Pieno Zvaigzdes

Annual Report • Apr 28, 2023

AB Pieno Žvaigždės Financial Statements For the Year Ended 31 December 2022, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union, presented together with Independent Auditor’s Report and Annual Report AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 Content Company Details 1 Management’s Statement on the Financial Statements 2 Statement of Comprehensive Income 3 Statement of Financial Position 4 Statement of Changes in Equity 5 Statement of Cash Flows 6 Notes to the Financial Statements 30 Confirmation of the Management 53 Annual report for 2022 54 Social Responsibility Report 85 AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 1 Company Details AB Pieno Žvaigždės Telephone: +370 5 246 1414 Telefax: +370 5 246 1415 Company code: 124665536 Registered at: Perkūnkiemio St. 3, Vilnius, Lithuania Management: Board Vitalis Paškevičius Voldemaras Klovas Julius Kvaraciejus Aleksandr Smagin Gžegož Rogoža Regina Kvaraciejienė Artiom Smagin General Director Aleksandr Smagin Auditor Ernst & Young Baltic UAB Banks AB SEB bank AB Swedbank Luminor bank AS Lithuanian branch UAB Perlo paslaugos AS SEB Banka AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 (EUR thousand unless otherwise stated) 2 Management’s Statement on the Financial Statements The Board and Management have today discussed and authorised for the issue the set of financial statements (further – financial statements) and signed them on behalf of the Company. The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. We consider that the accounting policies used are appropriate and that the financial statements present fairly the Company’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards as adopted by the European Union. We recommend the financial statements to be approved at the General Shareholders’ Meeting. Vilnius, 5 April 2023 Management and authorised finance department employees: ------------------------ --------------------------- Aleksandr Smagin Audrius Statulevičius General Director Finance Director ------------------------ Ramutė Plaušinienė Chief Accountant AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 (EUR thousand unless otherwise stated) 3 Statement of Comprehensive Income thousand EUR Note 2022 2021 Revenue from contracts with customers 1 204,553 176,692 Cost of sales 3 (175,930) (144,485) Gross profit 28,623 32,207 Other operating income 2 1,773 694 Other operating expenses 2 (300) (45) Selling and distribution expenses 3 (17,239) (17,452) Administrative expenses 3 (17,926) (13,814) (Impairment)/reversal of impairment of receivables 20 (38) 291 Operating profit/(loss) (5,107) 1,881 Finance income 4 38 73 Finance costs 5 (896) (717) Other costs 5 (238) (259) Profit/(loss) before tax (6,203) 978 Income tax /(expenses) benefit 6 883 245 Profit/(loss) for the year (5,320) 1,223 Other comprehensive income - - Total comprehensive income/(loss) for the year (5,320) 1,223 Basic earnings / (loss) per share (EUR) 7 (0.12) 0.03 Diluted earnings/ (loss) per share (EUR) 7 (0.12) 0.03 The accompanying notes are an integral part of these financial statements. AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 (EUR thousand unless otherwise stated) 4 Statement of Financial Position thousand EUR Note As at 31/12/2022 As at 31/12/2021 Assets Property, plant and equipment 8 43,984 47,352 Intangible assets 9 51 68 Right-of-use assets 16 1,427 2,015 Other financial assets 22 22 Loans granted 11 411 317 Deferred income tax 18 2,337 1,454 Total non-current assets 48,232 51,228 Inventories 10 19,649 17,038 Trade receivables 11 6,907 5,821 Prepayments 11 162 203 Other receivables 11 457 595 Cash and cash equivalents 12 272 1,736 Total current assets 27,447 25,393 Total assets 75,679 76,621 Equity Issued capital 13,089 13,089 Share premium 7,891 7,891 Reserves 1,570 1,570 Retained earnings (loss) 474 5,794 Total equity 13 23,024 28,344 Liabilities Grants 14 1,007 1,189 Loans and borrowings 15 - 16,280 Employee benefits 17 1,495 1,212 Lease liabilities 16 638 1,081 Total non-current liabilities 3,140 19,762 Loans and borrowings 15 28,426 4,920 Trade and other payables 19 19,719 22,608 Employee benefits 17 250 - Lease liabilities 16 1,120 987 Total current liabilities 49,515 28,515 Total liabilities 52,655 48,277 Total equity and liabilities 75,679 76,621 The accompanying notes are an integral part of these financial statements. AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 (EUR thousand unless otherwise stated) 5 Statement of Changes in Equity thousand EUR No- tes Issued capital Share premium Legal reserve Other reserves Retained earnings Total equity As at 01/01/2021 13,089 7,891 1,570 - 10,890 33,440 Net profit for 2021 - - - - 1,223 1,223 Other comprehensive income - - - - - - Total comprehensive income for the year - - - - 1,223 1,223 Dividends 13 - - - - (6,319) (6,319) As at 31 December 2021 13,089 7,891 1,570 - 5,794 28,344 Net loss for 2022 - - - - (5,320) (5,320) Other comprehensive income - - - - - - Total comprehensive income/(loss) for the year - - - - (5,320) (5,320) Dividends 13 - - - - - - As at 31 December 2022 13,089 7,891 1,570 - 474 23,024 The accompanying notes are an integral part of these financial statements. AB Pieno Žvaigždės Financial Statements for the year ended 31 December 2022 (EUR thousand unless otherwise stated) 6 Statement of Cash Flows thousand EUR Note 2022 2021 Operating activities (Loss) profit before tax for the year (6,203) 978 Adjustments to: Depreciation and amortisation 8, 9, 16 5,786 5,504 Amortisation of grants 14 (167) (159) Gain on disposal of property, plant and equipment 2, 8 (1,604) (191) Write-off of property, plant and equipment 8 5 2 Impairment (reversal) of receivables 20 38 (291) Change in vacation reserve 19 (127) 304 Impairment of inventories 10 2,944 51 Interest income 4 (37) (73) Interest expense 5 896 717 1,531 6,842 Changes in inventories (5,555) (3,812) Change in trade receivables, prepayments, other receivables (929) 368 Change in trade payables and other payables (2,555) 6,665 Net cash flows from / (used in) operating activities (7,508) 10,063 Investing activities Acquisitions of property, plant and equipment 8 (2,033) (7,044) Purchase of intangible assets 9 (22) (43) Proceeds from sale of property, plant and equipment 2,829 577 Interest received 37 73 Loans granted 11 - (25) Collection of loans granted 11, 20 6 102 Grants received 14 320 12 Net cash flow from / (used in) investing activities 1,137 (6,348) Financing activities Loan received 15 12,146 16,000 Repayment of borrowings 15 (4,920) (13,420) Payment of lease liabilities principal amount 16 (1,364) (1,061) Interest paid 20 (952) (781) Dividends paid 20 (2) (6,270) Net cash flow from/(used in) financing activities 4,908 (5,532) Change in cash and cash equivalents (1,464) (1,817) Cash and cash equivalents as at January 1 12 1,736 3,553 Cash and cash equivalents as at 31 December 12 272 1,736 The accompanying notes are an integral part of these financial statements. 7 2022 General information The head office of AB Pieno Žvaigždės (hereinafter “the Company”) is located in Perkūnkiemio St. 3, Vilnius, Lithuania. AB Pieno Žvaigždės was established in 1998 by way of a merger of stock companies Mažeikių Pieninė, Pasvalio Sūrinė and Kauno Pienas. The main office of the Company is located in Vilnius and the branches are in Mažeikiai, Pasvalys, Kaunas and Panevėžys. All ordinary shares of the Company are quoted in the Vilnius Stock Exchange. There is no controlling entity or individual among the shareholders of AB Pieno Žvaigždės. The Company is engaged in production and sales of dairy products to retail stores directly and through distributors. The average number of employees in 2022 was 1,601 (in 2021: 1,711 employees). Significant accounting policies Statement of compliance The financial statements of AB Pieno Žvaigždės have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Except for the impact of the new standards and their amendments as well as new interpretations on the financial statements, the Company has consistently applied the accounting policy, set out in the financial statements, to all periods presented in these financial statements. The management of the Company approved these financial statements on 5 April 2023. The shareholders have a statutory right to approve these financial statements or not to approve them and require preparation of new financial statements. Basis of preparation The financial statements are presented in the euro being the functional currency of the Company, and are prepared on the historical cost basis, except for financial assets and financial liabilities, the fair value changes of which are recognised through profit or loss or comprehensive income. These financial statements have been prepared based on a going concern basis of accounting which assumes that the Company has ability to continue as a going concern for at least 12 months after the date of these financial statements. The management of the Company considers that there are no significant climate related matters, which could affect the Company’s ability to continue as a going concern. The current macroeconomic situation has impact on the Company’s results, which are disclosed in Notes of these financial statements. The Company’s main source of credit is credit lines and a long-term credit agreement with SEB Bankas AB and Swedbank AB (as subsequently amended) signed in 2019. The term of the loan is five years with annual instalments of EUR 4.920 million. Securing long-term bank funding allows the Company for better managing of cash flows and planning of long-term investments (Note 15). As at 31 December 2022, the Company’s credit limits totalled EUR 13 million (credit line and overdrafts), of which EUR 12,146 thousand were used. As at 2021 December 31 st the Company had EUR 11 million of unused credit limits (credit line and overdrafts). 8 2022 Significant accounting policies (continued) Basis of preparation (continued) As at 31 December 2022 the Company under current loans and borrowings to financial institutions presents used credit lines and overdraft agreements with maturity in 2023 amounting to EUR 12,146 thousand and long term loan amounting to EUR 16,280 thousand due to breached covenant (as described in Note 15). As a result, the current liabilities exceed the current asset by EUR 22,068 thousand as at 31 December 2022 (by EUR 3,122 thousand as at 31 December 2021). To solve the liquidity shortage the following actions were made by the management of the Company: 1) EUR 11,360 thousand – the Company has received bank waiver in 2023 confirming that due to breached covenant earlier repayment of the non-current part of the loan, other than based on repayment schedule, will be not requested from the Company and no sanctions will be applied. 