting a training program to build the necessary Agile development skillset. Production milestones are based on exchange of information between teams and on transparency, which enables ongoing veriﬁcation of progress and enables the studio to react to potential mistakes. Member companies of the CD PROJEKT Group continue to monitor technological progress and, whenever possible, introduce changes which may beneﬁt the quality, production or distribution of games. Risk related to collaboration with key suppliers Description: In the course of their activities, Group member companies cooperate with many external entities. The Group relies on these entities, among others, for specialized applications and software, licenses and other services required in its daily work. Ooading certain activities to experienced contractors may increase the Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 51 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP eciency of ongoing projects, but may also represent a risk. Choosing the wrong contractor, or terminating cooperation with a key supplier of essential products or services may impair the progress of ongoing projects, harm sales and thereby have a detrimental eect of the ﬁnancial performance and reputation of Group mem- ber companies. The strategic licensing and partnership agreement signed in 2022 with Epic Games International S.à r.l., which also provides for dedicated technical support for the Company’s products on the part of Epic Games, entails the risk of terminating cooperation with this key business partner, which would aect the Company’s development schedule, as well as the related goals and expenditures. Actions taken: The Group minimizes the risk related to key suppliers by maintaining good trade relations with business partners and by actively seeking new collaboration opportunities. A procurement policy has been introduced at the Company, encompassing, among others, best practices in terms of communication and business negotiations with partners. The Company also provides training for employees who engage in procurement processes. Member companies of the Group work to make sure that business relations are appropriately structured – starting with selection of supplier, through quotations and negotiations, all the way to delivery. Member companies of the Group also actively monitor the market and may take steps to replace selected products or services, should such changes become necessary. To mitigate this risk the Company takes steps to ensure far-reaching contractual protections. The licensing and partnership agreement with Epic Games International S.à r.l. was signed for a period of 15 years with a prolon- gation option; the agreement also does not restrict the number of games which can be developed with the use of Unreal Engine. Risk of temporary restriction of access to distribution channels which carry the Group’s products, or to certain markets and hardware platforms Description: The Company distributes its own products via physical channels (retail outlets) as well as digitally, which – except for the Group’s proprietary GOG.COM platform – relies on cooperation with external distributors. Company games may be denied presence on, or withdrawn from selected storefronts, and their introduction or return to such storefronts may depend on multiple factors, some of which may be outside of Company control. In particular, development of games for “closed” platforms, such as gaming consoles or iOS devices, and dis- tributing games on markets where the applicable legislation calls for certiﬁcation (e.g. China) requires direct cooperation with the certiﬁer. Failure to meet certiﬁcation criteria is a risk, as are changes in local laws or regu- lations aecting the certiﬁer, termination of cooperation with the platform proprietor, delays in the certiﬁcation process, denial of certiﬁcation or revocation of previously granted certiﬁcation. Each of those events may adversely impact revenues from sales of the Group’s products on selected territories or platforms. Restriction of sales in selected traditional or digital distribution channels may aect the revenues and therefore also the earnings of the Company and its Group. The impact of this risk depends on many factors, such as the importance of the product, market share of the given distributor or the region to which the restriction applies. Actions taken: To minimize the risk of restricted availability of CD PROJEKT RED products the Company cooper- ates with a broad range of distribution partners. In order to minimize the risk of failing certiﬁcation, and therefore of not being able to distribute its products on certain territories or platforms, the Company in justiﬁable cases Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 52 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP the Company engages with local partners who possess the experience and knowledge required to secure certiﬁcation of the game (or of its new editions or supplementary content) prior to its rollout on the given market. The Company also keeps track of legislative changes in key markets which may have a negative impact on the distribution of the Group’s products. This enables the Group to react to such changes in a timely manner, and to mitigate the potential negative consequences for its member companies. Cybersecurity risks related to leakage, loss or unauthorized modiﬁcation of data Description: Data storage and data processing in IT or communications systems operated by CD PROJEKT carries the risk of leakage, loss or unauthorized modiﬁcation. Cybersecurity risks go beyond corruption or destruction of data and the associated ﬁnancial loss, and may include theft of intellectual property, loss of productivity or loss of reputation. Cybersecurity risks may involve internal or external circumstances, whether intentional or inadvertent, which result e.g. from human error, cyberattacks, deployment of malicious software or other breaches of security. Actions taken: To minimize cybersecurity risks the Group has instituted the Information Security Policy which provides guidance with regard to processing and protection of information. This policy is augmented by spe- cialized procedures, covering e.g. access management, collaboration with external partners or managing the security of IT systems. The Group continues to roll out and improve technical measures which contribute to the resilience of its IT infrastructure. Security requirements are uniformized and iterated to ensure that access to information and data processing are performed in a controlled manner. An important aspect of the Group’s approach to cybersecurity is a series of internal training courses related to IT security, raising awareness of threats such as phishing. The Group continues to monitor its data processing systems to ensure appropriate technical safeguards against potential evasion of security measures. Risk of unavailability of IT infrastructure or services Description : Given the nature of the business in which CD PROJEKT Group member companies engage, and the ongoing development of the digital entertainment markets, products and services oered by the Group are becoming ever more dependent on the reliability, accessibility and security of IT infrastructure. IT systems, including servers and networks, as well as Internet access devices, may be subject to outages and technical malfunctions caused by various factors, which may negatively aect the continuity or eciency of ongoing projects. Such risks may involve e.g. unavailability of on-premises infrastructure or SaaS resources due to server crashes, network outages or upstream failures in the network provider’s infrastructure. Actions taken: In order to minimize the risk of unavailability of IT infrastructure or services, IT teams monitor the selection of IT tools used to ensure high availability of critical systems and services. Given that most of these systems are located on the Group’s premises, the main server room has been equipped with uninterrupted power supply devices, access control systems as well as alarms and systems which monitor key environmental parameters. With regard to external services, the Group’s contractors are screened for security arrangements such as operational continuity plans. Service provisioning agreements include SLA clauses which specify required reaction times, contractual penalties and audit rights. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 53 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP LEGAL RISKS Risk associated with regulatory compliance Description: The activities of the CD PROJEKT Group are subject to a wide range of legal regulations which may dier depending on the territory where Group member companies carry out activities and distribute products, services or licenses. Numerous aspects require constant legal oversight, especially as relates to protection of intellectual property, corporate law (including provisions which regulate CD PROJEKT’s listing on the Warsaw Stock Exchange), antitrust regulations, consumer rights or labor law. Frequent changes in the applicable laws or interpretations, occurring both in Poland and abroad, carry the risk of noncompliance or infringement on the part of the Group’s member companies. Some changes in legal regulations may fail to acknowledge the speciﬁc nature of the videogame industry, exposing Group member companies to major unforeseen expendi- tures as they work to maintain legal compliance. In addition, there is a notable tendency among legislators to expand the scope of regulations applicable to the gaming industry – such as consumer protection, regulation of gambling, limiting the time spent in front of a video screen, or protection of minors. Each regulation which concerns the Group’s activities may encounter legal uncertainty e.g. as a result of changing interpretations, lack of ocial guidelines governing application of legal provisions, or insucient case law. This, in turn, complicates the process of addressing legal risks in order to maintain compliance. Large portions of sale, purchase and licensing agreements concluded with foreign parties fall within the jurisdic- tion of countries indicated by the Group’s business partners. This creates the risk of incorrect interpretations of foreign law or of the provisions of contracts governed by foreign law. Such exposure to multiple legal systems also carries the risk of potential inadvertent breaches of foreign law. Actions taken: The Company takes a number of actions to manage and mitigate the risk of noncompliance. Compliance has been disaggregated within CD PROJEKT’s organizational structure through appointment of a Chief Compliance Ocer. By formalizing compliance, along with creating a distinct Privacy & Compliance team as part of the legal department, tasked with monitoring and coordinating the Company’s compliance require- ments (both internal and external), the Company attempts to ensure that upcoming legal changes are taken into account ahead of time, and that appropriate safeguards and adaptations are put in place at the Group’s member companies. Furthermore, the Company also works to raise the expertise of personnel charged with maintaining compliance, through training courses, certiﬁcation and involvement in expert panels, including at conferences devoted to the legal aspects of carrying out business activities in Poland as well as on the international stage. The Company performs ongoing monitoring of changes in legal regulations and case law, guidelines, best practices and announcements issued by public bodies and supervisory organs (this activity is carried out within the Company’s legal department as well as externally, by contracting specialized law ﬁrms). The need to ensure compliance in daily activities of persons employed by the Company motivates the teams responsible for compliance to practice their communication skills and ensure that the wording of procedures and internal regulations remains understandable for all employees. Risk associated with processing personal data Description: The risk associated with processing personal data aects a range of data processing activities carried out by the Company which fall within the scope of Polish and foreign legal regulations on territories where the Group conducts its business. Noncompliance with privacy regulations applicable to the Company may result in additional costs related to administrative penalties or private claims by individuals whose data Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 54 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP is not being properly processed. If data protection measures – whether existing at present or expected to be rolled out in the future – prove insucient, unlawful disclosure, corruption or loss of personal data may ensue. This may be caused by IT system failures, human error, or malicious third-party interference. Actions taken: With regard to processing of personal data, CD PROJEKT Group member companies are assisted by internal mechanisms in place at the Group, as well as by external services, including those provided by the Personal Data Ocer. The Group takes action to mitigate and control risks associated with processing personal data. This includes internal audits, conﬁdentiality audits carried out in the framework of speciﬁc projects, data protection and privacy impact analysis, and ad-hoc consultations held for the beneﬁt of employees who super- vise processing of personal data. Speciﬁc activities are assigned to teams in the framework of internal audits. Additionally, a dedicated Privacy & Compliance team has been established at the Company, tasked, among others, with organizing regular training courses related to protection of personal data and information security in general, as well as with assisting Group member companies in this scope. In communication with consumers we try to use simple language and apply legal design practices to make our documentation more understandable, thereby increasing the transparency of our consumer relations and building trust in our organization. Risk associated with intellectual property rights Description: Products and services oered by Group member companies are based upon intellectual property. Eective acquisition, licensing and protection of intellectual property rights held by the Group is therefore an important aspect of the Group’s activities. In the course of their operating activities, including in the videog- ame development process, Group member companies acquire copyright to third-party works or images on the basis of contracts concluded with authors. The Group invests substantial eort in monitoring intellectual property (e.g. as relates to images, names or items); however, given the large number of such entities as well as the variability of legal regulations which extend protection to their creators on various territories, the risk of inadvertent infringement of third-party IPR cannot be entirely ruled out. Due to the global reach of CD PROJEKT Group products and services, it is natural to oer such products and services in local languages and using national alphabets. This, however, involves the risk that some names used by the Company may conﬂict with existing trademarks, giving rise to trademark infringement claims. In addition, the Group may be unable to locally register some of its trademarks due to their resemblance to trademarks which have already been registered. Group member companies monitor the impact of intellectual property regulations upon the Group’s activities; however, claims related to inadvertent infringement of third-party IPR cannot be ruled out. It should be noted that