Comments on CCP hf 2010 Financial Statements Note: The following impressions are based solely on a superficial review of the

Companys 2010 financial statements and are not intended to be authoritative and not to be used as a basis for any investment or purchasing decision. General Comments: CCP uses International Financial Reporting Standards and their statements have been audited by Deloitte, one of the so called Big Four accounting firms. These two factors provide significant assurance, although not certainty, that the statements accurately reflect the state of the Company. Income Statement: The income statement shows a company with good revenue and excellent margins while making considerable investment in new software and (possibly) somewhat heavy general and administrative costs. Overall a positive story. Balance Sheet: The standout here is the capitalized development cost of $54 million. That represents a huge investment that has to pay off. Also notable is the current maturities of long-term debt at $12 million and cash of $11 million. Cash: CCP generated cash of about $17 million from operations in 2010. Thats very positive. On the other hand their use of cash in game development was even higher at $23.5 million. The injection of new capital ($16 million) covered the difference and, after other investments in property, plant and equipment increased their cash on hand to $11 million as reflected on the balance sheet. Issues for 2011: The critical issue facing CCP in 2011 is the continued funding of their new game development programs. According to some sources neither of the new games, World of Darkness and DUST 514, will be ready for release until 2012. Thus it is reasonable to assume that the development cost in 2011 will be at least as high as it was in 2010, i.e. $23.5 million. In addition, CCP has $12 million in debt to repay. Simplistically, their cash situation in 2011 looks like:

Cash Requirements Debt repayment Game development Cash required Cash Available Cash on-hand Cash from operations in 2011 (assume same as 2010) Cash available Cash Shortfall

$12.0 23.5 35.5

11.0 17.0 28.0 $ 7.5

Realistically, they are going to need some new equipment and a little bit of cash on-hand so their real cash shortfall is probably more like $10 or $11 million for 2011. Then comes 2012. If new games dont start generating serious cash until mid-year, for instance, CCP could easily need another $4 to $6 million in the first half. Companies have three sources of cash. They can get it from their customers by selling more, they can borrow it or they can get it from investors. Any further cash from sales would, obviously, have to come from EVE Online since the games are not expected to be released until 2012. This puts some added incentive and pressure on the success of CCPs virtual goods initiative. The most obvious answer would seem to be to obtain new debt to replace that which comes due in October. Creditors like to have security for their loans. That is they prefer companies have sufficient assets so that if a company cant pay back their loan, the assets can be sold and generate enough proceeds to recover the amount of the loan. CCP has few assets to secure a loan. Of course, that was also true when they got their current loan. Since their financial situation has done nothing but improve over the last couple of years, one would assume that the Company can get a new loan. The downside is that they will have to pay a much higher than normal rate of interest. It should be noted that any significant loss of EVE Online subscribers could alarm potential creditors. The other option is to obtain a new injection of capital from investors. This is generally preferable to a loan for growing companies since there is no associated interest cost. The negative side is that most investors dont have an unlimited amount of money to invest and enlisting new investors reduces the ownership share of the original investors. CCP just sold $16 million in equity instruments in 2009 (paid for in 2010). Presumably the Company thought at that time that either $16 million was sufficient to carry them through to the release of the new

games or that $16 million was all they could raise. Regardless, it is possible for the Company to seek out new equity investment to make up the anticipated cash shortfall. I have no way of knowing if this is realistically possible. Summary CCP has strong earnings and cash generation. However, they have very heavy development costs which exceed the Companys ability to fund internally. This is not at all unusual. It does appear that management has underestimated the time and cost of their development project. Again, this is not particularly unusual in large software projects. CCP has a need for additional cash over the next 18 months (at least) that they must resolve. I have no way of knowing the position of CCP with its current and potential creditors and investors. However, there appears to be no reason to believe that CCP will not be successful in obtaining the additional cash it needs based on the information provided in its 2010 financial statements. Given their current loan matures in 4 months, it is reasonable to assume that the Company has already resolved this issue.