2) EUR 10,146 thousand – the Company has signed credit lines and overdraft amendments in 2023 with the banks postponing the maturity term from 2023 to 2024. 3) EUR 562 thousand – the Company’s results for the two first months of 2023 improved, and the Company generated EBITDA (earnings before interest, tax, depreciation and amortization) of EUR 2,558 thousand. Therefore, the remaining amount to solve the liquidity shortage is covered by the cash flows from operating results. Considering the above-mentioned circumstances, as at the date of approval of these financial statements, the Company's liquidity shortage is solved. In addition, it is planned to increase the amount of long-term credit by refinancing the investments made in the last few years. The Company’s management is of the opinion that the going concern basis of accounting is appropriate and there are no material uncertainties related to going concern. The preparation of financial statements in conformity with IFRSs, as adopted by the EU, requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical information and factors that reflect the present circumstances. Based on these assumptions and estimates, a conclusion is made about the values of assets and liabilities that cannot be determined from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. 9 2022 Significant accounting policies (continued) Judgements and estimates made by management in the application of IFRSs as adopted by the EU that have the most significant effect on the financial statements are discussed on paragraph “Critical accounting estimates and judgements”. Foreign currency transactions Foreign currency transactions are translated to the euro at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the euro at the foreign exchange rate ruling at the date of the statement of financial position. Foreign exchange differences arising on translation are recognised in profit or loss. Non- monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated to the euro at the rate of exchange at the date of the transaction. Non-monetary assets and liabilities denominated in a foreign currency that are stated at fair value are translated to the euro at the rate of exchange as at the date when the fair value was determined. Property, plant and equipment Owned assets Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Land is stated at cost less impairment losses. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to asset acquisition and condition necessary for it to be capable of operating. Borrowing costs that are directly attributable to the acquisition, construction or production of an item of property, plant and equipment where substantial period of time is necessary to get ready the asset for its intended use, are capitalised as part of cost of the asset. In 2022 and 2021 no borrowing costs were capitalised as part of the cost of the asset. Cost of self-constructed property, plant and equipment includes costs related to materials and direct labour costs as well as related indirect costs. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment and are depreciated over their expected useful lifetime. Useful lives, residual amounts and depreciation methods are reviewed at each reporting date. Subsequent costs Costs incurred when replacing a component part of an item of property, plant and equipment are capitalised only upon write-off of the carrying amount of the component and if it is probable that the future economic benefits embodied with the item and the cost of the component part can be measured reliably. All other costs are recognised in profit or loss as an expense as incurred. Depreciation charge Depreciation (except for land which is not depreciated) is charged to profit or loss on a straight- line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: 10 2022 Significant accounting policies (continued) • buildings 20–80 years • machinery and equipment 5–40 years • vehicles and other non-current asset 4–20 years Intangible assets Intangible assets with a definite useful life acquired by the Company are stated at cost less accumulated amortisation and impairment losses. The Company does not have internally generated goodwill and trademarks. Intangible assets (continued) Subsequent costs Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other costs are recognised in profit or loss as an expense as incurred. Amortisation charge Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. The estimated useful lives are from 1 to 3 years. Financial instruments Financial assets. The financial assets of the Company include cash, trade and other receivable amounts. Trade receivables are recognised initially when they occur. At the time of initial recognition, all other financial assets are recognised when the Company becomes a party to the contractual terms of the instrument. Financial assets (other than trade receivables without significant financing component), if not measured at fair value with the change in fair value carried in profit or loss in the statement of comprehensive income, are initially measured at fair value plus transaction costs directly attributable to acquisition or disposal. Trade receivables without significant financing component are initially recognised at transaction price. Classification of financial assets. Financial assets are divided into three groups, depending on the method of their measurement: ▪ financial assets subsequently measured at amortised cost; ▪ financial assets subsequently measured at fair value through other comprehensive income (with recycling of cumulative gains and losses via profit or loss upon derecognition (debt instruments) and with no recycling of cumulative gains and losses via profit or loss upon derecognition (equity instruments)); ▪ financial assets subsequently measured at fair through profit or loss. 11 2022 Significant accounting policies (continued) Financial instruments (continued) The classification of financial assets depends on the financial asset management business model (assessing how the entity manages the financial assets to generate cash flows) and the characteristics of the contractual cash flows of the financial asset (whether the contractual cash flows only include principal and interest payments). The Company has no financial assets that are subsequently measured at fair value through other comprehensive income. Financial assets subsequently measured at fair through profit or loss comprise derivatives (Note 20). A financial asset is stated at amortised cost if the following two conditions are met: ▪ the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and ▪ its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. Financial assets that do not include cash flows that meet only the payment requirement of the principal part, and the interest are measured at fair value with the change in the fair value carried in profit or loss in the statement of comprehensive income. Financial assets measured at amortised cost in subsequent periods are measured using the effective interest rate method. Amortised cost is reduced due to impairment losses. Interest income, foreign exchange gains and losses and impairment losses are recognised through profit or loss. Any gain or loss arising from derecognition is carried through profit or loss. The effective interest method (EIR) is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments over the expected life of the financial liability, or (where appropriate) over a shorter period. Financial assets measured at fair value with any fair value changes carried in profit or loss in the statement of comprehensive income are initially recognised at fair value. Subsequently, gains and losses from the change in fair value, including all interest and dividends, are recognised in profit or loss in the statement of comprehensive income. Recognition, classification and measurement of financial liabilities Borrowings are initially recognised at fair value of proceeds received, less the costs of transaction. Subsequent to initial recognition, loans are stated at amortised cost using the EIR method and the difference between the proceeds received and the amount payable over the loan period is recognised in the statement of comprehensive income for the period, except for capitalised borrowing costs, which are described below. Borrowing costs which are directly attributable to acquisition of assets that require time to prepare for an intended use or sale, construction or production, are capitalised in the cost of a respective asset. All other borrowing costs are expensed in the period they occur. Borrowings are classified as non-current if the completion of a refinancing agreement before the reporting date provides evidence that the substance of the liability at the reporting date was non-current. Trade liabilities are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market. Such liabilities are carried at amortised cost using the effective interest rate method. Gain and losses are recognised in the statement of comprehensive income when trade payables are expensed or amortised. 