any claim ﬁled against the company in conjunction with potential infringement of intellectual property rights, patents or trademarks may undermine the Group’s reputation and growth prospects. Actions taken: The CD PROJEKT Group is actively involved in activities related to protection of intellectual property. It continually works to analyze and adapt its contracts to the existing legal circumstances in order to minimize the above-mentioned threats. In doing so, the Group enlists the assistance of specialized law ﬁrms. As a result, the legal safeguards present in the Group’s third-party contracts are iteratively improved. The Group registers trademarks throughout the European Union and elsewhere. It also monitors, on an ongoing basis, the registration of trademarks by third parties, and performs ongoing legal veriﬁcation of its products and services in order to prevent infringement of third-party IPR. The Group also takes action to combat infringement of its own IPR – among others, by monitoring online auction portals and distribution platforms in Europe, the United States Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 55 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP and Asia. Auctions which violate the Group’s IPR are regularly struck down, depending on the solutions oered by the given portal. The Company performs ongoing monitoring of changes in legal regulations and case law, both Polish and EU-wide, along with guidelines, best practices and notiﬁcations issued by public authorities and supervisory bodies. A dedicated Privacy & Compliance team has been established within the legal department at the Company, tasked, among others, with monitoring and coordinating the Company’s needs with regard to intellectual property. This team also organizes regular training courses for Company employees, and develops internal recommendations in the scope of IPR in order to raise awareness and supplement information regarding the requirements faced by the Group’s projects. In response to emerging IPR protection challenges, members of the legal department continue to improve their skills and gain expert knowledge, thereby improving solutions applied by the Company in this scope. Risk associated with changes or diering interpretations of ﬁscal regulations, and with subsidies Description: Signiﬁcant changes are occurring in tax law. Legislative bodies have imposed additional reporting obligations upon taxpayers and introduced a range of new restrictions related e.g. to eligibility of expenditures as tax-deductible revenues, while also introducing new forms of tax relief, enabling taxpayers to reduce their overall tax burden. Frequent conﬂicts between interpretations of ﬁscal regulations issued by public authorities give rise to uncertainties with regard to the correctness of the Company’s tax reporting. When deciding to make use of tax relief, member companies of the CD PROJEKT Group must develop appropriate internal doc- umentation and settlement standards, which, in turn, may potentially be brought into question by tax authorities. Group member companies also beneﬁt from subsidies which support ongoing investment and development projects. Relying on this form of funding may involve a risk of having the relevant documentation, justiﬁcations for funding requests or calculations and settlements questioned by the authorities – while the projects are in progress as well as following their conclusion. Actions taken: To minimize the risk of rejection of its tax or subsidy-related settlements, the Group has estab- lished an internal tax unit, charged with overseeing such settlements as well as overall compliance with tax law. This unit monitors legislative processes and interpretations issued by ﬁscal authorities, and implements procedures which aim to systematize internal procedures and guarantee proper discharge of ﬁscal obligations by the Group, including in the context of its tax strategy. Any recommendation to apply speciﬁc ﬁscal regulations is preceded by in-depth analysis of the applicable regulations and interpretations covering the issue at hand. Furthermore, the tax unit assists in the development and clariﬁcation of tax law, solicits individual interpretations of tax law, and participates in public hearings in the context of legislative processes. When discharging their tax obligations and ensuring proper interpretation of tax law, Group member companies enlist the assistance of external consultants and experts, both Polish and foreign, who specialize in matters with a signiﬁcant inﬂuence on their tax settlements. TEAMRELATED RISKS Risk associated with departure of team members Description: The risk associated with departure of team members, some of who may hold high-ranking posi- tions, along a high churn rate, is an important threat to the continuity of operations and attainment of business objectives by member companies of the Group. Talent and commitment are highly prized in the gamedev Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 56 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP industry, and there is ﬁerce competition among commercial entities wishing to attract skilled professionals. Loss of key team members may harm innovation, pace of work and quality of products and processes. It may also cause the Company to forfeit unique opportunities and, as a consequence, blunt its competitive edge. This translates into increased expenses (e.g. recruitment costs) and a potential reduction in revenues (delayed projects, disruption, loss of quality etc.) Actions taken: The CD PROJEKT Group involves its employees in large-scale, ambitious and innovative projects, which oer many opportunities for career and personal development. The Group’s internal vocational training and workshop curriculum actively supports development of professional capabilities and soft skills. The Group also continues to improve its remuneration and incentivization policies in order to keep abreast with market standards. The Group aims to oer competitive salary and compensation packages, among others by monitoring local and global trends related to various job categories, based on the available market reports. Member companies of the Group strive to provide team members with market-competitive fringe beneﬁts packages (such as medical care, ﬁtness programs, access to internal gym, healthy food at the oce, etc.) HR teams additionally undertake a range of activities to improve internal procedures, e.g. by measuring KPIs related to turnover, retention, headcount or rules concerning ﬂexible work models (oce work, remote work or hybrid arrangements). Regardless of the actions undertaken by the Group, a certain level of churn is unavoidable and natural. Given the speciﬁc nature of the Group’s activities, which focus on long-term projects, such churn typically increases in periods following each release. Risk associated with availability and recruitment of specialists Description: The activities and growth prospects of CD PROJEKT Group member companies are greatly depen- dent on maintaining an experienced, knowledgeable, talented and motivated workforce. The Group’s devel- opment plans call for continual recruitment of employees, both Polish and foreign. Talent and commitment are highly prized in the digital entertainment industry, and there is ﬁerce competition among commercial entities wishing to attract skilled professionals. Recruitment is a multistage process which aims to accurately assess the motivation, competences and predispositions of a prospective candidate; however, in some cases it may become too protracted, forcing the candidate to seek other opportunities. The inability to attract world-class specialists might impact the quality and release schedule of Group products, and therefore also the Group’s growth rate and ﬁnancial result. Actions taken: Member companies of the Group work to expand and upgrade their internal HR and recruitment departments. Employees are oered comfortable work conditions, competitive remuneration, bonuses and incentives, Employee Pension Scheme coverage, participation in and co-funding of vocational training courses, as well as numerous fringe beneﬁts (such as private medical care, three internal canteens, in-house gym, and access to external clubs and sports facilities). A relocation package is oered to foreign nationals who arrive in Poland, with a range of activities available in order to ease their immigration and settlement. To enable employ- ees to perform their work regardless of location, the Company has introduced a ﬂexible policy which includes home-ﬁrst, oce-ﬁrst or hybrid work models – providing another potential incentive for candidates who may be considering CD PROJEKT as their potential employer. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 57 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Risk of noncompliance with employment regulations Description: Given the number and diversity of individuals employed at the Group there is a risk of violating employment regulations in the course of daily activities at the Company and its subsidiaries. In this context the Group may be subject to periodic inspections carried out by institutions and authorities authorized to perform such inspections, as well as to lawsuits ﬁled by former employees alleging breaches of labor law and employment regulations. Such noncompliance may also cause undesirable dynamics in employee relations, and undermine the substance of civil law agreements related to the videogame development cycle. All of the above may negatively aect the employer-employee relationship, and the listed infringements may, in addition to legal consequences, carry the risk of harming the Group’s public image. Actions taken: Promoting a healthy organizational culture where everyone enjoys equal rights is key from the point of view of existing employees as well as potential candidates involved in recruitment activities. To implement its long-term strategy, the Group must safeguard the rights of its employees and counteract violations. With regard to minimizing risks related to employment regulations, the Company undertakes a range of activities to protect its team members. Each team at the Company is assigned a HR Partner; furthermore, procedures which regulate the rights and responsibilities of employees are implemented and enforced – this includes a procedure for counteracting misconduct in employee relations, as well as a for- mal Diversity Policy. Employees are able to anonymously or personally report any irregularities, including breaches of employment regulations, based on suitable whistleblowing regulations. There are systems in place which protect the conﬁdentiality of such reports and their authors, and which protect whistleblowers from potential retribution. The Company also works to ensure transparent internal communication related to employment, including changes in regulations, types of agreements, absences, leaves (including parental leave) and feedback options. FINANCIAL RISKS Financial risks identiﬁed by the Group have been described in the Consolidated Financial Statement of the CD PROJEKT Group for 2022. ENVIRONMENTAL RISKS Risk of facing regulatory and market pressure to undertake activities related to environmental and climate protection Description: The risk of facing pressure to undertake activities in the scope of environmental and climate protection results from the increasing expectations on the part of business partners and regulators, and is associated with dynamic restrictive changes in environmental law – both domestic and European. Newly introduced and planned legislation related to environmental and climate-centric transformation under the European Green Deal requires Group member companies to monitor emerging regulations and adapt to changes, among others by disclosing their greenhouse gas emissions, investigating the mutual links between the activities of Group member companies and climate change, and taking tangible steps to reduce harmful emissions throughout the value chain. Potential noncompliance with environmental law may result in administrative penalties imposed by the competent authorities. Environmental risks also apply to ownership, leasing and use of business properties, where additional expenses are incurred while undergoing transformation to a zero-emissions energy-ecient economic model. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 58 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Actions taken: Minimizing environmental impact and introducing solutions which beneﬁt the environment are among the Group’s priorities. In 2021 the Management Board of CD PROJEKT S.A. decided to initiate prepara- tions for the deployment of an Environmental Management System consistent with ISO 14001:2015/EMAS, which involves, among others, ongoing analysis and keeping up to date with the relevant regulations, assessment of the environmental impact of the Group’s activities against the backdrop of measurable indicators, and analysis of the Group’s compliance in this regard. In 2022 the Company also adopted a formal Environmental Policy which serves as the basis for rolling out the Environmental Management System. The Company carries out periodic audits of its compliance with environmental regulations and works to raise environmental awareness of its team members, becoming involved in actions which beneﬁt the environment and the climate. To ensure proper identiﬁcation of requirements stemming from environmental and climate protection laws, the Company cooperates with a consulting agency which specializes in environmental audits and supports the Company in monitoring anticipated legal reforms. In 2022 the Company held a taxonomy workshop to assess the materiality of climate risks, in line with the guidelines published by the Task Force on Climate-Related Financial Disclosures (TCFD). The Company monitors its environmental indicators and the associated costs, including consumption of energy and water, waste management and atmospheric emissions. It works to increase the share of renewable-energy infrastructure and improve the energy eciency of its buildings, and invests in environmentally-conscious solutions based on modern technologies. Continually improving its energy eciency and minimizing its environmental footprint enables the Company to manage and mitigate potential environmental risks on an ongoing basis. Detailed information regarding the Company’s environmental impact, including its carbon footprint and the risks and opportunities related to climate change, can be found in the Company’s Sustainability Report. 03 RESULTS OF OPERATION OF THE CD PROJEKT GROUP Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 60 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Discussion of the key economic and financial figures disclosed in the consolidated and separate financial statements CONSOLIDATED INCOME STATEMENT Table 3 Consolidated income statement of the CD PROJEKT Group (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 change change % Sales revenue       .% Sales of products       .% Sales of services     -  -.% Sales of goods for resale and materials     -  -.% Cost of sales of products, services, goods for resale and materials     -  -.% Costs of products and services sold       .% Cost of goods for resale and materials sold     -  -.% Gross proﬁt/(loss) on sales       .% Selling expenses     -  -.% Administrative expenses       .% Other operating income       .% Other operating expenses       .% (Impairment)/reversal of impairment of ﬁnancial instruments - - - .% Operating proﬁt/(loss)       .% Finance income       .% Finance costs       .% Proﬁt/(loss) before tax       .% Income tax       .% Net proﬁt/(loss)       .% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 61 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DESCRIPTION AND ASSESSMENT OF THE FACTORS AND UNUSUAL EVENTS AFFECTING THE RESULTS OF OPERATIONS OF THE CD PROJEKT GROUP IN 2022 The following unusual events relating to the CD PROJEKT RED segment had a material impact on the results, assets, equity & liabilities and cash ﬂows of the CD PROJEKT Group in the reported period (which was not observed in the comparative period): ■ The release in 2022 of the Group’s ﬂagship titles: Cyberpunk 2077 and The Witcher 3: Wild Hunt in the version for new generation consoles; ■ Recognition in the income statement under corporate income tax of a part of the tax collected in other jurisdic- tions in respect of royalties paid to the Company (withholding tax) which does not qualify for deduction due to the application of the preferential IP Box tax rate; ■ Release of Cyberpunk: Edgerunners update 1.6 and the ﬁrst release on Netﬂix of the anime series Cyberpunk: Edgerunners produced in the CD PROJEKT RED segment, which had a signiﬁcant favourable eect on the segment around the game and the level of Cyberpunk 2077 sales in the second half of 2022; ■ Conducting a buyback of the Company’s shares with a view to their voluntary redemption; ■ Adopting a decision to gradually phase out The Witcher: Monster Slayer project and, consequently, a recogni- tion by the Company of a write-down of shares held in Spokko sp. z o.o. and adopting a strategic decision on a planned reorganization of the CD PROJEKT Group in 2023 by merging CD PROJEKT S.A. (as the acquirer) and Spokko sp. z o.o. (as the acquiree); ■ Recognizing a write-down of expenditure incurred on development work associated with the Sirius project developed by The Molasses Flood studio incurred by 31 December 2022. The results of the evaluation of the scope and commercial potential of the Project in its original formula and the start of work to deﬁne a new project framework were the reasons behind that decision. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 62 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE CONSOLIDATED INCOME STATEMENT OF THE CD PROJEKT GROUP BY OPERATING SEGMENT CD PROJEKT RED segment Table 4 Income statement of the CD PROJEKT RED segment (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 change change % Sales revenue       .% Sales of products       .% Sales of services     -  -.% Sales of goods for resale and materials      .% Cost of sales of products, services, goods for resale and materials       .% Costs of products and services sold       .% Cost of goods for resale and materials sold     -  -.% Gross proﬁt/(loss) on sales       .% Selling expenses     -  -.% Administrative expenses       .% Other operating income     -  -.% Other operating expenses       .% (Impairment)/reversal of impairment of ﬁnancial instruments - - - .% Operating proﬁt/(loss)       .% Finance income        .% Finance costs       .% Proﬁt/(loss) before tax       .% Income tax       .% Net proﬁt/(loss)       .% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 63 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP In 2022, Sales of products of this segment comprised, in particular: ■ revenue relating to Cyberpunk 2077; ■ revenue relating to Witcher 3: Wild Hunt and expansions: Hearts of Stone and Blood and Wine; ■ licence revenue recognized in respect of the Cyberpunk: Edgerunners series which premiered in September; ■ revenue generated as part of the project GWENT: The Witcher Card Game; ■ licence revenue relating to games The Witcher 2, The Witcher and Thronebreaker: The Witcher Tales; ■ licence revenue from franchises. The higher level of Sales of products of the CD PROJEKT RED segment in 2022 compared with 2021 was mainly due to an increase in sales relating to the Cyberpunk 2077 game due to, among other things good reception of the Edgerunners Update 1.6 released in September preceding the premiere of the Cyberpunk: Edgerunners anime series on Netﬂix. The update released included additional content for the game related to the series (side quests, locations, items, an arcade game) and a number of updates and technical improvements to the game. A marketing and communication campaign supporting the update and the premiere of the series itself translated to a signiﬁcant boost to sales of the game itself. In 2022, Sales of services comprised mainly revenue related to services provided to the subsidiaries and shipping charges paid by the customers of the CD PROJEKT RED GEAR store. The drop in value of this item compared with the comparative period is due to an absence of material revenue from barter advertising agreements recorded in the comparative period. Sales of goods for resale and materials of the CD PROJEKT RED segment in 2022 comprised mainly revenue from the sale of ready-made physical sets and elements of physical sets of own titles (media, boxes, ﬁgurines, gadgets), mainly The Witcher 3, to distributors as well as sales of franchise products of CD PROJEKT RED. The most signiﬁcant component of the Cost of products, services, goods for resale and materials sold of the CD PROJEKT RED segment was the Cost of products and services sold, where mainly the cost of amortization of expenditure on development projects – own games manufactured is presented. The value of this item in 2022 comprised mainly amortization of expenditure on the Cyberpunk 2077 game which, following the rec- ognition of 40% of the expenditure in costs in the quarter when the premiere took place (the fourth quarter of 2020), is recognized in subsequent periods at 3% of the initial value of the asset, and production costs of the Cyberpunk: Edgerunners series recognized on a one-o basis in the period when the series premiered on Netﬂix. The increase in the item discussed compared with 2021 was mainly due to one-o recognition of the production costs of the Cyberpunk: Edgerunners series. In the item discussed, the Group also recognizes the cost of sales related to the Revenue from sales of services earned. In 2022, the Cost of goods for resale and materials sold contained the cost of manufacture of ready-made physical sets, their elements and franchise products sold to distributors. Costs of promotion of the products of the CD PROJEKT RED studio had the largest share in the cost of sales of the CD PROJEKT RED segment in 2022. They related mainly to the support of the sales of the Cyberpunk 2077 game, including the new generation versions, and campaigns associated with the release of Edgerunners Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 64 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP Update 1.6, and the support of the release of The Witcher 3 game for new generation Xbox Series X|S and Playstation 5 consoles in December 2022. Moreover, costs of servicing and updating the products of the CD PROJEKT RED segment, mainly the Cyberpunk 2077 game and GWENT: The Witcher Card Game constituted a signiﬁcant part of the item discussed in 2022. In the item discussed, the segment also recognizes the costs of ﬁxed and performance-related remuneration of the in-house publishing teams and the costs of performance-related remuneration of the management boards of the companies. A signiﬁcant decrease in the level of Cost of sales in 2022 compared with the prior year was aected, to the largest extent, by a reduction of more than 50% in expenditure on servicing and updating products, and lower promotional expenditure. The Administrative expenses of the CD PROJEKT RED segment comprise, in particular: ■ the ﬁxed and performance-based remuneration of the administrative teams and the external costs of third party services classiﬁed in this category which, in step with an increase in the employment levels and the scale of operations of the segment’s companies, are growing gradually; ■ the ﬁxed part of the remuneration of the management boards of the companies; ■ costs of work on the future games incurred at an initial stage (research phase) preceding the execution of the projects (development phase) and the start of their capitalization as part of Expenditure on development projects forming part of Non-current assets (PLN 4 593 thousand in 2022 compared with PLN 23 985 thousand in 2021); the drop in expenditure in 2022 compared with the prior year is due to completion of the research phases of two projects of two of the projects and their moving on to the development phase; ■ the cost of valuation of the rights awarded under the incentive scheme for the years 2020–2025. As regards Other operating income and expenses, the CD PROJEKT RED segment recognizes the revenue generated from the lease of oce space (and the accompanying maintenance costs) in the real estate complex located at ul. Jagiellońska 74 and 76 in Warsaw, revenue and costs from re-invoiced services, revenue in respect of the subsidies received and the costs of one-o events: recycling of inventories, scrapping of ﬁxed assets, write-os of intangible assets and donations (including, in the period discussed, mainly support for the Polish Humanitarian Action for assistance related to the situation in Ukraine). A material increase in Other operating expenses in 2022 in relation to the comparative period was due to recognition of a write-down relating to expenditure on development work associated with the Sirius Project being developed by The Molasses Flood studio incurred until 31 December 2022. In 2022, the CD PROJEKT RED segment showed a surplus of Financial income over Financial costs compared with a loss in the comparative period. This was mainly due to an increase in interest income on bank deposits and Treasury bonds, and the recognition of a gain on redemption of Treasury bonds which, in total, exceeded the excess of foreign exchange losses and write-downs of non-current ﬁnancial assets: ■ a write-down of PLN 2 900 thousand of shares in CD PROJEKT RED STORE sp. z o.o. in connection with plans to continue the existing operation of a mail-order shop with gadgets for gamers in cooperation with a special- ized external entity; Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 65 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP ■ a write-down of PLN 27 271 thousand resulting from an impairment test of the shares in a subsidiary Spokko sp. z o.o. relating with the decision to phase out The Witcher: Monster Slayer project and reorganiza- tion of the CD PROJEKT Group in 2023 by merging CD PROJEKT S.A. (as the acquirer) and Spokko sp. z o.o. (as the acquiree). Corporate income tax recognized in the income statement for the current year and the eective tax rate increased signiﬁcantly compared with 2021. The reason for the increase is the recognition of a portion of the tax collected in other jurisdictions on the licence fees paid to the Company (withholding tax) in the corporate income tax amount. Following collection of the documents conﬁrming the amounts and the fact of payment of withholding tax abroad, the Company deducted the foreign withholding tax from the domestic corporate income tax amount, a signiﬁcant portion of which was calculated using a preferential IP Box tax rate (5%) and charged the excess to the income statement. The consolidated Net proﬁt of the CD PROJEKT RED segment for 2022 amounted to PLN 342 095 thousand and was PLN 103 417 thousand (43.3%) higher than in the comparative period. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 66 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP GOG.COM segment Table 5 Income statement of the GOG.COM segment (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 change change % Sales revenue     -  -.% Sales of products -   - - Sales of services   - -.% Sales of goods for resale and materials     -  -.% Cost of sales of products, services, goods for resale and materials     -  -.% Costs of products and services sold    -  -.% Cost of goods for resale and materials sold     -  -.% Gross proﬁt/(loss) on sales     -  -.% Selling expenses     -  -.% Administrative expenses     - -.% Other operating income       .% Other operating expenses     -  -.% (Impairment)/reversal of impairment of ﬁnancial instruments - - - - Operating proﬁt/(loss)   -    - Finance income       .% Finance costs     - -.% Proﬁt/(loss) before tax   -    - Income tax   -    - Net proﬁt/(loss)   -    - Sales revenue of the GOG.COM segment in 2022 amounted to PLN 188 579 thousand and was 5.7% lower than in 2021. A decrease in Sales revenue compared with the comparative period was mainly due to an absence of Sales of products due to termination of GOG.COM’s participation in the GWENT consortium at the end of 2021. Starting from 2022, GOG does not receive the corresponding portion of the revenue and expenses generated by this project. The GWENT products: The Witcher Card Game and Thronebreaker: The Witcher Tales are still available to GOG.COM customers, however, the principles of cooperation and settlements between GOG.COM Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 67 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP and CD PROJEKT S.A. are implemented similarly to standard cooperation and settlements as part of the digital distribution of games. Starting from the current year, GOG.COM presents the revenue earned from the sales of the discussed products under Sales of goods for resale and materials. Sales of goods for resale and materials had the largest share (99.9%) in Sales revenue of the GOG.COM segment. They include the digital distribution of games from GOG.COM’s external suppliers to ﬁnal customers, carried out via the GOG.COM platform and the GOG GALAXY application. The value of Sales of goods for resale and materials earned in 2022 was slightly lower than the value generated in the comparative period in 2021 in which sales as part of digital distribution were supported by the restrictions related to the COVID-19 pandemic which were still in force in many countries. The most important release of 2022 on GOG.COM was one of the most anticipated games by the GOG community – The Elder Scrolls V: Skyrim Anniversary Edition, considered a classic of the open-world RPG genre. In addition, a number of launches have also been added to the shop’s oer, such as the classic title Wheel of Time, available only on our platform, and the Middle-earth™ series: Shadow of War™ and Middle-earth™: Shadow of Mordor™, A Plague Tale: Innocence, Alien: Isolation, Two Point Hospital, or a new game in the iconic series Return to Monkey Island. In addition, in response to the invasion of Ukraine by Russian armed forces, as from the beginning of March 2022 the Company discontinued sales to Russia and Belarus, which had a negative impact on the level of rev- enue earned. The Company estimates that in the period of 12 months from March 2021 to February 2022 the total share of Russia and Belarus in the sales of products of the GOG.COM segment amounted to approx. 