12 2022 Significant accounting policies (continued) Financial instruments (continued) Derecognition of financial assets. Financial assets (or, where appropriate, part of financial assets or part of the group of similar financial assets) are derecognised when: ▪ the rights to receive cash flows from the asset have expired; ▪ when the Company retains the right to cash flows but undertakes an obligation to settle the total amount to a third party as to transfer agreement within a short period of time; ▪ the Company transfers its rights to receive cash flows from the asset and (or): (a) transfers substantially all the risks and rewards of the asset, (b) neither transfers nor retains substantially all the risks and rewards of the asset, but transfers control of the asset. When the Company transfers its rights to receive cash flows from an asset but does not transfer either risk or rewards of ownership related to the financial asset or control over the asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. The Company reduces the gross carrying amount of the financial asset if it cannot reasonably expect to recover all or part of the financial asset. Writing down is an event of derecognition. Derecognition of financial liabilities. A financial liability is derecognised by the Company when the obligation under the liability is discharged or cancelled, or expired. The Company also ceases recognition of a financial liability when its terms are changed and the cash flows of the amended liability are materially different. In this case, the new financial liability is recognised at fair value in accordance with the amended contractual terms. In the event of derecognition of a financial liability, the difference between the carrying amount written off and the consideration paid (including any transferred non-cash assets or liabilities assumed) is recognised in profit or loss in the statement of comprehensive income. Offsetting of financial assets and liabilities. Financial assets and financial liabilities are offset when, and only when, the Company has a legally enforceable right to record the amounts and intends to make an offsetting, or dispose the asset to offset the liability. Derivatives Derivatives are recognised initially at fair value, attributable transaction costs are recognised in profit or loss when incurred. Subsequently to initial recognition, derivatives are measured at fair value, and changes therein are accounted in profit or loss as the Company’s hedging instruments do not qualify for hedge accounting. Measurement of fair value of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: - In the principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous market for the asset or liability. 13 2022 Significant accounting policies (continued) Financial instruments (continued) Measurement of fair value of financial assets (continued) If the Company measures an asset or a liability initially at fair value and the transaction price differs from fair value, the difference is recognised in profit or loss unless that IFRS specifies otherwise. Assets and liabilities that are measured at fair value in the statement of financial position or are not valued at fair value, but information about them is disclosed, are categorized by the Company into a three-level fair value hierarchy based on the availability of the inputs. • Level 1: inputs are quoted prices (unadjusted) in active markets for identical instruments. • Level 2: directly (i.e. as prices) or indirectly (i.e. derived from prices) observable inputs. This category includes instruments measured at the quoted prices of similar instruments in active markets, the quoted prices of identical or similar instruments in less active markets or other valuation techniques, for which all significant inputs are either directly or indirectly observable from market data. • Level 3: unobservable inputs. This category includes all instruments measured using unobservable inputs which have significant effect on the valuation of instruments. Instruments in this category are measured on the basis of quoted prices of similar instruments; to reflect the differences between instruments, unobservable adjustments or assumptions are necessary. In the cases, the inputs used to measure the fair value of an asset or a liability might be categorised within different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The fair value of interest-bearing financial instruments is estimated based on discounted cash flows using the market interest rates for items with similar terms and risk characteristics. Where the fair values of financial assets and liabilities differ materially from their carrying amounts, such fair values are separately disclosed in the notes to the financial statements. When there is no quoted price in an active market, the Company uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. If the Company determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that used only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. Factoring Factoring transaction is a funding transaction wherein the Company transfers to factor claim rights for determined fee. The Company alienates rights to receivables due at a future date according to invoices. Factoring transactions of the Company comprise factoring transactions without regress right (the factor is not entitled to returning the overdue claim back to the Company). The factoring expenses comprise a lump-sum contract fee charged on the conclusion of the contract, commission fees charged for processing the invoices, and interest expenses depending on the duration on the payment term set by the debtor. 14 2022 Significant accounting policies (continued) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The costs of inventories are calculated using the FIFO method. The cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity distributed according to norms calculated considering the use of production capacities. Cash and cash equivalents Cash includes cash in hand and cash at banks. Cash equivalents are short-term highly liquid investments readily convertible into known amounts of cash. Such investments mature in less than three months and are subject to insignificant risk of change in value. In the statement of cash flows, cash and cash equivalents comprise cash on hand, cash at banks and deposits with the original maturity of less than 3 months. Impairment Impairment of financial assets Following IFRS 9, in common case scenario, the Company recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate. ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12- month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). For trade receivables the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. Based on the assessment of the Company’s management, trade receivables do not include significant financing component and, respectively, their impairment is measured using a simplified method, firstly the management performs individual ECL assessment considering the customer’s credit history, future factors and subjective market factors related to the debtor, secondly all overdue balances for more than 180 days are allowed by 100% and lastly, the Company records an additional allowance of 0,1% for total outstanding accounts receivable balance, which is not overdue or overdue less than 180 days at the year end. Application of 0,1% is based on historical information of the Company on bad debts. Impairment of non-financial assets The carrying amounts of the Company’s assets other than inventories and deferred income tax asset are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, the Company makes estimate of the recoverable amount of such asset. 15 2022 Significant accounting policies (continued) For intangible assets not yet ready for use, the recoverable amount is measured at each statement of financial position date. For impairment testing, assets are grouped together into the smallest group of assets (as practically possible) that generates cash inflows. The Company’s management considers the entire Company as one cash-generating unit (CGU). The recoverable amount of an assets or CGU is greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. Impairment losses are recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are included in profit or loss. The Company constantly monitors the latest government legislation in relation to climate related matters. The significant accounting estimates made by management incorporate the future effects of the Company’s strategic decisions and commitments on having its set of production adhered to the energy transition targets, short and long-term impacts of climate- related matters and energy transition to lower carbon energy sources. At the current time, no legislation has been passed that will impact the Company. The Company will adjust the key assumptions used in value-in-use calculations and sensitivity to changes in assumptions should a change be required. Reversals of impairment on non-financial assets An impairment loss of non-financial assets is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, if no impairment loss had been recognised, net of depreciation or amortisation. Dividends Dividends are recognised as a liability in the period in which they are declared. The withholding tax related to the payment of dividends is recognised when the obligation to pay such dividends arises. Provisions A provision is recognised if, as a result of a past event, the Company has a present (legal or constructive) obligation that can be estimated reliably, and it is probable that an outflow of economic benefits, which can be reliably estimated, will be required to settle the obligation. The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation the provision is reversed. The provision is used only for expenditures for which the provision was originally recognised. When the effect of the time value of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation. If the discounting method is applied, the increase of provisions in a course of time is recognised as financial expenses. Employee benefits Short-term employee benefits are recognised as a current expense in the period when employees render the services. These include salaries and wages, social security contributions, bonuses, paid holidays and other benefits. All pension obligations are borne by the State. 