3.7%. Cost of goods for resale and materials sold of the GOG.COM segment corresponds to the costs of games sold and its increase in the reporting period is mainly due to lower sales of goods for resale and materials of the segment. In the period discussed, Selling expenses of the GOG.COM segment decreased by 30.2% compared with 2021. This was possible due to a number of cost optimization initiatives implemented by GOG and the termination of its participation in the GWENT consortium by the end of 2021. Among the Selling expenses shown in the GOG.COM segment relating to the functioning of the GOG.COM plat- form, the following had the most signiﬁcant share in Selling expenses: ■ the remuneration of the team responsible for operating, development and promotion of the GOG.COM platform, as well as maintenance and further development of the GOG GALAXY application; ■ transaction costs related to the processing of payments on the GOG.COM platform; ■ the costs of the ICT infrastructure related to making sales; ■ the costs of the marketing activities concerning the GOG.COM website and the GOG GALAXY application – in the analysed period, these were primarily the costs of a promotion related to the digital distribution of games on the GOG.COM platform; ■ the amortization/depreciation expense, including the amortization of completed development projects. In 2022, Administrative expenses of the GOG.COM segment were also slightly lower than those recognized in the comparative period. The main components of the Administrative expenses of the GOG.COM segment are remuneration of the administrative teams, ﬁxed remuneration of the Company’s Management Board, as Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 68 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP well as the costs of the incentive scheme and other external services classiﬁed in this category. A decrease in Administrative expenses in the period discussed compared with the comparative period was mainly due to lower costs of external services acquired. In 2022, Other operating income of the GOG.COM segment comprised mainly income resulting from remeasure- ment of liabilities as at the balance sheet date, income from re-invoicing and sales of other services, including the provision of IT services within the Group. In Other operating expenses of the GOG.COM segment, the largest items included: ■ costs of IT services provided within the Group to support GWENT: The Witcher Card Game; ■ costs relating to remeasurement of the estimated recoverable amount of non-current prepayments (the so-called minimum guarantees) made by GOG.COM to the providers of digital content oered on the GOG.COM platform. A signiﬁcant decrease in Other operating expenses compared with the prior year is due to one-o events charged to the income statement in 2021, including, among other things, costs resulting from updating historical assumptions regarding the depreciation of previously developed technology related to the shop’s customer, and a provision for potentially overdue CIT in proceedings before the customs and tax oce. As at the date of preparing the ﬁnancial statements covering 2022, a ﬁrst-instance tax assessment decision has been issued, but GOG.COM and its advisors disagree with the position adopted by the tax authorities. GOG.COM appealed against the decision of the customs and tax oce and is awaiting its consideration. In the 2022, the GOG.COM segment showed an excess of Financial costs over Financial income. This is primarily an excess of foreign exchange losses over foreign exchange gains. Foreign exchange losses in the GOG.COM segment result primarily from the translation of liabilities to suppliers as at the balance sheet date. Income tax expense for the current year comprises mainly: change in the balance of deferred tax, CIT payable and an adjustment of tax on capital gains relating to 2021. In 2022, the Net proﬁt amounted to PLN 5 248 compared with a Net loss of PLN 29 791 in the comparative period. Table 6 Net proﬁtability ratio – Alternative Performance Measure 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 CD PROJEKT Group CD PROJEKT RED GOG.COM Net proﬁt margin (Net proﬁt / sales revenues) .% .% .% .% .% -.% The Net proﬁtability ratio presents additional information, indicating what part of Sales revenue remains in the enterprise in the form of a Net proﬁt after covering all the costs and tax charges shown in the Income statement. An increase in the value of this ratio means an increase in the eectiveness of the activities carried out, related to the level of the Sales revenue earned. The ratio used is a standard and commonly used measure in ﬁnancial analysis, and its usefulness was analysed in terms of the information provided to investors on the eectiveness of the activities of the CD PROJEKT Group and its segments. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 69 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP An increase in the Net proﬁtability ratio of the Group in 2022 compared with the prior year is mainly due to the improvement of the ratio in the CD PROJEKT RED segment, where a decrease, compared with 2021, in typical costs for the period was noted after the release of a large project, namely Cyberpunk 2077: ■ expenditure on the work associated with servicing the Cyberpunk 2077 game signiﬁcantly decreased; ■ costs of the research phase of newly launched development projects recognized in the segment’s results of operations decreased signiﬁcantly; ■ expenditure on promotional campaigns decreased. In addition, in 2022, the GOG.COM segment generated a positive proﬁtability ratio compared with the negative one resulting from one-o events (additional costs relating to higher depreciation of technology and recognition of a provision for potential tax liabilities and the related interest) in the prior year. Therefore, the Group and each of its segments recorded a signiﬁcant increase in the net proﬁtability of their operations in 2022. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 70 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP INCOME STATEMENT OF CD PROJEKT S.A. Table 7 Income statement of CD PROJEKT S.A. (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 change change % Sales revenue       .% Sales of products       .% Sales of services     -  -.% Sales of goods for resale and materials       .% Cost of sales of products, services, goods for resale and materials       .% Costs of products and services sold       .% Cost of goods for resale and materials sold     - -.% Gross proﬁt/(loss) on sales       .% Selling expenses     -  -.% Administrative expenses       .% Other operating income     -  -.% Other operating expenses       .% (Impairment)/reversal of impairment of ﬁnancial instruments - - - .% Operating proﬁt/(loss)       .% Finance income        .% Finance costs       .% Proﬁt/(loss) before tax       .% Income tax       .% Net proﬁt/(loss)       .% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 71 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE INCOME STATEMENT OF CD PROJEKT S.A. CD PROJEKT S.A. is the Parent Company of the CD PROJEKT Group and, at the same time, the largest entity in both the Group and the CD PROJEKT RED segment. Therefore, a commentary on the Income statement of the CD PROJEKT RED segment (excluding the impact of the signiﬁcantly smaller subsidiaries CD PROJEKT RED STORE sp. z o.o. and CD PROJEKT Inc.) corresponds directly to the operations and results of CD PROJEKT S.A. In 2022, the Sales revenue of CD PROJEKT S.A. amounted to PLN 772 500 thousand and was 11.6% higher than the Company’s Sales revenue for 2021. The Company’s Net Proﬁt for 2022 amounted to PLN 341 073 thousand and was 42.0% higher than in the prior year. In 2022, the value of Sales revenue and Net proﬁt of CD PROJEKT S.A. accounted for, respectively, 99.0% and 99.7% of the Sales revenue and Net proﬁt disclosed in the Income statement of the CD PROJEKT RED segment discussed above. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 72 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION Table 8 Consolidated statement of ﬁnancial position of the CD PROJEKT Group (in PLN thousand) 31.12.2022 31.12.2021 change change % NON-CURRENT ASSETS        .% Property, plant and equipment       .% Intangible assets       .% Expenditure on development projects       .% Investment properties     -  -.% Goodwill      .% Shares in non-consolidated subsidiaries       .% Prepayments and deferred costs       .% Other ﬁnancial assets       .% Deferred tax assets       .% Other receivables   - -.% CURRENT ASSETS       -  -.% Inventories     -  -.% Trade receivables       .% Current income tax receivable       .% Other receivables     -  -.% Prepayments and deferred costs       .% Other ﬁnancial assets     -  -.% Bank deposits over  months       .% Cash and cash equivalents     -  -.% TOTAL ASSETS         .% * restated data Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 73 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP 31.12.2022 31.12.2021 change change % EQUITY         .% Share capital      .% Supplementary capital         .% Share premium      .% Treasury shares -  - - - Other reserves     -  -.% Foreign exchange dierences on translation      .% Retained earnings / (Accumulated losses) -  -    -.% Net proﬁt (loss) for the period       .% NON-CURRENT LIABILITIES      .% Other ﬁnancial liabilities     -  -.% Other liabilities     - -.% Deferred tax provision  - - - Deferred income     -  -.% Provision for retirement and similar beneﬁts   - -.% Other provisions       .% CURRENT LIABILITIES     -  -.% Other ﬁnancial liabilities     -  -.% Trade payables       .% Current income tax liabilities     -  -.% Other liabilities      .% Deferred income     -  -.% Provision for retirement and similar beneﬁts    .% Other provisions       .% TOTAL LIABILITIES AND EQUITY         .% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 74 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF THE CD PROJEKT GROUP Assets The item Expenditure on development projects, in which the Group recognizes expenditure on the development of new products and technologies, incurred and deferred, had the largest share in the value of the Group’s Non-current assets as at the end of 2022, as well as the greatest impact on the increase in the balance thereof. The increase in the value of the said item in the discussed period is the result of the expenditure incurred by the CD PROJEKT RED segment on the production of future games in an amount higher than the amortization of ﬁnished productions and write-downs resulting from writing o expenditure on discontinued projects. The balance of Property, plant and equipment primarily consists of: ■ the value of the real estate complex at ul. Jagiellońska 74 and 76, the recognized part thereof being the part to be used by CD PROJEKT S.A. for its own purposes; ■ plant and machinery, where the Group recognizes, among other things, computers, servers and other electronic devices used in its activities; ■ assets in respect of the right of use of leased oce space (with the adequate value of Other ﬁnancial liabilities in respect of concluded contracts on the lease of space being recognized on the Equity and liabilities side at the same time). The increase in the value of this item in the discussed period was primarily due to expenditure on the construc- tion work at the CD PROJEKT campus in Warsaw (ﬁxed assets under construction). The most signiﬁcant items recognized in Intangible assets are mainly the value of the CD PROJEKT corporate brand and the The Witcher trademark, as well as the value of the copyright and computer software held by the Group. The increase in the value of the Group’s Intangible assets in the discussed period is related to an investment in new game production technologies in the CD PROJEKT RED segment. Another material component of the Non-current assets of the CD PROJEKT Group is Goodwill which is com- posed of amounts resulting from accounting for the merger of the parent company with the CDP Investment Group on 30 April 2010 and accounting for the acquisition of a development studio located in Wrocław by CD PROJEKT S.A. from Strange New Things sp. z o.o. sp. k. on 18 May 2018. The Goodwill reported did not change over the discussed period. The balance of Investment properties consists of the values of the properties at ul. Jagiellońska 74 and ul. Jagiellońska 76, the parts thereof classiﬁed as earmarked for lease (both to related entities and external lessees). The value of Shares in non-consolidated subsidiaries as at the end of 2022 comprised the equity of The Molasses Flood LLC, Boston, CD PROJEKT RED Vancouver Studio Ltd. and Spokko sp. z o.o., Warsaw. The increase in the value of this item during 2022 was mainly due to an increase in equity of The Molasses Flood LLC, Boston and CD PROJEKT RED Vancouver Studio Ltd. In Other ﬁnancial assets under Non-current assets the Group presents primarily the value of domestic Treasury bonds purchased as part of the diversiﬁcation of credit risk, measured at amortized cost, with a maturity date of more than 12 months. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 75 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP The value of Inventories as at the end of 2022 consists mainly of ready-made physical sets and elements of physical sets of the editions of games of own production intended for external distributors and goods for resale in the warehouses of the CD PROJEKT RED GEAR online company store which sells products related to the CD PROJEKT RED brands to retail customers in Europe and North America. The consolidated balance of Trade receivables as at 31 December 2022 comprised mainly receivables resulting from license reports received after the balance sheet date relating to sales in the periods of the last quarter of 2022 in the CD PROJEKT RED segment. Its increase compared with the end of 2021 was directly attributable to higher sales, compared with the prior year, in the CD PROJEKT RED segment in the last quarter of the year. The decrease in the value of the Group’s Other receivables during 2022 is primarily the result of a decrease in receivables in respect of the withholding tax deducted by the foreign recipients of the licences granted by the CD PROJEKT RED segment (the recognition of the excess of the withholding tax paid abroad in the income statement) and the recognition of advances for development projects in work in progress. Moreover, Group companies disclose VAT settlements and advances to suppliers in respect of future deliveries of goods for resale and services and security deposits paid in this item. The consolidated value of the current and non-current Prepayments and deferred costs recognized as at the end of the analysed period was mainly aected by the amount of the so-called minimum guarantees, i.e. advances and prepayments made by GOG.COM to its suppliers towards fees for the distribution of games oered on the GOG.COM platform, not recognized in the income statement by the balance sheet date. The increase in the discussed item is mainly due to the conclusion of new contracts by GOG.COM for subsequent products which will join the list of games available on GOG.COM. Moreover, the item contains, among other things, prepayments related to marketing activities and deferred fees for software, licences and rights. Other ﬁnancial assets (current) contain mainly the value of foreign Treasury bonds purchased by CD PROJEKT S.A. as part of the diversiﬁcation of credit risk and measured at fair value through other comprehensive income. The total value of ﬁnancial reserves in the form of Cash and cash equivalents, Bank deposits over 3 months and liquid ﬁnancial assets in the form of purchased Treasury bonds (recognized in total in current and non-cur- rent Other ﬁnancial assets) held by the Group as at 31 December 2022 amounted to PLN 1 091 005 thousand. As at the end of 2022, Non-current assets accounted for 49.2%, and Current assets – 50.8% of Total assets of the CD PROJEKT Group. Liabilities and equity The increase in the CD PROJEKT Group’s Equity during 2022 was mainly due to the net proﬁt earned in an amount exceeding a decrease in equity resulting from decisions of the General Shareholders Meeting of CD PROJEKT S.A. regarding the payment of dividend for 2021 (May 2022) and the buyback of own shares (October 2022). The value of Non-current liabilities did not change materially in 2022. In current and non-current Other ﬁnancial liabilities, the Group recognizes liabilities in respect of the perpet- ual usufruct of land at the Jagiellońska 74 and Jagiellońska 76 complexes in Warsaw and liabilities resulting Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 76 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP from the valuation of instruments hedging the foreign exchange risk related to holding foreign Treasury bonds denominated in foreign currencies as well as liabilities in respect of payment of a part of the purchase price of the shares in The Molasses Flood with a deferred payment term. A decrease in this item during 2022 is due to reclassiﬁcation of the liabilities arising on the valuation of instruments hedging foreign exchange risk to Other ﬁnancial assets, and the settlement of a part of the liability relating to the payment of a part of the purchase price of the shares in The Molasses Flood. The increase in the Group’s Trade payables as at the end of 2022 is mainly due to trade payables of the CD PROJEKT RED segment relating to the services provided to this segment. In Deferred income (current and non-current) as at the end of 2022, the Group’s segments recognized mainly: ■ CD PROJEKT RED – the so-called minimum guarantees, i.e. advances towards royalties related to sales in future periods, received or receivable from publishers and distribution partners; ■ CD PROJEKT RED and GOG.COM – deferred income concerning subsidies; ■ GOG.COM – deferred income settlements with the Company’s customers (including the Store credit and Wallet granted); ■ GOG.COM – the value of pre-orders for games with a release date in future periods, placed by customers. The decrease in the balance compared with the end of 2021 is mainly due to a drop in the balance of minimum guarantees in the CD PROJEKT RED segment in connection with the settlement of the sales made in the period and the settlement of a subsidy in the CD PROJEKT RED segment. The value of the Group’s Other liabilities as at 31 December 2022 comprised mainly current tax liabilities (VAT, PIT) and social security liabilities. The value of Other provisions of the CD PROJEKT Group concerned mainly the CD PROJEKT RED segment, where: ■ the balance of provisions for performance-based remuneration increased compared with the end of 2021 in line with an increase in the result of operations for the reporting period; ■ there was a surplus of provisions for other costs utilized and released over the balance of new provisions for costs recognized during the period. In the Equity and liabilities of the CD PROJEKT Group as at the end of 2022, Equity represented 89.4%, whereas Current and non-current liabilities represented 11.6%. The consolidated statement of ﬁnancial position by business segment of the Group is contained in the Consol- idated ﬁnancial statement of the CD PROJEKT Group for 2022. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 77 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DESCRIPTION OF THE STRUCTURE OF ASSETS AND EQUITY & LIABILITIES OF THE CONSOLIDATED BALANCE SHEET, INCLUDING FROM THE PERSPECTIVE OF LIQUIDITY As at the end of 2022, the CD PROJEKT Group had assets with a carrying value of PLN 2 274 124 thousand. Within these assets, liquid ﬁnancial reserves maintained in bank accounts, in the form of bank deposits and Treasury bonds (foreign and domestic) amounted to PLN 1 091 005 thousand and represented 48.0% of total assets. Assets with limited liquidity (Property, plant and equipment, Expenditure on development projects, Investment properties and Shares in non-consolidated subsidiaries) totalling PLN 702 621 thousand represented 30.9% of total assets. As at 31 December 2022, the total of Trade receivables, Other current receivables and Inventories amounted to PLN 235 130 thousand, whereas the total value of current and non-current liabilities amounted to PLN 240 720 thousand. As at the end of 2022, the Group did not have any external liabilities in respect of loans or borrowings. The accumulated cash and cash equivalents, deposits and Treasury bonds ensure the Group’s high liquidity and may be used to secure the ﬁnancing of the Group’s further development, including the ﬁnancing of the development of future products and technologies, promotional support for scheduled premieres, securing future investment opportunities and ensuring provisions for possible unplanned situations or emerging opportunities. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 78 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP STATEMENT OF FINANCIAL POSITION OF CD PROJEKT S.A. Table 9 Statement of ﬁnancial position of CD PROJEKT S.A. (in PLN thousand) 31.12.2022 31.12.2021 change change % NON-CURRENT ASSETS        .% Property, plant and equipment       .% Intangible assets       .% Expenditure on development projects       .% Investment properties     -  -.% Goodwill      .% Investments in subordinated entities       .% Prepayments and deferred costs      .% Other ﬁnancial assets       .% Deferred tax assets       .% Other receivables    .% CURRENT ASSETS       -  -.% Inventories     -  -.% Trade receivables       .% Other receivables     -  -.% Prepayments and deferred costs       .% Other ﬁnancial assets     -  -.% Bank deposits over  months       .% Cash and cash equivalents     -  -.% TOTAL ASSETS         .% * restated data Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 79 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP 31.12.2022 31.12.2021 change change % EQUITY         .% Share capital      .% Supplementary capital         .% Share premium      .% Treasury shares -  - - - Other reserves     -  -.% Retained earnings / (Accumulated losses) - -  - - Net proﬁt (loss) for the period       .% NON-CURRENT LIABILITIES       .% Other ﬁnancial liabilities       .% Other liabilities     - -.% Deferred income     -  -.% Provision for retirement and similar beneﬁts   - -.% Other provisions       .% CURRENT LIABILITIES     -  -.% Other ﬁnancial liabilities     -  -.% Trade payables       .% Current income tax liabilities     -  -.% Other liabilities      .% Deferred income     -  -.% Provision for retirement and similar beneﬁts    .% Other provisions       .% TOTAL LIABILITIES AND EQUITY         .% Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 80 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE STATEMENT OF FINANCIAL POSITION OF CD PROJEKT S.A. CD PROJEKT S.A. is the Parent Company of the CD PROJEKT Group and, at the same time, the largest entity in both the Group and the CD PROJEKT RED segment. Therefore, a commentary on the statement of ﬁnancial position of the Group, excluding information relating to the GOG.COM segment and the impact of the statement of ﬁnancial position of the subsidiaries CD PROJEKT Inc. and CD PROJEKT RED STORE sp. z o.o., to a large extent covers the operations and results of CD PROJEKT S.A. As at the end of 2022, total assets of CD PROJEKT S.A. amounted to PLN 2 183 974 thousand and were PLN 90 150 thousand lower than total assets of the CD PROJEKT Group, representing 96.0% of the Group’s total assets. The largest dierences between the consolidated statement of ﬁnancial position of the CD PROJEKT Group and the separate statement of ﬁnancial position of CD PROJEKT S.A. relate to the following items: ■ investments in subsidiaries – CD PROJEKT S.A., as owner of the other Group companies on a stand-alone basis, discloses the value of investments in subsidiaries which amounted to PLN 53 566 as at the end of 2022 and is eliminated at the Group consolidation level and presented in Shares in non-consolidated subsidiaries; ■ Other items of Assets and Liabilities – on a stand-alone basis, they do not take into account the values resulting from the consolidation of the ﬁnancial statements of other Group companies, including, in particular, with regard to the items indicated, amounts attributable to the subsidiary GOG sp. z o.o. whose total assets represent 4.3% of the total assets of the CD PROJEKT Group. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 81 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP CONSOLIDATED STATEMENT OF CASH FLOWS Table 10 Consolidated statement of cash ﬂows of the CD PROJEKT Group (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 OPERATING ACTIVITIES Net proﬁt/(loss)     Total adjustments:     Depreciation and amortization of property, plant and equipment, intangible assets, expenditure on development projects and investment properties     Amortization of development projects recognized as cost of goods sold     Foreign exchange gains/(losses)   ( ) Interest and participation in proﬁts ( ) () Gains/(Losses) on investing activities     Increase/(Decrease) in provisions ( ) ( ) (Increase)/Decrease in inventories   ( ) (Increase)/Decrease in receivables ( )    Increase/(Decrease) in liabilities, excluding loans and borrowings   ( ) Change in other assets and liabilities ( ) ( ) Other adjustments     Cash from operating activities     Income tax expense     Withholding tax paid abroad     Income tax (paid)/refunded ( ) ( ) Net cash from operating activities     INVESTING ACTIVITIES Cash inﬂows      Sale of intangible assets and property, plant and equipment   Repayment of loans granted   - Sale of shares in a subsidiary   Expiry of bank deposits over  months     Redemption of bonds     Interest on bonds     Interest received on deposits    Inﬂows from execution of forward contracts -   Other inﬂows from investing activities   Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 82 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 Cash outﬂows      Acquisition of intangible assets and property, plant and equipment     Expenditure on development projects     Acquisition of investment properties and capitalization of expenditure    Loans granted     Acquisition of a subsidiary     Contribution to the capital of a subsidiary   - Placement of bank deposits over  months      Purchase of private equity interests in the gaming sector   - Purchase of bonds and cost of their purchase     Outﬂows from execution of forward contracts   - Net cash from investing activities ( ) ( ) FINANCING ACTIVITIES Cash inﬂows    Net proceeds from the sale of shares and issue of shares in the execution of the incentive scheme    Payment of ﬁnance lease liabilities   Cash outﬂows     Purchase of treasury shares for redemption   - Dividends and other distributions to shareholders     Payment of lease liabilities     Interest paid   Net cash used in ﬁnancing activities ( ) ( ) Net increase/(decrease) in cash and cash equivalents ( ) ( ) Change in cash and cash equivalents in the balance sheet ( ) ( ) Cash and cash equivalents as at the beginning of the period     Cash and cash equivalents as at the end of the period     * restated data Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 83 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE CONSOLIDATED STATEMENT OF CASH FLOWS OF THE CD PROJEKT GROUP Under Operating activities in 2022, the CD PROJEKT Group showed net cash inﬂows of PLN 406 031 thousand, i.e. PLN 561 794 thousand less than in 2021. However, it should be noted that the reference period was unusual due to the inﬂow of record-high receivables as a result of the premiere of Cyberpunk 2077 in December 2020 at CD PROJEKT S.A. The consolidated net proﬁt was adjusted for: I. Non-cash items (an increase in total): ■ Depreciation/Amortization – mainly of Property, plant and equipment and Intangible assets; ■ Amortization of development projects, recognized as the cost of sales, corresponding primarily to the amortization of expenditure on development projects related to Cyberpunk 2077 together with the edition for new generation consoles, Xbox Series X|S and Playstation 5, launched in the reporting period, and one-o recognition of expenditure on the Cyberpunk: Edgerunners series in costs; ■ Foreign exchange gains (losses), an increase resulting from the translation of foreign Treasury bonds; ■ Gains/(Losses) on investing activities, an increase due to write-downs of intangible assets and shares in subsidiaries; ■ (Increase)/decrease in provisions (a decrease); ■ Other adjustments, an increase resulting mainly from the elimination of accounting for the costs of the incentive scheme and adjustments to the amortization/depreciation recognized in the cost of sales and operating expenses. II. Items related to changes in current assets and current liabilities (a decrease in total): ■ (Increase)/decrease in inventories, an increase in the balance of cash ﬂows as a result of a drop in inventories; ■ (Increase)/decrease in receivables, a decrease in the balance of cash ﬂows as a result of an increase in the balance of receivables in the CD PROJEKT RED segment as at the end of 2022; ■ Increase/(decrease) in liabilities, excluding loans and borrowings, an increase in the balance of cash ﬂows in consequence of an increase in the balance of the Group’s liabilities; ■ Increase/(decrease) in other assets and liabilities, a decrease in the balance of cash ﬂows resulting mainly from accounting for the minimum guarantees for royalties from sales previously received by CD PROJEKT RED and an increase in the balance of the so-called minimum guarantees contracted during the reporting period by GOG.COM with its suppliers; III. Item recognized in other sections of the statement of cash ﬂows – Interest and shares in proﬁts, resulting in a decrease in the cash ﬂows shown under operating activities; IV. Dierence between the corporate income tax recognized in the income statement (an increase) and the tax actually paid during 2022, taking into account settlements related to withholding tax. The negative balance of Net cash ﬂows from investing activities during 2022 was mostly aected by invest- ment in the following assets: ■ Expenditure on development projects, related primarily to the implementation of the CD PROJEKT RED seg- ment’s projects; ■ Purchase of intangible assets and property, plant and equipment; ■ Contributions to the capital of subsidiaries – mainly Spokko sp. z o.o. for the implementation of the projects carried out as part of its activities and a decrease in the balance of loans previously raised by the company with CD PROJEKT S.A. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 84 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP At the same time, during 2022, inﬂows from expired bank deposits (longer than 3 months) and inﬂows from redemption of bonds amounted to PLN 1 244 286 thousand in total, while outﬂows on new bank deposits placed (longer than 3 months) and acquisition of new Treasury bonds amounted to PLN 1 301 770 thousand. Negative Net cash from ﬁnancing activities of the CD PROJEKT Group in 2022 were mainly due to the payment of dividend (PLN 100 739 thousand) and buyback of own shares (PLN 99 993 thousand). In total, in 2022, the CD PROJEKT Group generated Net cash outﬂows of PLN 133 759 thousand. At the same time, the total balance of ﬁnancial reserves which comprise Cash and cash equivalents, Bank deposits over 3 months and Treasury bonds purchased decreased by PLN 62 996 thousand. In the same period, the Group spent PLN 200 732 in total on the payment of dividend and buyback of own shares with a view to their redemp- tion and invested PLN 207 831 thousand in new productions. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 85 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP STATEMENT OF CASH FLOWS OF CD PROJEKT S.A. Table 11 Statement of cash ﬂows of CD PROJEKT S.A. (in PLN thousand) 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 OPERATING ACTIVITIES Net proﬁt/(loss)     Total adjustments:     Depreciation and amortization of property, plant and equipment, intangible assets, expenditure on development projects and investment properties     Amortization of development projects recognized as cost of goods sold     Foreign exchange gains/(losses)   ( ) Interest and participation in proﬁts ( ) () Gains/(Losses) on investing activities     Increase/(Decrease) in provisions ( ) ( ) (Increase)/Decrease in inventories   ( ) (Increase)/Decrease in receivables ( )    Increase/(Decrease) in liabilities, excluding loans and borrowings   ( ) Change in other assets and liabilities ( ) ( ) Other adjustments     Cash from operating activities      Income tax expense     Withholding tax paid abroad     Income tax (paid)/refunded ( ) ( ) Net cash from operating activities      INVESTING ACTIVITIES Cash inﬂows      Sale of intangible assets and property, plant and equipment    Expenditure on development projects provided as part of a consortium -  Repayment of loans granted     Sale of shares in a subsidiary   Expiry of bank deposits over  months     Redemption of bonds     Interest on bonds     Interest received on deposits    Inﬂows from execution of forward contracts -   Other inﬂows from investing activities   Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 86 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP 01.01.2022 – 31.12.2022 01.01.2021 – 31.12.2021 Cash outﬂows      Acquisition of intangible assets and property, plant and equipment     Expenditure on development projects     Acquisition of investment properties and capitalization of expenditure    Loans granted     Acquisition of a subsidiary -   Contribution to the capital of a subsidiary     Placement of bank deposits over  months      Purchase of private equity interests in the gaming sector   - Purchase of bonds and cost of their purchase     Outﬂows from execution of forward contracts   - Net cash from investing activities ( ) ( ) FINANCING ACTIVITIES Cash inﬂows    Net proceeds from the sale of shares and issue of shares in the execution of the incentive scheme    Payment of ﬁnance lease liabilities   Cash outﬂows     Purchase of treasury shares for redemption   - Dividends and other distributions to shareholders     Payment of lease liabilities     Interest paid   Net cash used in ﬁnancing activities ( ) ( ) Net increase/(decrease) in cash and cash equivalents ( ) ( ) Change in cash and cash equivalents in the balance sheet ( ) ( ) Cash and cash equivalents as at the beginning of the period     Cash and cash equivalents as at the end of the period     * restated data Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 87 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP DISCUSSION OF THE STATEMENT OF CASH FLOWS OF CD PROJEKT S.A. CD PROJEKT S.A. is the Parent Company of the CD PROJEKT Group and, at the same time, the largest entity in both the Group and the CD PROJEKT RED segment which accounts for 81.1% of the Group’s sales and controls, as at the end of 2022, 96.3% of the Group’s cash and cash equivalents, deposits and investments in Treasury bonds, and has the largest impact on cash ﬂows of the entire CD PROJEKT Group, as part of its operating, investing and ﬁnancing activities. Therefore, a commentary on the statement of cash ﬂows of the Group, exclud- ing information relating directly to the GOG.COM segment and the impact of the subsidiaries CD PROJEKT Inc. and CD PROJEKT RED STORE sp. z o.o., in principle covers the operations and results of CD PROJEKT S.A. DISCUSSION OF THE FEASIBILITY OF INVESTMENT PLANS As at 31 December 2022, the Group had no liabilities in respect of loans and borrowings and held its own cash, deposits and Treasury bonds totalling PLN 1 091 005 thousand. As at the end of 2022, the Group’s trade receivables amounted to PLN 165 290 thousand and current liabilities amounted to PLN 204 534 thousand. The planned sources of funding for future investment plans include accumulated own funds and future net cash inﬂows from operating activities. As at the date of publication of these ﬁnancial statements, the Group does not anticipate any problems in securing funds for the implementation of its investment plans in the foreseeable future. DIVIDENDS CD PROJEKT S.A. does not have a formal dividend policy. The Company aims to have sucient working cap- ital to conduct and develop its business activities. If the indicated objectives are secured and the Company is adequately funded, the Company’s management will consider distributing the net proﬁt generated to the shareholders, in whole or in part. Due to the cyclical nature of the business (usually associated with a multi-year period of investment in game production and the high impact of release periods on the Group’s results and cash ﬂows), each year the Com- pany’s management takes an individual decision regarding the recommendation to the General Meeting of Shareholders to distribute a portion of net proﬁt to shareholders, e.g. in the form of a dividend. When deciding to recommend payment of a dividend, the Management Board takes into account, among other things, the Group’s ﬁnancial position; the current and anticipated operating results of the Group; demand for capital resulting from investments and potential acquisition activity; macroeconomic situation and other factors which the Management Board may deem material. INFORMATION ON LOANS AND BORROWINGS IN 2022 In 2022, the CD PROJEKT Group did not have any liabilities in respect of external loans or borrowings. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 88 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP INFORMATION ON LOANS GRANTED IN 2022 In 2022, none of the CD PROJEKT Group companies granted any loans to non-Group entities. CD PROJEKT Inc., CD PROJEKT RED STORE sp. z o.o., Spokko sp. z o.o. and The Molasses Flood LLC used the ﬁnancing in the form of loans from CD PROJEKT S.A. INFORMATION ON SURETIES AND GUARANTEES GRANTED IN 2022 AND OTHER MATERIAL OFFBALANCESHEET ITEMS Information on sureties and guarantees and other material o-balance-sheet items is presented in the Consol- idated ﬁnancial statement of the CD PROJEKT Group for 2022. INFORMATION ON THE CURRENT ECONOMIC AND FINANCIAL POSITION OF THE GROUP In recent years, the Group conducted proﬁtable operations which generated net cash inﬂows. The work completed in recent years, crowned by the largest in the Group’s history premiere of the Cyberpunk 2077 game, moved the Company and the Group to a new business and economic level, while showing the areas which require improvements in the future. In the reporting period, the Parent Company continued improving its internal organization and production pro- cesses which enabled it to start working on two AAA projects in parallel. Along the work on the Cyberpunk 2077 updates and the version for new generation consoles (released on 15 February 2022), and the work on the new version of The Witcher 3: Wild Hunt for new generation consoles (released on 14 December 2022), research and development work related to the Company’s subsequent productions was also carried out. The Group has cash reserves and its current economic and ﬁnancial position is stable. INFORMATION ON THE ANTICIPATED ECONOMIC AND FINANCIAL POSITION OF THE GROUP In accordance with an updated strategy of the CD PROJEKT Group announced on 4 October 2022 focusing on the long-term development of its key projects, in the coming years the Group’s activities will be based on the existing and new productions realized under the The Witcher and Cyberpunk brands as well as under the third franchise, as part of which a video game with the code name Hadar is being developed. For the current year, the Company announced releasing a large expansion for Cyberpunk 2077 entitled “Phantom Liberty”. As at the date of publication of these ﬁnancial statements, the Management Board believes that the Group’s ﬁnancial and economic position is stable and does not anticipate any threats to liquidity or restrictions to the Group’s solvency in the period of 12 months after the balance sheet date. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 89 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP RELATEDPARTY TRANSACTIONS Within the activities of the CD PROJEKT Group in 2022, there were mainly the following types of transactions between related entities: ■ sale of licences between CD PROJEKT S.A. and GOG sp. z o.o., Spokko sp. z o.o., The Molasses Flood LLC, as part of the activities carried out by the individual entities; ■ provision of services such as: accounting, human resources and payroll management, legal, ﬁnancial, adminis- trative and management services rendered mainly by CD PROJEKT S.A. to related entities; ■ lease of oce space by CD PROJEKT S.A. to GOG.COM sp. z o.o., Spokko sp. z o.o. and CD PROJEKT RED STORE sp. z o.o.; ■ sale of CD PROJEKT Inc.’s services to CD PROJEKT S.A. and GOG sp. z o.o., related to the coordination of publishing and promotional activities in North America; ■ loans granted to CD PROJEKT Inc., CD PROJEKT RED STORE sp. z o.o. and Spokko sp. z o.o. by CD PROJEKT S.A.; ■ cooperation in activities related to the online store, licensing and development of products for the store’s oer between CD PROJEKT S.A. (the game developer and the holder of IP rights) and CD PROJEKT RED STORE sp. z o.o. and CD PROJEKT Inc. (the operators of the stores in the individual territories); ■ other immaterial ones, arising from current operating activities, e.g. reinvoicing jointly incurred costs. Transactions between related entities are concluded on an arm’s length basis as part of the normal business activities carried out by the CD PROJEKT Group entities. Detailed information about the terms and conditions of transactions between related entities is contained in the Consolidated ﬁnancial statement of the CD PROJEKT Group for 2022. DESCRIPTION OF THE MAIN DOMESTIC AND FOREIGN INVESTMENTS AND THE STRUCTURE OF THE MAIN CAPITAL INVESTMENTS At the end of 2022, material items of the Group’s Assets comprised Cash and cash equivalents (PLN 277 827 thou- sand), Bank deposits with maturity of more than 3 months (PLN 337 330 thousand), domestic Treasury bonds (PLN 232 757 thousand) and foreign Treasury bonds (PLN 243 091 thousand). Surplus cash is invested both domestically and abroad, in deposits with banks cooperating with the Group or in low-risk ﬁnancial instruments (respecting the principle of diversiﬁcation of deposits placed and investments made). As at 31 December 2022, Cash and cash equivalents, deposits and bonds amounted to PLN 1 091 005 thousand. The business activities of the Group, and CD PROJEKT S.A. in particular, are directly related to the production and release of video games. The ongoing production of new projects is at the same time the main focus of the Group’s and the Parent Company’s investments. Expenditure incurred on work related to new projects is presented within Non-current assets under Expenditure on development projects. The balance of expenditure incurred as at the end of 2022 amounted to PLN 473 202 thousand and increased by PLN 123 007 compared with the end of 2021. CD PROJEKT RED’s intention is to further increase the production capacity, number and scale of its projects in line with the strategy announced in October 2022. In connection with the acquisition of properties at ul. Jagiellońska 74 and 76 in Warsaw in 2018 and 2019, the Group began the process of revitalising the CD PROJEKT campus by adapting it to the needs and speciﬁc nature of its business. The Group intends to continue this process in the coming years. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 90 CORPORATE GOVERNANCEFINANCIAL RESULTSBUSINESS ACTIVITYCD PROJEKT GROUP A detailed description of the individual items comprising the Group’s Non-current assets is included in the com- mentary on the Consolidated statement of ﬁnancial position of the Group in this report. At the end of 2022, the CD PROJEKT Group had the following wholly owned subsidiaries of CD PROJEKT S.A. operating abroad: ■ CD PROJEKT Inc. (Los Angeles); ■ CD PROJEKT RED Vancouver Studio Ltd. (acquisition of the company took place in 2021); ■ CD PROJEKT SILVER Inc. (acquisition of 100% of the company’s shares by CD PROJEKT Inc. took place in 2022). ■ In addition, CD PROJEKT Inc. acquired a 60% interest in The Molasses Flood LLC (Boston) in 2021. At the end of 2022, the Company’s domestic subsidiaries within the CD PROJEKT Group were: ■ GOG sp. z o.o. (100% of shares); ■ Spokko sp. z o.o. (87.6% of shares); ■ CD PROJEKT RED STORE sp. z o.o. (100% of shares). The total value of investments in domestic and foreign subsidiaries disclosed in the separate ﬁnancial statements of CD PROJEKT S.A. (the Group’s holding company) amounted to PLN 53 566 thousand at the end of 2022. In 2022, the CD PROJECT Group ﬁnanced its current operations and investment projects from its own funds. EXPLANATION OF THE DIFFERENCES BETWEEN THE FINANCIAL RESULTS REPORTED FOR 2022 AND THE PREVIOUSLY PUBLISHED FORECASTS FOR A GIVEN YEAR The CD PROJEKT Group has not published any ﬁnancial forecasts for 2022, therefore, no explanations are given for the dierences between the ﬁnancial results shown in the report. DESCRIPTION OF THE UTILIZATION OF ISSUE PROCEEDS BY THE COMPANY BY THE DATE OF PUBLICATION OF THE REPORT As part of exercising the rights under the incentive scheme operated in the Group from 2016 to 2019, the Company: i) conducted an issue of new shares obtaining total proceeds of PLN 2 149 thousand in 2021; ii) conducted an issue of new shares obtaining total proceeds of PLN 822 thousand in 2022; Total proceeds from the issues of shares under the incentive scheme in 2021 and 2022 represented 3.0% of the expenditure incurred to conduct a buyback of own shares with a view to their redemption conducted in 2022. 04 CORPORATE GOVERNANCE Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 92 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Entity contracted to audit financial statements On 9 March 2022 the Supervisory Board of CD PROJEKT S.A., acting on advice of the Audit Committee of the Company’s Supervisory Board recommending extension of the Company’s contract with its licensed auditor, decided to select Grant Thornton Polska sp. z o.o. sp. k. (now operating as Grant Thornton Polska PSA) with a registered oce in Poznań as the entity contracted to conduct an audit and review of the separate and con- solidated ﬁnancial statements of the Company for 2022 and 2023. Grant Thornton Polska PSA has also been contracted to audit the ﬁnancial statement of GOG sp. z o.o., CD PROJEKT RED STORE sp. z o.o. and Spokko sp. z o. o. Shareholders controlling at least 5% of the vote at the General Meeting The Company’s share capital amounts to 100 770 800 PLN, divided into 100 770 800 shares with a nominal value of 1 PLN per share. The shareholding structure is determined on the basis of formal notices issued by shareholders who control at least 5% of the total number of votes at the General Meeting of Shareholders. Table 12 Shareholders controlling at least 5% of the vote at the General Meeting as of the publication date of this report Number of votes at the GM % of total number of votes at the GM Marcin Iwiński    .% Michał Kiciński *    .% Piotr Nielubowicz    .% The Goldman Sachs Group, Inc. **    .% * As disclosed in the most recent declaration received by the Company – see Current Report no. 33/2021 of 26 May 2021. ** As disclosed in Current Report no. 4/2023 of 15 February 2023, the aggregate percentage share of votes controlled by The Goldman Sachs Group, Inc. as a result of holding shares (1.70%) and other ﬁnancial instruments (4.70%) was 6.39% as of 10 February 2023. Ac- cording to the relevant notiﬁcation obtained by the parent Company, The Goldman Sachs Group, Inc. controls 1 708 240 votes from shares, 2 122 503 votes which may be gained in the exercise or conversion of a ﬁnancial instrument comprising securities on loan, and 2 613 546 votes from other types of ﬁnancial instruments. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 93 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP INCENTIVE PROGRAM COVERING THE YEARS 20202025 Pursuant to General Meeting adopted on 28 July 2020 and 22 September 2020, a third edition of the Company incentive program, covering the years 2020–2025, was formally instituted. In line with the adopted stipulations, a total of 4 000 000 entitlements may be granted under the program. The program may also vest by issuing and assigning to entitled parties a certain quantity of subscription warrants which incorporate the right to take up shares of the parent Company issued in the framework of a conditional increase in the Company share capital, or, alternatively, by extending an oer to entitled parties to purchase Company shares which will have previously been bought back by the Company on the open market. Acquisition and exercise of subscription warrants or the purchase of the parent Company’s own shares by the entitled parties, as appropriate, is conditioned upon attaining certain goals and criteria deﬁned under the program. These include earnings goals (80% of entitlements), market goals (20% of entitlements), individual goals (in selected cases) as well as – in all circumstances – fulﬁllment of a loyalty criterion up until the day the attainment of the program’s goals and criteria is declared. Earnings goal - 80% of entitlements Base variant, entitling participants to exercise their entitlements at the base price: Achieving consolidated net earnings from continuing activity for the Group as a whole, increased by costs related to estimation of the granted entitlements as entered in the Group’s accounts for each veriﬁcation period, of at least: a) for the ﬁnancial years 2020–2023 – 6 billion PLN and at least 59.02 PLN per Company share outstanding on the ﬁnal date of the corresponding veriﬁcation period, or b) for the ﬁnancial years 2020–2024 – 7 billion PLN and at least 68.86 PLN per Company share outstanding on the ﬁnal date of the corresponding veriﬁcation period, or c) for the ﬁnancial years 2020–2025 – 8.3 billion PLN and at least 81.65 PLN per Company share outstanding on the ﬁnal date of the corresponding veriﬁcation period. Alternative variant whereby any of the above stated goals are achieved one year in advance, entitling participants to exercise their entitlements at a discount: Achieving consolidated net earnings from continuing activity for the Group as a whole, increased by costs related to estimation of the granted entitlements as entered in the Group’s accounts for each veriﬁcation period, of at least: a) for the ﬁnancial years 2020–2022 – 6 billion PLN, or b) for the ﬁnancial years 2020–2023 – 7 billion PLN, or c) for the ﬁnancial years 2020–2024 – 8.3 billion PLN, or d) for the ﬁnancial years 2020–2025 – 10 billion PLN and at least 98.37 PLN per Company share outstanding on the ﬁnal date of the corresponding veriﬁcation period. Market goal – 20% of entitlements Entitlements exercised at base price: A goal predicated upon the change in the price of CD PROJEKT S.A. stock on the Warsaw Stock Exchange in such a way that the percentage dierence between the closing price of CD PROJEKT S.A. stock on the veriﬁ- cation date and the corresponding closing price on 22 September 2020 is more than 100% greater than the corresponding change in the value of the WIG index over the same period. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 94 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP With regard to entitlements assigned thus far, the base exercise price is 390.59, while the discounted price is 317.06 PLN. As of the publication date of this report there are 2 113 000 entitlements outstanding under the 2020–2025 incentive program. Based on the Group’s 2020 and 2021 earnings, as well as assumptions concerning further years covered by the incentive program, the Management Board has performed an analysis of the feasibility of attaining the earnings goal as deﬁned for the entire duration of the program, and has consequently revised its projections, declaring that the most likely outcome is that the earnings goal for the duration of the program cannot be attained. Information regarding the control system of employee share programs A share-based incentive program, covering the activities of the Company and its Group in the 2020–2025 period, was approved by the General Meetings of Shareholders on 28 July 2020 and 22 September 2020. The detailed set of terms and conditions was endorsed by the Supervisory Board and subsequently approved by the Management Board on 30 October 2020. Implementation of the aforementioned program is directly supervised by the Supervisory Board and Manage- ment Board of CD PROJEKT S.A. Disclosure of the purchase of own shares On 4 October 2022 the Management Board of the Company announced that, based on Resolution no. 4 of the Extraordinary General Meeting of the Company of 29 November 2016, it had decided on the terms and conditions of buy-back of Company shares for voluntary redemption. As a result of a buy-back program based on the aforementioned decision, between 5 October 2022 and 24 October 2022 the Company purchased a total of 860 290 of its own shares with a nominal value of 1 PLN each, constituting 0.85% of the Company’s share capital, having allocated 99 943 thousand PLN for this purpose. Own shares were purchased on the regulated market of the Warsaw Stock Exchange. The Management Board provided detailed updates on the commencement and course of the buy-back program in Current Reports no. 40/2022, 40/2022K, 42/2022, 44/2022 and 45/2022 respectively. As of the publication date of this report the aforementioned shares have not been redeemed and remain in the Company’s possession. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 95 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Company shares held by members of the Management Board and the Supervisory Board Table 13 Shares held by members of the Management Board and Supervisory Board of the Company* Name Position as of 30.03.2023 as of 31.12.2022 as of 01.01.2022 Adam Kiciński President of the Board          Piotr Nielubowicz Vice President of the Board          Adam Badowski Board Member       Michał Nowakowski Board Member       Piotr Karwowski Board Member       Paweł Zawodny Board Member     n/a Marcin Iwiński Chairperson of the Supervisory Board          Katarzyna Szwarc Deputy Chairperson of the Supervisory Board    Maciej Nielubowicz Supervisory Board Member    Piotr Pągowski Deputy Chairperson of the Supervisory Board (until  December ) n/a  - * based on declarations and notiﬁcations ﬁled with the Company. On 30 November 2022 the Company disclosed the sale of Company shares carried out by a member of the Management Board – Michał Nowakowski. According to the notiﬁcation received by the Company, Mr. Nowa- kowski had sold 50 000 Company shares on the regulated market of the Warsaw Stock Exchange. Persons discharging managerial and executive responsibilities at CD PROJEKT S.A. do not directly hold any shares of entities aliated with CD PROJEKT S.A. Management structure Pursuant to domestic regulations expressed in the Commercial Companies Code, in addition to the General Meeting of Shareholders, the Company’s corporate bodies include the Management Board and the Supervisory Board. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 96 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Composition of the Management Board of CD PROJEKT S.A. As of the publication date of this report, the composition of the Company’s Management Board is as follows: Adam Badowski – Board Member Heads the CD PROJEKT RED development studio which is owned by the Company. Co-devel- ops the conceptual framework and artistic vision of projects carried out at CD PROJEKT RED. Michał Nowakowski – Board Member Co-develops and coordinates the Company’s global publishing activities. Oversees formu- lation and implementation of the Company’s sales policies. Piotr Karwowski – Board Member Supervises the Group’s activities related to online games and services, as well as cyber- security. Also responsible for the activities and development of the GOG.COM segment and GWENT: The Witcher Card Game. Paweł Zawodny – Board Member Serves as Chief Technology Ocer (CTO) and head of production at CD PROJEKT RED. Oversees the technological and organizational transformation of CD PROJEKT RED. Jeremiah Cohn – Board Member Responsible for overseeing the marketing and communication departments as Chief Mar- keting Ocer (CMO). Also manages the newly established franchise development team. Adam Kiciński – President of the Board Oversees formulation of the Company’s and its Capital Group’s business strategies and supports their practical implementation. Coordinates Company activities in the scope of investor relations. Piotr Nielubowicz – Vice President of the Board; Chief Financial Ocer Coordinates the Company’s ﬁnancial and accounting branches; ensures that the Company meets its ﬁnancial reporting obligations. Participates in investor relations. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 97 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Management Board members represent the Company and its Management Board. Management Board mem- bers cooperate with one another, share information regarding important matters aecting the Company, jointly manage the Company and jointly bear the associated responsibility. The Management Board formulates the Company’s strategies, develops its ﬁnancial plans and manages the Company in such a way as to ensure implementation of these strategies and plans. Chart 18 Tenure of incumbent members of the Management Board as employees at the Group’s member com- panies (in years) Changes in the composition of the Management Board of CD PROJEKT S.A. The following changes in the composition of the Management Board occurred during the reporting period: ■ On 26 January 2022 the Supervisory Board of the Company adopted resolutions appointing two new persons to the Management Board of CD PROJEKT S.A.: Paweł Zawodny and Jeremiah Cohn – eective on 1 February 2022 in both cases. ■ On 4 October 2022 the Company received a notice of resignation of Marcin Iwiński from his duties as Vice President of the Management Board for International Aairs and Member of the Management Board, eective at end of day on 31 December 2022. Concurrently, Mr. Iwiński also notiﬁed the Company of his intent to seek appointment as Chairperson of the Supervisory Board of the Company starting on the day immediately following expiration of his membership of the Management Board. Consequently, as of 1 January 2023, the Management Board of the Company consists of seven members. All other incumbent members of the Management Board of the Company were appointed to the current term by Supervisory Board resolutions of 25 May 2021. Paweł Zawodny Jeremiah Cohn Piotr Karwowski Michał Nowakowski Adam Badowski Piotr Nielubowicz Adam Kiciński 29 24 20 18 16 9 5 Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 98 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Composition of the Supervisory Board of CD PROJEKT S.A. The incumbent members of the Supervisory Board of CD PROJEKT S.A. are as follows: ■ Marcin Iwiński – Chairperson of the Supervisory Board ■ Katarzyna Szwarc – Deputy Chairperson of the Supervisory Board ■ Maciej Nielubowicz – Secretary of the Supervisory Board; Member of the Audit Committee ■ Michał Bień – Supervisory Board Member; Member and Chairperson of the Audit Committee meeting inde- pendence criteria ■ Jan Łukasz Wejchert – Supervisory Board Member; Member of the Audit Committee meeting independence criteria Changes in the composition of the Supervisory Board of CD PROJEKT S.A. On 4 October 2022 the Company received a notice of resignation of Piotr Pągowski from his duties as Member of the Supervisory Board and Member of the Audit Committee, eective at end of day on 31 December 2022. On 20 December 2022 the Extraordinary General Meeting of the Company appointed Marcin Iwiński to the Supervisory Board for its current term of oce, eective on 1 January 2023. On the same day – 20 December 2022 – the Supervisory Board adopted a resolution which (i) dismisses Ms. Katarzyna Szwarc from her duties as Chairperson of the Supervisory Board for its current term, eective on 1 January 2023; (ii) appoints Mr. Marcin Iwiński as Chairperson of the Supervisory Board for its current term of oce, eective on 1 January 2023; (iii) appoints Ms. Katarzyna Szwarc as Deputy Chairperson of the Supervisory Board for its current term of oce, eective on 1 January 2023. Moreover, in light of the above-mentioned changes in its composition, the Supervisory Board decided that beginning on 1 January 2023 the composition of the Audit Committee for the current term of oce of the Supervisory Board will be as follows: i) Michał Bień – Chairperson of the Audit Committee meeting independence criteria speciﬁed in Art. 129 section 3 of the Act on Licensed Auditors, Audit Firms and Public Supervision; Member of the Audit Committee meeting criteria speciﬁed in Art. 129 section 5 of the said Act, ii) Maciej Nielubowicz – Member of the Audit Committee possessing knowledge and skills in the scope of accounting or auditing ﬁnancial statements; Member of the Audit Committee meeting criteria speciﬁed in Art. 129 section 5 of the Act on Licensed Auditors, Audit Firms and Public Supervision, iii) Jan Łukasz Wejchert – Member of the Audit Committee meeting independence criteria speciﬁed in Art. 129 section 3 of the Act on Licensed Auditors, Audit Firms and Public Supervision; Member of the Audit Committee meeting criteria speciﬁed in Art. 129 section 5 of the said Act, possessing knowledge and skills in the scope of accounting or auditing ﬁnancial statements. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 99 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP The following incumbent members of the Supervisory Board were appointed for the current term of oce by Ordinary General Meeting resolutions adopted on 25 May 2021: Katarzyna Szwarc, Michał Bień, Maciej Nielubowicz and Jan Łukasz Wejchert. Gross remuneration of members of the Management Board and Supervisory Board of CD PROJEKT S.A. A remuneration policy is in force at the Group, adopted on 27 August 2020 by the Supervisory Board as autho- rized by the General Meeting of 28 July 2020. The policy speciﬁes, among others, the composition of variable remuneration, criteria and deferment periods for disbursement of variable remuneration, as well as non-mone- tary beneﬁts which may be assigned to members of the Management Board as part of their ﬁxed remuneration. ADAM KICIŃSKI, PRESIDENT OF THE BOARD Mr. Kiciński’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 420 thousand PLN. In 2022 this ﬁxed remuneration was increased to 600 thousand PLN. In 2022 Mr. Kiciński also received bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2021, was 4 387 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 5 033 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. MARCIN IWIŃSKI, VICE PRESIDENT OF THE BOARD CURRENTLY CHAIRPERSON OF THE SUPERVISORY BOARD Mr. Iwiński’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 336 thousand PLN. In 2022 this ﬁxed remuneration was increased to 600 thousand PLN. In 2021 Mr. Iwiński also received bonuses under the incen- tive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2021, was 2 194 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 2 517 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. PIOTR NIELUBOWICZ, VICE PRESIDENT OF THE BOARD Mr. Nielubowicz’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 348 thousand PLN. In 2022 this ﬁxed remuneration was increased to 600 thousand PLN. In 2021 Mr. Nielubowicz also received bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earn- ings of the Group in 2021, was 4 387 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 5 033 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 100 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP ADAM BADOWSKI, BOARD MEMBER Mr. Badowski’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 398 thousand PLN. In 2022 this ﬁxed remuneration was increased to 600 thousand PLN. In 2021 Mr. Badowski also received bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2021, was 3 029 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 5 033 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. MICHAŁ NOWAKOWSKI, BOARD MEMBER Mr. Nowakowski’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 360 thousand PLN. In 2022 this ﬁxed remuneration was increased to 600 thousand PLN. In 2021 Mr. Nowakowski also received bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earn- ings of the Group in 2021, was 3 029 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 5 033 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. PIOTR KARWOWSKI, BOARD MEMBER Mr. Karwowski’s ﬁxed remuneration paid by CD PROJEKT S.A. in 2021 was 185 thousand PLN. In 2022 this ﬁxed remuneration was increased to 540 thousand PLN. In 2021 Mr. Karwowski also received bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2021, was 3 029 thousand PLN, while the portion associated with the net earnings of the Group in 2022 was 5 033 thousand PLN. The latter portion had not been disbursed as of the balance sheet date. PAWEŁ ZAWODNY, BOARD MEMBER Mr. Zawodny’s ﬁxed remuneration paid out by CD PROJEKT S.A. for the period between his appointment (i.e. 1 February 2022) and 31 December 2022 was 550 thousand PLN. Since 2022, in light of his appointment to the Management Board, Mr. Zawodny is also eligible for bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2022 was 2 516 thousand PLN, and had not been disbursed as of the balance sheet date. In 2022 Mr. Zawodny also received variable remuneration in the amount of 440 thousand PLN, associated with the net earnings of the Company in 2021. JEREMIAH COHN, BOARD MEMBER Mr. Cohn’s ﬁxed remuneration paid out by CD PROJEKT S.A. for the period between his appointment (i.e. 1 February 2022) and 31 December 2022 was 110 thousand USD. Since 2022, in light of his appointment to the Management Board, Mr. Cohn is also eligible for bonuses under the incentive program in force at the Company. This variable portion of his salary associated with the net earnings of the Group in 2022 was 2 516 thousand PLN, and had not been disbursed as of the balance sheet date. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 101 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Table 14 Remuneration paid to members of the Management Board of CD PROJEKT S.A. during their ten- ure as members of the Company’s managerial bodies, and paid by the Company’s subsidiaries in association with discharging managerial duties at these subsidiaries 01.01.2022–31.12.2022 01.01.2021–31.12.2021 Marcin Iwiński -  thousand PLN Piotr Karwowski  thousand PLN   thousand PLN Jeremiah Cohn  thousand USD n/a Assignment of bonuses to Members of the Management Board The variable portion of Management Board Members’ remuneration is settled in annual cycles based on the Group’s longstanding incentive scheme, and is tied to the Group’s net earnings. Compensation paid out in the framework of share-based incentive schemes Pursuant to resolutions of the General Meetings of 28 July 2020 and 22 September 2020 another edition of the Company’s incentive program was instituted, covering the years 2020–2025. The program involves key employees and collaborators of the Company and other companies constituting its Group, as well as other persons regarded as having inﬂuence on the ﬁnancial results of the Company and its Group, as speciﬁed in resolutions adopted on 28 July 2020 and 22 September 2020 by the General Meeting of CD PROJEKT S.A., the Terms and Conditions of the Incentive Program and the corresponding resolutions of the Supervisory Board and Management Board. The value of potential beneﬁts assignable to members of the Management Board under the incentive program for 2020–2025 is listed in the table below. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 102 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Table 15 Entitlements assigned and potential value of monetary beneﬁts (in PLN thousands) obtainable by members of the Management Board in light of their involvement in the 2020–2025 incentive program Value of potential beneﬁts Name Position Entitlements granted 01.01.2021–31.12.2021 01.01.2022–31.12.2022 Adam Kiciński President of the Board  thousand -  Marcin Iwiński Vice President of the Board (until ..)  thousand -  Piotr Nielubowicz Vice President of the Board  thousand -  Adam Badowski Board Member  thousand -  Michał Nowakowski Board Member  thousand -  Piotr Karwowski Board Member  thousand -  Paweł Zawodny Board Member  thousand n/a  Jeremiah Cohn Board Member  thousand n/a  The value of potential beneﬁts listed in the above tables, payable to participants of successive editions of long- term share-based incentive programs for Management Board members is based on the fair value of assigned entitlements on the grant date, as calculated by a licensed actuary. These values have been duly recognized as Group expenditures in the years 2021 and 2022 respectively. The presented ﬁgures incorporate the change in Management Board’s projections regarding the attainability of earnings goals of the 2020–2025 incentive program. The dierence between the market value of CD PROJEKT shares and their respective take-up or purchase prices, calculated for the given exercise date under the terms of successive incentive programs may dier signiﬁcantly from the estimation prepared by the actuary on the grant date and recognized on the Group’s balance sheet. Future beneﬁts obtainable by participants of the program will depend on the share price at the moment of purchase or take-up of shares by entitled parties. With regard to entitlements assigned thus far, the base take-up or purchase price payable by entitled parties (following attainment of the program’s goals and other criteria) is 390.59 PLN, while the corresponding discount price is 371.06 PLN. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 103 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Remuneration of Supervisory Board members Table 16 Gross remuneration (including for participation in the Audit Committee) paid out to members of the Supervisory Board of CD PROJEKT S.A. in 2021 and 2022 (PLN thousands) Name 01.01.2021–31.12.2021 01.01.2022–31.12.2022 Katarzyna Szwarc – Chairperson of the Supervisory Board   Piotr Pągowski –Deputy Chairperson of the Supervisory Board   Maciej Nielubowicz – Secretary of the Supervisory Board   Michał Bień – Supervisory Board Member; Chairperson of the Audit Committee   Krzysztof Kilian – Supervisory Board Member  – Łukasz Wejchert – Supervisory Board Member   Disclosure of retirement benefits and similar compensation payable to former members of the Issuer’s executive, supervisory or administrative bodies, and of any liabilities associated with such benefits, specifying the aggregate amounts for each category of recipients As of 31 December 2022 the Company had no such liabilities. Agreements between the Issuer and members of its managing bodies concerning compensation in the event of their resignation or dismissal As of 31 December 2022 and as of the preparation date of this report there were no provisions in force regu- lating compensation in the event of resignation or dismissal of members of the Company’s Management Board. Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 104 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP Transactions between the Issuer and members of its managing and supervisory bodies not otherwise reported In 2022 there were no signiﬁcant transactions with members of the managing and supervisory bodies of CD PROJEKT S.A. not disclosed elsewhere in this report. The following transactions are not regarded as signiﬁcant: medical coverage fees, use of company cars, reim- bursements and incidental purchases of Group products by members of the Management Board or Supervisory Board on the same terms as those oered to the rest of the team. Changes in basic management practices at the Company and its Group No signiﬁcant changes in basic management policies aecting the Company and its Group occurred in 2022. Corporate governance policies CD PROJEKT S.A. follows the corporate governance policies listed in the “Best Practice for WSE Listed Com- panies 2021” document, published as an attachment to Resolution no. 13/1834/2021 of the Supervisory Board of the Warsaw Stock Exchange on 29 March 2021. Details concerning the implementation of speciﬁc corpo- rate governance policies at CD PROJEKT S.A. in 2022 can be found on the Company website at https://www. cdprojekt.com/en/investors/corporate-governance/. Disclosure of significant legal proceedings The following legal proceedings took place during the reporting period (the presented status is valid for the publication date of this report): Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 105 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP CRIMINAL PROCEEDINGS IN WHICH CD PROJEKT S.A. IS RECOGNIZED AS THE VICTIM Case against natural persons (including former members of the Management Board of Optimus S.A.) charged with acting against the Company’s interests In case no. XVIII K 126/09, following indictment ﬁled by the District Attorney in the District Court for the City of Warsaw, on 27 October 2016 the District Court convicted Mr. Michał L., Mr. Piotr L. and Mr. Michał D. of violating sections 296 §1, 296 §3 and others of the Penal Code. The Company acted as an auxiliary prosecutor in the court of ﬁrst instance and will retain this status until the trial has concluded. Having found the defendants guilty, the Court awarded the Company 210 thousand PLN in damages under Art. 46 of the Penal Code. According to the operative part of the judgement total losses sustained by the Company as a result of the defendants’ actions were estimated at not less than 16 million PLN (this ﬁgure follows from standard regulations applicable to criminal trials). The Company subsequently ﬁled an appeal against the judgment, contesting, among others, the amount of damages awarded to the Company. An appeal against the full judgement was also ﬁled by the defendants’ attorneys. On 26 October 2017 the Appellate Court vacated the judgment of the court of ﬁrst instance and remanded the case to be retried in full. The District Court for the City of Warsaw subsequently ﬁled the case under no. XVIII K 316/17. The parent company continues to act in the capacity of an auxiliary prosecutor. LITIGATION IN WHICH CD PROJEKT S.A. IS NAMED AS THE DEFENDANT Class action lawsuit ﬁled against CD PROJEKT S.A. concerning US securities On 25 December 2020 and subsequently on 15 January 2021 the Management Board of the Company received information concerning the ﬁling of civil class action lawsuits in the US District Court for the Central District of California, by law ﬁrms acting on behalf of groups of holders of securities traded in the USA under the ticker symbols “OTGLY” and “OTGLF” and based on Company shares, whereby the plaintis call for the court to adju- dicate whether the actions undertaken by the Company and members of its Management Board in connection with the release of Cyberpunk 2077 constituted a violation of federal laws, i.a. by misleading investors and, consequently, causing them to incur damages. In subsequent months the Company was notiﬁed of two further lawsuits ﬁled in the aforementioned court, both of which were materially consistent with the lawsuit described above, and also named CD PROJEKT as the defendant. None of these complaints speciﬁed the quantity of damages sought. On 18 May 2021 the Company was notiﬁed that the court had consolidated the aforementioned lawsuit and named a lead plainti. Following consolidation, all four lawsuits were merged into a single case. On 29 June 2021 the Company received a transcript of a lawsuit ﬁled against the Company and members of its Management Board by a law ﬁrm representing the lead plainti and other eligible holders of US securities traded under the ticker symbols “OTGLY” and “OTGLF”. The lawsuit was not materially dierent from earlier lawsuits ﬁled in this matter, and likewise, did not specify the amount of damages sought. On 12 August 2021 the Company ﬁled a responsive pleading, asking that the complaint be dismissed by the court. Subsequently, on 5 October 2021 the Company was notiﬁed that the plaintis had responded with their own pleading which objected against the complaint being dismissed, to which the Company responded on 17 November 2021, again asking for the complaint to be dismissed. On 7 December 2021 the Company entered into settlement negotiations with the plaintis, as a result of which on 16 December 2021 a Settlement Term Sheet was signed whereupon the Company agreed to pay a settlement Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. between1 January and 31 December 2022 (all ﬁgures quoted in PLN thousands unless indicated otherwise) 106 FINANCIAL RESULTS CORPORATE GOVERNANCEBUSINESS ACTIVITYCD PROJEKT GROUP in the amount of 1 850 thousand USD in exchange for which the plaintis would relinquish any claims against the Company. This settlement was subsequently endorsed by the Company’s insurer, i.e. Colonnade Insurance S.A. (Polish division). On 27 January 2022 the Company concluded a formal Stipulation Agreement which conﬁrmed the provisions of the Settlement Term Sheet. Similarly to the Settlement Term Sheet, the Stipulation Agreement expressly rules out any admission of wrongdoing on the part of the Company or other defendants named in the case. On 4 January 2023, after the balance sheet date, the Company was notiﬁed that the District Court for the Central District of California had issued an order concerning preliminary approval of the class action settlement. The order approves the conditions of the settlement, including full relinquishing of any claims against the Company and members of its Management Board on the part of the plaintis, and the remittance of a settlement in the amount of 1 850 thousand USD to the plainti class by the Company and its insurer, Colonnade Insurance S.A. (Polish division). This Management Board report on the activities of the CD PROJEKT Group and CD PROJEKT S.A. was approved for publication by the Management Board of CD PROJEKT S.A. on 30 March 2023 and signed on 30 March 2023, pursuant to Art. 52 section 3 item 2 of the Accounting Act of 29 September 1994 (JL 2023, item 120, as amended). This report is subject to approval by the General Meeting of CD PROJEKT S.A. Piotr Nielubowicz Vice President of the Board CONTACT FOR INVESTORS: [email protected] WWW.CDPROJEKT.COM

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CD Projekt Management Reports 2023

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CD Projekt — Management Reports 2023

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CD Projekt Management Reports 2023