16 2022 Significant accounting policies (continued) Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognises termination benefits when it is firmly committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Under the remuneration plans employees are entitled to jubilee bonuses as well as retirement benefits. Each employee of the Company leaving the Company on the normal retirement date is entitled to a benefit equal to 2 monthly wages, as stipulated in the legal acts of the Republic of Lithuania. The jubilee bonuses are paid to employees who have reached 50 and 60 years old. Provisions for jubilee bonuses and retirement benefits are calculated individually for each entitled individual. The base for the calculation of provision for an employee is expected benefit which the Company is obliged to pay in accordance with internal policy and regulation. The present value of these obligations is estimated at the end of each reporting year. The Company recognizes the liability in the statement of financial position under current and non- current liabilities and reflects the current value of the benefits at the date of the statement of financial position. Revenue from contracts with customers Revenue of the Company is recognised in accordance to IFRS 15. The Company recognises revenue at the time and to the extent that the transfer of goods or services to customers would reflect an amount that the Company expects to receive in exchange for those goods or services. In applying this Standard, the Company takes into account the terms of the contract and all relevant facts and circumstances. Revenue in the Company is recognised using the 5-step model: Step 1. Identification of the contract with the customer. A contract is an agreement between two and/or more parties (subject to the terms of the purchase/sale) which creates the rights to be enforced and the obligations to be enforced (not applicable, if the joint venture agreement is signed). A contract subject to IFRS 15 is recognised only if the following criteria are met: ▪ the parties have approved the contract (in writing, orally or in accordance with other usual business practices) and are bound by the obligations under the contract; ▪ there is a possibility to identify the rights of each party regarding the transferable goods and/or services; ▪ there is a possibility to identify the payment terms provided for the transferable goods and/or services; ▪ the contract is of a commercial character; ▪ there is a chance of getting a reward in return for the goods and/or services that will be passed on to the customer. Contracts with the customer may be aggregated or disaggregated into several contracts, while retaining the criteria of the former contracts. Such aggregation or disaggregation is considered a change of contract. 17 2022 Significant accounting policies (continued) Revenue from contracts with customers (continued) Step 2. Identification of performance commitments in the contract. The contract establishes a commitment to deliver goods and/or services to the customer. When goods and/or services can be distinguished, the commitments are recognised separately. Each commitment is identified in one of two ways: 1) the product and/or service is separate, or 2) a set of individual goods and/or services that are essentially the same and passed on to the customer in a uniform model. Step 3. Determination of a transaction price. The Company’s transactions provide for fixed prices of the goods at the moment of the transfer of control. The Company takes into account the potential impact of non-monetary rewards and the impact of the consideration payable to the customer (in the event of non-performance or partial performance of contractual obligations, the consideration paid by the Company for the marketing services acquired from customer). It is probable that the potential impact of the non-monetary reward and the impact of the consideration payable to the customer will not have influence (there have not been any material cases historically and none are expected arising from current year sales) on revenue recognition, except for marketing services purchased from customers, which are described in more detail in step 5 below. Step 4. Assigning a transaction price to performance obligations. A performance obligation is a contractual undertaking to transfer a product or service that is segregated to the customer, or a set of segregated goods or services that are essentially the same and are transferred on to the customer according to the same model. The transaction price is allocated to each performance obligation based on the relative individual selling prices of the good or service promised in the contract. In assessing the transaction price, the Company assesses the discount or variable amount of consideration that relates only to a specific part of the contract. Similar transactions are measured equally. Step 5. Recognition of revenue when performance obligations are fulfilled by the Company. Revenue from sales is recognised as a representation of the delivery of goods or the rendering of services at the amount that correctly represents the performed obligation and the right to receive consideration in exchange for the goods and/or services. Revenue recognition depends on whether the liability is being settled over a certain period (continuous) or at a certain point in time. In any case, the transfer of control is taken into account. The Company recognises revenue from contracts with customers at a point in time. The Company also purchases marketing services from its customers. Based on agreements marketing related services acquired from customers (retailers) do not represent distinct services related to various advertising and marketing activities provided to the Company, and therefore all such marketing expenses incurred over the financial period are accounted as revenue reduction in the Company’s statements of comprehensive income (Note 1). 18 2022 Significant accounting policies (continued) Grants Asset-related government grants comprise grants received in the form of non-current assets or intended for the acquisition of non-current assets. Grants are recognised in the statement of financial position when there is reasonable assurance that it will be received and that the Company will comply with the conditions attaching to it. Grants intended to compensate the Company for the cost of an asset are recorded as a liability and subsequently recognised in profit or loss on a proportionate basis over the expected useful life of the asset. Grants received as a compensation for the expenses of the current or previous reporting period, also, all the grants, which are not asset-related grants, are considered as income-related grants. The income-related grants are recognised as used in parts to the extent of the expenses incurred during the reporting period to be compensated by that grant. The balance of unutilised grants is shown in the caption ‘Grants’ in the statements of financial position. Expenses Other operating income and costs Other operating income and expenses comprise gains and losses from sale of property, plant and equipment, and other items, which are not directly related to the primary activities of the Company. Finance income and finance expenses Finance expenses comprise interest payable on borrowings calculated using the effective interest rate method and foreign exchange losses (net value). The interest expense component of lease payments is recognised in profit or loss using the effective interest rate method. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The financial costs are distributed over the entire period of finance lease, so as to produce a constant periodic interest rate on the remaining balance of the liability. Finance income comprises interest receivable on funds invested, dividend income and foreign exchange gains (net value). Interest income is recognised in profit or loss as it accrues, using the effective interest rate method. Dividend income is recognised in profit or loss on the date the right to receive payments is established. Income tax Income tax for the period comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the date of the statement of financial position, and any adjustment to tax payable in respect of previous years. The effective income tax rate applicable for companies of the Republic of Lithuania in 2022 and 2021 was 15%. Deferred tax is provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The following temporary differences are not provided for: differences arising at initial recognition of assets or liabilities that affect neither accounting, nor taxable profit. The amount of deferred tax depends 19 2022 Significant accounting policies (continued) Income tax (continued) on the expected future use of the asset and the settlement of future liabilities and substantially enacted tax rate expected to apply. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Starting from 1 January 2014, deductible tax losses carried forward can be used to reduce the taxable income earned during the reporting year by maximum 70%. Tax losses can be carried forward for indefinite period, except for the losses incurred as a result of disposal of securities and/or derivatives. Such carrying forward is disrupted if the Company stops its activities due to which these losses were incurred except when the Company does not continue its activities due to reasons which do not depend on the Company itself. The losses from disposal of securities and/or derivatives can be carried forward for 5 consecutive years and only be used to reduce the taxable income earned from the transactions of the same nature. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. According to legislation on taxation in effect, the Tax Authorities may at any time during 3-5 successive years (depending on tax) after the end of the reporting tax year carry out a tax inspection of the Company and impose additional taxes or fines by reassessing taxes calculations. The Company’s management believe that all the taxes are properly calculated and paid according to the prevailing tax laws and it is not aware of any circumstances that may give rise to a potential material liability in respect of taxes not paid. Basic and diluted earnings per share Basic earnings per share are calculated by dividing net profit attributable to ordinary equity holders by the weighted average number of ordinary shares. As there are no instruments that dilute equity, the basic and diluted earnings per share do not differ. Segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including transactions with other segments), whose operating results are regularly reviewed by the entity’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segmentation principles are presented in Note 1. Financial risk management In its activities the Company is exposed to various financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. General risk management policy establishment and supervision is the responsibility of the Board. Risk management policy was set up in order to identify and analyse risks facing the Company, and determine risk acceptance limits. Risk management policy and processes are reviewed regularly considering changes in the markets and activities of the Company. The Company, applying learning and management 20 2022 standards and procedures, aims to establish constructive control environment where all employees clearly realise their functions and responsibilities. The Company’s management pays the greatest attention to unpredictability of financial markets and aims to decrease its eventual impact on the Company’s financial performance. From time to time the Company can use derivative financial instruments in order to hedge certain risks (a) Market risk Market risk is the risk that changes in market prices - such as foreign exchange rates and interest rates - will affect the Company's result or the value of its financial instruments held. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Significant accounting policies (continued) Financial risk management (continued) Currency risk Major currency risks of the Company occur due to the fact that the Company is involved in imports and exports. The Company’s policy is to match cash flows arising from highly probable future sales and purchases in each foreign currency. The Company does not use any financial instruments to manage its exposure to foreign exchange risk other than aiming to borrow in EUR. Interest rate risk The Company’s borrowings are subject to variable interest rates, related to EURIBOR. The cash flow sensitivity analysis is presented in Note 20. The Company does not have any significant loans granted or receivable amounts with fixed interest rates presented at fair value. (b) Credit risk Credit risk is the risk of financial loss to the Company if a customer or a counterparty to a financial instrument fails to meet the contractual obligations. Credit risk arises principally from amounts receivable from the Company’s customers and cash balance held in banks. The Company has established procedures ensuring that sales are made to customers having a proper credit history without exceeding the limit of credit risk set by management. The concentration of credit risk is disclosed in Note 20 of the financial statements. The carrying amount of financial assets represents the maximum credit exposure, refer to Note 20. (c) Liquidity risk An appropriate management of liquidity risk enables the Company to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities. For analysis of liquidity risk please refer to Note 20. Capital Management The Board’s policy is to keep the shareholders’ equity over borrowings at the level to maintain the confidence of investors, creditors and the market and to fund business development opportunities in the future. The Board keeps track on the ratios of capital return and makes suggestions regarding payment of dividends, based on the Company’s performance results and strategic plans. 21 2022 The Board also aims to keep balance between bigger return, which could be available if there was higher level of borrowed assets and security, which is provided by higher level of equity. The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 December 2022 and 31 December 2021. According to the Companies Law of the Republic of Lithuania, the Company’s equity shall be not less than 50% of its share capital. The Company complies with this requirement. 22 2022 Significant accounting policies (continued) Events after the reporting period The events which occurred after the reporting period and provide additional information about the Company’s position at the reporting date (adjusting events) are reflected in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material. Right-of-use assets and lease liabilities A. The Company is a lessee At inception of a contract, the Company assesses whether the contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows: • Buildings 5 years • Vehicles and other equipment 2–5 years If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment. Refer to the accounting policies in sub- section “Impairment of non-financial assets” of the section “Impairment”. Lease liabilities At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects the Company exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. 23 2022 Significant accounting policies (continued) Right-of-use assets and lease liabilities (continued) In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Company’s lease liabilities are accounted for under the caption “Lease liabilities” (Note 16). Short-term leases and leases of low-value assets The Company applies the recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value (EUR 5 thousand). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. B. The Company is a lessor At inception of a contract, the Company, as a lessor, determines whether the lease is a finance lease or an operating lease. If the Company determines that the lease transfers substantially all of the risks and rewards of ownership of the underlying asset, the lease is a finance lease. Leases in which the Company does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Lease payments are accounted for on a straight-line basis over the lease term and recognised as revenue in the statement of profit or loss based on its lease nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent payments are recognized as revenue in the period in which they are earned. 24 2022 Significant accounting policies (continued) Adoption of new and/or amended IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations The accounting policies adopted by the Company are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Company as of 1 January 2022: • IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets as well as Annual Improvements 2018-2020 (Amendments) The amendments are effective for annual periods beginning on or after 1 January 2022 with earlier application permitted. The IASB has issued narrow-scope amendments to the IFRS Standards as follows: ➢ IFRS 3 Business Combinations (Amendments) update a reference in IFRS 3 to the previous version of the IASB’s Conceptual Framework for Financial Reporting to the current version issued in 2018 without significantly changing the accounting requirements for business combinations. ➢ IAS 16 Property, Plant and Equipment (Amendments) prohibit a company from deducting from the cost of property, plant and equipment any proceeds from the sale of items produced while bringing the asset to the location and condition necessary for it be capable of operating in the manner intended by management. Instead, a company recognizes such sales proceeds and related cost in profit or loss. ➢ IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments) specify which costs a company includes in determining the cost of fulfilling a contract for the purpose of assessing whether a contract is onerous. The amendments clarify, the costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to the contract activities. ➢ Annual Improvements 2018–2020 make minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases. The amendments had no impact on the Company’s financial statements for the year ended 31 December 2022. Standards issued but not yet effective and not early adopted • IFRS 17: Insurance Contracts The standard is effective for annual periods beginning on or after 1 January 2023 with earlier application permitted, provided the entity also applies IFRS 9 Financial Instruments on or before the date it first applies IFRS 17. This is a comprehensive new accounting standard for insurance contracts, covering recognition and measurement, presentation and disclosure. IFRS 17 applies to all types of insurance contracts issued, as well as to certain guarantees and financial instruments with discretional participation contracts. The Company does not issue contracts in scope of IFRS 17; therefore, its application is not expected to have an impact on the Company’s financial performance, financial position or cash flows. 25 2022 Significant accounting policies (continued) Adoption of new and/or amended IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations Standards issued but not yet effective and not early adopted (continued) • IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies (Amendments): The Amendments are effective for annual periods beginning on or after 1 January 2023 with earlier application permitted. The amendments provide guidance on the application of materiality judgements to accounting policy disclosures. In particular, the amendments to IAS 1 replace the requirement to disclose ‘significant’ accounting policies with a requirement to disclose ‘material’ accounting policies. Also, guidance and illustrative examples are added in the Practice Statement to assist in the application of the materiality concept when making judgements about accounting policy disclosures. The management is in the process to evaluate the impact of the implementation of these amendments. • IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (Amendments) The amendments become effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period. The amendments introduce a new definition of accounting estimates, defined as monetary amounts in financial statements that are subject to measurement uncertainty, if they do not result from a correction of prior period error. Also, the amendments clarify what changes in accounting estimates are and how these differ from changes in accounting policies and corrections of errors. The management is in the process to evaluate the impact of the implementation of these amendments. • IAS 12 Income taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2023 with earlier application permitted. The amendments narrow the scope of and provide further clarity on the initial recognition exception under IAS 12 and specify how companies should account for deferred tax related to assets and liabilities arising from a single transaction, such as leases and decommissioning obligations. The amendments clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement, having considered the applicable tax law, whether such deductions are attributable for tax purposes to the liability or to the related asset component. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal. The management is in the process to evaluate the impact of the implementation of these amendments. • IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non- current (Amendments) The amendments are effective for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted, and will need to be applied retrospectively in accordance with IAS 8. The objective of the amendments is to clarify the principles in IAS 1 for the classification of liabilities as either current or non-current. The amendments clarify the meaning of a right to defer settlement, the requirement for this right to exist at the end of the reporting period, that management intent does not affect current or non-current classification, that options by the counterparty that could result in settlement by the transfer of the entity’s own equity instruments do not affect current or non-current classification. Also, the amendments specify that only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification. Additional disclosures are also required for non-current liabilities arising from loan arrangements that are subject to covenants to be complied with within twelve months after the reporting period. The amendments have not yet been endorsed by the EU. The management is in the process to evaluate the impact of the implementation of these amendments. 26 2022 Significant accounting policies (continued) Adoption of new and/or amended IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations Standards issued but not yet effective and not early adopted (continued) • IFRS 16 Leases: Lease Liability in a Sale and Leaseback (amendments) The amendments are effective for annual reporting periods beginning on or after January 1, 2024, with earlier application permitted. The amendments are intended to improve the requirements that a seller- lessee uses in measuring the lease liability arising in a sale and leaseback transaction in IFRS 16, while it does not change the accounting for leases unrelated to sale and leaseback transactions. In particular, the seller-lessee determines ‘lease payments’ or ‘revised lease payments’ in such a way that the seller- lessee would not recognise any amount of the gain or loss that relates to the right of use it retains. Applying these requirements does not prevent the seller-lessee from recognising, in profit or loss, any gain or loss relating to the partial or full termination of a lease. The amendments are applied retrospectively in accordance with IAS 8 to sale and leaseback transactions entered into after the date of initial application of IFRS 16. The amendments have not yet been endorsed by the EU. The management is in the process to evaluate the impact of the implementation of these amendments. • IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (Amendments): Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IFRS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The amendments have not yet been endorsed by the EU. Management has made an assessment of the effect of the standard and its amendments and considers that this amendment to the Standard is not expected to have an impact on the Company’s financial performance, financial position or cash flows. There are no other new or amended standards or their interpretations, which are not yet effective and which may have material impact on the Company. 27 2022 Significant accounting policies (continued) Critical accounting estimates and judgements Estimates and underlying assumptions are reviewed on an ongoing basis and based on historical experience and other factors that reflect the current situation and reasonable future events. The Company makes estimates and assumptions concerning future events. Resulting accounting estimates, by definition, will seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of the assets and liabilities within the next financial year are discussed below. Impairment of property, plant and equipment The Company at the end of each reporting period assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. Recoverable amount is the higher of an asset’s or cash-generating unit's fair value less costs of disposal and its value in use (Note 8). The Company’s management considers the entire Company as one cash-generating unit. The Company’s production branches are not independent units, they all are integrated into a common system and rely on each other activities. When raw milk is purchased on the market, all its ingredients (protein and fat) are used for finished products, which are produced in different branches of the Company. The management measures what returns are being generated from the entire raw milk collected and processed. It is therefore appropriate to consider the entire Company as one cash-generating unit without identifying a separate cash-generating unit. In 2022, the Company has performed impairment assessment of non-current assets (including rights of used assets) with carrying value as at 31 December 2022 amounting to EUR 45,411 thousands in the Company’s financial statements. To assess impairment, the management made estimate of the recoverable amount of such assets. The recoverable value was determined based on value in use by using discounted future cash flows method for the period from 2023 to 2027. The expected increase in sales is 2% in average each year. Expenses and profitability for 2023 – 2027 forecasted based on historical profitability level of the Company. Discount rate of 12% (pre- tax) was applied for cash flow forecasts. Cash flows for a longer than five-year period was extrapolated applying the growth rate of 2%, which reflects the management’s best estimate given the current market situation. As a result, non-current assets of the Company were not impaired as at 31 December 2022. Impairment sensitivity analysis (increasing discount rate by 1% and decreasing EBITDA profitability by 1%) resulted to no impairment of the Company’s non-current asset as at 31 December 2022. As at 31 December 2021 there were no indications, that non-current asset of the Company might be impaired, therefore detailed testing was not performed. Impairment losses on receivables At the end of each reporting period, the management of the Company makes assumptions, on the basis of which decisions are made on the valuation of expected credit losses (for more information refer to “Impairment of financial assets”). The Company has identified that the loss rates approximates to 0.1% from total receivables (during 2017–2022). Forward looking estimate is applied by accounting for additional allowance for the trade receivables that are yet not overdue based on historic information (Note 20). Management assumes that a default occurs when the amounts receivable are outstanding and loans granted are overdue for more than 180 days (Note 20). 28 2022 Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Write down of inventories to net realisable value At least on a quarterly basis, the Company determines whether the carrying amount of its inventory does not exceed the net realisable value. In respect of obsolete or slow moving items this involves comparing the levels of inventory held to future utilisation and sales projections. In addition, all of the Company’s product inventories are tested for potential decline of their expected selling prices below cost (Note 10). Deferred tax asset The Company recognises deferred tax assets based on the judgement of management that realization of the related tax benefits through future taxable profits is probable. Management’s judgements are based on internal budgets and forecasts (Note 18). Employee benefits provision Recognition of provision for employee benefits requires estimate of the probable outflow of economic benefits and defining the best estimate of the expenditure required to settle the present obligation at the end of reporting period. Details of applied estimates and their influence on the financial statements are disclosed in Note 17. Non-current asset useful life estimate The useful life of the Company’s property, plant and equipment is established individually for each asset, estimating the future economic benefit, planned period, intensity and environment of use, the changes of the asset’s useful features throughout the useful operation period, technological and economic progress, which may make the asset old-fashioned, as well as legal and other factors, limiting the useful life of non-current tangible assets. In 2022, the Company has revised useful lives of property, plant and equipment according to IAS 16 Property, plant and equipment and adjusted useful lives. New useful lives of property, plant and equipment have been applied prospectively from 31 August 2022 (Note 8). Total acquisition cost of property, plant and equipment items for which useful lives were extended was EUR 19,460 thousand in 2022 (in 2021: EUR 27,920 thousand). Estimation of raw material cost allocation The Company specialises in the production of dairy products, so the largest part of the production cost is the amount paid for the raw milk purchased. The main ingredients in raw milk are fat (cream) and protein (skim milk). Because of the variety of products with different fat and protein contents, the management judgement is involved in identifying what proportion of the raw milk price is attributable to fat and what proportion to protein. The management of the Company determines the milk cost allocation ratios in a way that interrelated products margin remains similar. 29 2022 Significant accounting policies (continued) Significant accounting judgements and estimates (continued) Valuation of impact of Russian Federation military invasion to Ukrainian Republic On 24 February 2022, the Russian invasion into Ukraine began. The management of the Company, assessing the current political situation and sanctions applied to the aggressor’s countries (Russia and Belarus) in Lithuania and other markets, assessed the possible impact on the Company's strategic goals, cash flows, financial results and going concern. The Company's management assessed the possible real and potential direct and indirect impact of the Russian invasion into Ukraine on the Company's activities, the impact of the affected markets, supply chains of the Company, its financial situation and economic results, using all the information currently available, and did not identify significant risks to the Company's financial condition, except for general negative impact on economy, including inflation and increase in prices of energy resources. Impact is disclosed in Note 3. In 2022, the Company’s sales to Russia, Belarus and Ukraine (put together) amounted to 0.3% of total sales. Sales are no longer performed to these countries on these financial statement’s approval date. At the end of the financial year, the Company had no balances of trade receivables from above mentioned countries, as well as had no balances of production exceptionally produced only for mentioned above countries. 30 2022 1. Operating segments Basis for segmentation The Company produces and sells various types of dairy products. Financial performance is analysed as per different types of dairy products. Certain types of dairy products have similar economic characteristics. Given the fact, the dairy product types have been aggregated to reportable segments. Aggregation also includes evaluation of similarities of the dairy product types in respect to production process, customer type and geographical areas, methods of product distribution. The Company has identified the following reportable segments: cheese, dry dairy products, ice cream and fresh dairy products. The management of the Company reviews internal management reports of reportable segments at least on a quarterly basis. Other segments include production of cream, whey, other products and services. None of these segments meet the quantitative thresholds (10% from total) for reportable segments in 2022 and 2021. Information about reportable segments Information on each reportable segment is presented below. The segment performance assessment is based on the segment’s gross profit, since the management believes that this information is the most relevant for performance evaluation of respective segments. Segment information is prepared in accordance with the same accounting principles as used in the financial statements of the Company. Information related with total assets and liabilities, interest income and operating expenses, pre-tax result of the operating segments is not provided to the Board and General Manager. In the management’s opinion, there is no need to allocate these line items to the operating segments. 2022, thousand EUR Cheese Dry dairy products Ice- cream Fresh dairy products Total reportable segments All other segments Total Sales 25,775 13,477 15,459 131,868 186,579 17,974 204,553 Gross profit 2,088 1,171 3,551 22,585 29,395 (772) 28,623 Depreciation and amortisation 1,014 59 2,314 388 3,775 20 3,795 Other material non-cash items: Impairment of property, plant and equipment - - - - - - - Impairment and write down of inventories - 2,796 - 147 2,943 - 2,943 Acquisitions of property, plant and equipment 412 - 79 1,542 2,033 - 2,033 31 2022 1. Operating segments (continued) 2021, thousand EUR Cheese Dry dairy products Ice-cream Fresh dairy products Total reportable segments All other segments Total Sales 23,098 8,852 15,536 126,894 174,380 2,312 176,692 Gross profit 2,202 431 3,692 25,325 31,650 557 32,207 Depreciation and amortisation 941 44 334 2,157 3,476 18 3,494 Other material non-cash items: Impairment of property, plant and equipment - - - - - - - Impairment and write down of inventories - - - - - 6 6 Acquisitions of property, plant and equipment 1,402 90 933 4,640 7,065 23 7,088 Geographic information Geographic information specifies revenues and non-current assets of the Company as per Company’s country and other countries. Revenue is presented based on the geographic location of customers, and non-current assets are presented according to their location. Sales, thousand EUR 2022 2021 Lithuania 113,402 106,859 Italy 842 887 Latvia 8,236 9,906 Germany 9,871 8,231 Great Britain 6,209 6,178 USA 3,863 3,411 Indonesia 6,206 5,206 Israel 6,279 5,859 Other countries 49,645 30,155 Revenue, total 204,553 176,692 Non-current assets, in thousand EUR 2022 2021 Lithuania 43,086 47,032 Poland 949 388 Total non-current assets 44,035 47,420 Major customers The Company has one customer from whom the revenue related to segment of cheese and fresh dairy products in 2022 made 17.7% (in 2021: 20.3%) of the total revenue. Revenue recognition during the year ended 31 December: thousand EUR 2022 2021 Recognised at a point of time 206,145 178,542 Marketing costs reducing the sales (1,592) (1,850) Recognised over a period of time - - 204,553 176,692 32 2022 2. Other activity Other operating income: thousand EUR 2022 2021 Income from rent and other services/goods 169 503 Net gain on disposal of property, plant and equipment (Note 8, 16) 1,604 191 1,773 694 Other operating expenses: thousand EUR 2022 2021 Expenses related to rent and other services/goods (300) (45) (300) (45) 3. Cost of sales, sales and distribution, administrative expenses Cost of sales: thousand EUR 2022 2021 Raw materials and consumables (128,191) (105,078) Other expenses (25,061) (19,317) Personnel costs (14,555) (15,132) Depreciation and amortisation (3,795) (3,494) Changes in finished goods and work in progress (4,328) (1,464) (175,930) (144,485) Increase in cost of sales is mainly due to increased raw milk, electricity, gas prices in 2022. Selling and distribution expenses: thousand EUR 2022 2021 Personnel costs (7,345) (7,487) Production delivery costs (2,121) (2,326) Marketing and advertising (882) (1,529) Fuel (2,001) (1,499) Consumables and spare parts (1,198) (1,034) Other expenses (647) (759) Development of new products (298) (484) Right-of-use assets depreciation (414) (432) Depreciation and amortisation (438) (478) Utilities (1,017) (574) Various services (247) (281) Repair (286) (244) Insurance (185) (155) Taxes (other than income tax) (80) (80) Low value rental expenses* (38) (39) Communication expenses (18) (20) Transport (24) (31) (17,239) (17,452) Increase in fuel and utilities expenses is due to significant increase in fuel, gas, electricity prices in 2022. Costs such as marketing and advertising were reduced in 2022 (compared to 2021) due to cost saving policy. 33 2022 3. Cost of sales, sales and distribution, administrative expenses (continued) Administrative expenses: thousand EUR 2022 2021 Personnel costs (7,115) (6,131) Other expenses (1,677) (1,336) Various services (1,361) (1,765) Marketing and advertising (2) - Security services (709) (643) Charity (471) (625) Right-of-use assets depreciation (524) (497) Consumables and spare parts (268) (315) Depreciation and amortisation (490) (468) Utilities (746) (578) Repair (227) (100) Insurance (424) (388) Taxes (other than income tax) (487) (384) Allowance and write down of inventories (3,069) (263) Fuel (245) (190) Communication expenses (63) (77) Development of new products (21) (37) Low value rental expenses (19) (17) Transport (8) - (17,926) (13,814) Personnel costs increased in 2022 due to newly established supervisory board and overall increase in the Company’s employees salary. Operating lease expenses out of IFRS 16 scope (short-term and/or low value). ** Right-of-use assets depreciation accounted under selling and administrative expenses amounted to EUR 938 thousand (in 2021: EUR 929 thousand) and under cost of sales – EUR 126 thousand (in 2021: EUR 135 thousand). 34 2022 4. Finance income thousand EUR 2022 2021 Interest 37 73 Change in fair value of interest rate swap (gain) 1 - Total finance income 38 73 5. Finance costs thousand EUR 2022 2021 Interest expenses on loans (896) (717) Other* (238) (259) Total finance costs (1,134) (976) * Including other interest expenses, factoring account fees, interest on late payments, and fines. 6. Income tax expense thousand EUR 2022 2021 Change in deferred income tax 883 245 Total corporate income tax expense 883 245 Reconciliation of effective tax rate thousand EUR 2022 2021 Result before tax (6,203) 978 Income tax using the prevailing tax rate (15%) 930 15% (147) Expenses not deductible for tax purposes 3.1% (194) 19.6% (192) Tax incentive (support, investments) 2,4% 147 (59.6%) 584 Effective tax rate (14.2%) 883 25% 245 (260) 7. Earnings per share Basic earnings per share is calculated dividing the net profit for the year by the average number of ordinary shares outstanding during the year. 2022 2021 Number of shares in issue calculated using weighted average method, units ‘000 45,134 45,134 Net result for the year, in thousand EUR (5,320) 1,223 Earnings (loss) per share (EUR) (0.12) 0.03 Diluted earnings (loss) per share (EUR) (0.12) 0.03 35 2022 8. Property, plant and equipment Land and buildings Machinery and equipment Other assets Construction- in-progress Total Balance as at 1 January 2021 41,473 105,702 19,018 275 166,468 Additions 845 3,410 597 2,192 7,044 Disposals and write-offs (724) (192) (490) - (1,406) Reclassifications - (497) 497 - - Transferred from construction in progress 267 1,886 - (2,153) - Balance as at 31 December 2021 41,861 110,309 19,622 314 172,106 Balance as at 1 January 2022 41,861 110,309 19,622 314 172,106 Additions - 1,263 342 428 2,033 Reclassification from/to right of-use- asset - - 135 - 135 Disposals and write-offs (2,160) (1,248) (284) - (3,692) Reclassifications - 1,171 (1,171) - - Transferred from construction in progress 13 659 - (672) - Balance as at 31 December 2022 39,714 112,154 18,644 70 170,582 Depreciation and impairment Balance as at 1 January 2021 24,347 80,756 16,290 - 121,393 Depreciation charge for the year 977 2,788 614 - 4,379 Depreciation of revalued assets (337) (192) (489) - (1,018) Balance as at 31 December 2021 24,987 83,352 16,415 - 124,754 Balance as at 1 January 2022 24,987 83,352 16,415 - 124,754 Depreciation charge for the year 1,000 3,057 626 - 4,683 Reclassification from/to right of-use- asset - - 20 - 20 Depreciation of assets disposed and written-off (1,353) (1,245) (261) - (2,859) Balance as at 31 December 2022 24,634 85,164 16,800 - 126,598 Carrying amounts As at 1 January 2021 17,126 24,946 2,728 275 45,075 As at 31 December 2021 16,874 26,957 3,207 314 47,352 As at 1 January 2022 16,874 26,957 3,207 314 47,352 As at 31 December 2022 15,080 26,990 1,844 70 43,984 Pledges of property, plant and equipment Property, plant and equipment with a carrying amount of EUR 30,434 thousand as at 31 December 2022 (in 2021: EUR 32,002 thousand) have been pledged to secure the bank loans (Note 15). Disposal of property, plant and equipment The Company sold part of its fixed assets in 2022 for EUR 2,770 thousand to a third party. In order to streamline the logistics activities of the Company, the storage and logistics premises and a land in Vilnius were sold. After the sale of the property, the Company signed a lease agreement for these premises for a period of two years, during which all logistics functions will be transferred to other geographical locations (branches of the Company). The transaction was assessed as sale and leaseback transaction. The Company has measured the right of use asset arising from the leaseback transaction at the proportion of the previous carrying amount of the asset that relates to 36 2022 8. Property, plant and equipment (continued) the right of use retained by the Company (Note 16). Accordingly, the Company has recognized only the amount of gain that relates to the rights transferred to the buyer (Note 2). Depreciation charge Depreciation is included in the following items of the statement of comprehensive income: thousand EUR 2022 2021 Cost of sales 3,795 3,494 Selling, distribution and administrative expenses 888 885 4,683 4,379 The Company's additions in 2022 and 2021 consists of acquisitions of new machinery, equipment and production lines amounted to EUR 2,003 thousand as at 31 December 2022 (in 2021 - EUR 7,044 thousand) As a result of changes in accounting estimates in 2022, depreciation costs of the Company for 2022 have decreased by approx. EUR 89 thousand in comparison to 2021 depreciations costs. In 2023, the effect on depreciation costs is expected to be approx. EUR 251 thousand less compared to 2022. As a result of changes in accounting estimates in 2021, depreciation costs of the Company for 2022 have decreased by approx. EUR 56 thousand in comparison to 2021 depreciations costs. Acquisition cost of fully depreciated property, plant and equipment still in use amounts to EUR 33,984 thousand as at 31 December 2022 (in 2021: EUR 35,171 thousand). The Company has not capitalised borrowing costs as at 31 December 2022 and 2021, as there were no projects performed, which comply with the capitalisation criteria. The management of the Company has assessed that no impairment identified for PPE as at 31 December 2022 and no impairment indications existed as at 31 December 2021. 37 2022 9. Intangible assets thousand EUR Computer software, etc. Total Cost of sales Balance as at 1 January 2021 1,365 1,365 Additions 43 43 Write-offs (1) (1) Balance as at 31 December 2021 1,407 1,407 Balance as at 1 January 2022 1,407 1,407 Additions 22 22 Write-offs - - Balance as at 31 December 2022 1,429 1,429 Amortisation and impairment Balance as at 1 January 2021 1,279 1,279 Charge for the year 61 61 Amortisation of written-off assets (1) (1) Balance as at 31 December 2021 1,339 1,339 Balance as at 1 January 2022 1,339 1,339 Charge for the year 39 39 Amortisation of written-off assets - - Balance as at 31 December 2022 1,378 1,378 Carrying amounts As at 1 January 2021 86 86 As at 31 December 2021 68 68 As at 1 January 2022 68 68 As at 31 December 2022 51 51 Amortisation expenses are included in the administrative expenses. As at 31 December 2022, the acquisition cost of fully amortised intangible assets still in use amounted to EUR 1,287 thousand (31 December 2021: EUR 1,166 thousand). 38 2022 10. Inventories thousand EUR As at 31 December 2022 As at 31 December 2021 Raw materials 8,399 7,556 Production-in-progress 3,800 3,836 Finished goods 7,442 5,639 Goods for re-sale 8 7 19,649 17,038 The acquisition cost of the Company’s inventories accounted for at net realisable value as at 31 December 2022 amounted to EUR 7,192 thousand (31 December 2021: EUR 1,107 thousand). The allowance and write down of the inventories are mostly related with the decrease in finished goods value to the net realisable value and the allowance and/or write-off of obsolete and slow- moving inventory. Changes of the allowance and write down for inventories for the year 2022 and 2021 have been included in administrative expenses. Changes in the allowance of inventories (EUR thousand): 2022 2021 Balance at beginning of year 270 219 Additional allowance made 2,944 51 Balance at end of year 3,214 270 Raw materials include raw milk and other materials used in production. Inventories recognised as costs during the year can be specified as follows: thousand EUR 2022 2021 Cost of sales (manufactured goods sold) (175,930) (144,485) Sales, distribution and administrative expenses (consumption of inventories) (3,712) (3,038) Other operating expenses (sold raw materials, spare parts) (56) (20) (179,698) (147,543) Sales and distribution and administrative expenses include consumed fuel and materials, and spare parts. Other operating expenses include cost of re-sold goods and cost of sold raw materials and other inventories. Inventories with the carrying amount of up to EUR 19,649 thousand as at 31 December 2022 (in 2021: EUR 17,038 thousand) have been pledged to secure the bank loans (Note 15). The Company had a part of inventories with the carrying amount of EUR 475 thousand as at 31 December 2022 (31 December 2021: EUR 514 thousand) held in warehouses rented from third parties. 39 2022 11. Trade receivables, prepayments and other receivables Trade receivables thousand EUR 2022 2021 Trade receivables 7,149 6,041 Impairment of receivables (242) (220) 6,907 5,821 For trade receivables ageing see Note 20. The Company’s management uses factoring services for faster collection of trade receivables. As factoring is without recourse on the financial statements trade receivables are disclosed net-off factored amount. Prepayments thousand EUR 2022 2021 Advance payments for delivery of milk 135 124 Other prepayments 27 79 162 203 Less: non-current portion - - 162 203 According to agreements with raw milk suppliers, prepayments for delivered milk shall be covered during the period from 1 to 2 years. A fixed rate interest, varying from 5% to 8%, is calculated on the outstanding prepayment balance. Other receivables thousand EUR 2022 2021 VAT receivable - 141 Deferred expenses 451 348 Loans to management, employees 417 423 868 912 Less: non-current portion (411) (317) 457 595 In 2020, the Company’s Board made a decision to grant an EUR 500 thousand loan to a general director. The loan will be repaid in instalments, the final repayment date of the loan is 1 July 2024. The annual interest rate under the Loan agreement is 5.83% (interest rate of “Loans to euro are households for other purposes – new agreements” announced by the Bank of Lithuania at the time of concluding the loan agreement). 40 2022 12. Cash and cash equivalents thousand EUR 2022 2021 Cash at banks 160 1,670 Cash on hand 112 66 272 1,736 As at 31 December 2022, part of cash at bank, comprising EUR 272 thousand, is pledged to secure the bank loans (as at 31 December 2021: EUR 1,736 thousand). The Company has no restrictions on the use of pledged cash, therefore, it is disclosed as cash and cash equivalents on these financial statements. 13. Equity As at 31 December 2022 and 2021, the issued capital comprised 45,134,419 units of ordinary registered shares at par value of 0.29 EUR each. All the shares are fully paid. There were no changes in issued capital during 2022 and 2021. Holders of ordinary shares have one voting right per share at the shareholders meeting and the right to dividends when they are declared, as well as the right to capital repayment in case of a decrease of a share capital. There is no controlling entity or individual among the shareholders of AB Pieno Žvaigždės. Legal reserve Under Lithuanian legislation, an annual allocation to the legal reserve should amount to at least 5% of the net profit until the reserve makes up 10% of the share capital. The reserve can be used only to cover the accumulated losses. As at 31 December 2022 and 2021, the legal reserve was fully formed and amounted to EUR 1,570 thousand. Other reserves Other reserves are formed on basis of a decision of the General Shareholders’ Meeting on appropriation of distributable profit. These reserves can be used only for the purposes approved by the General Meeting of Shareholders. According to the Law of Stock Companies, the reserves formed by the Company other than the legal reserve if not used or not planned to be used should be restored to retained earnings and redistributed. As at 31 December 2022 and 2021, no other reserves were accounted for. Dividends per share paid in 2021 were 0.14 EUR. There was no dividend payment in 2022. Dividends per share 2022 2021 Number of shares in issue calculated using weighted average method, units ‘000 45,134 45,134 Dividends per share (EUR) - 0.14 Dividends - 6,319 41 2022 14. Grants thousand EUR 2022 2021 Grants as at 1 January 2,343 2,331 Increase during the period 320 12 Grants as at 31 December 2,663 2,343 Amortisation as at 1 January 1,154 995 Charge for the year 167 159 Amortisation as at 31 December 1,321 1,154 Carrying amount as at 1 January 1,189 1,336 Carrying amount at 31 December 1,342 1,189 Less current portion 335 - Total non-current portion 1,007 1,189 Amortisation of the asset-related grants is calculated over the depreciation period of the related non-current assets and is carried in the statement of comprehensive income to reduce the depreciation charge. Amortisation of grants is stated under cost of sales in the statement of comprehensive income. Based on grant agreement signed, the Company has to comply with turnover and profitability covenants. As at 31 December 2022, the Company has breached profitability ratio set in the grant agreement, therefore EUR 335 thousand was presented under current liabilities (Note 19). As at 31 December 2021 the Company complied with the covenants set in grant agreements. 15. Loans and borrowings As at 31 December 2022 and 2021, Company’s loans and borrowings are as follows (thousand EUR): The balance of used syndicated credit agreement (between AB SEB bank and AB Swedbank) as at 31 December 2022 was 16,280 thousand EUR (as at 31 December 2021 - EUR 21,200 thousand). The balance of used syndicated credit limit agreement (between AB SEB bank and AB Swedbank) as at 31 December 2022 was 9,000 thousand EUR (31 December 2021: the credit limit was not used). The balance of used overdraft facility (AB SEB bankas, AB Swedbank, Luminor Bank AS) was 3,146 thousand EUR (31 December 2021: the overdraft was not used). Creditor Maturity date Currency As at 31 December 2022 As at 31 December 2021 AB SEB bankas, AB Swedbank April 2026 (EUR) 16,280 21,200 AB SEB bankas, AB Swedbank July 2023 (EUR) 9,000 - AB SEB bankas July 2023 (EUR) 706 - AB Swedbank July 2023 (EUR) 759 - Luminor Bank AS June 2023 (EUR) 1,681 - Total current liabilities 28,426 21,200 Less: current portion (28,426) (4,920) Total non-current portion - 16,280 42 2022 15. Loans and Borrowings (continued) Reconciliation of movement in interest bearing loans and borrowings thousand EUR 2022 2021 Balance as at January 1 21,200 18,620 Loan received 12,146 16,000 Repayment of borrowings (4,920) (13,420) Loan and factoring interest accrued 896 717 Loan and factoring interest paid (888) (717) Balance as at 31 December 28,434 21,200 All loans and borrowings as at 31 December 2022 and 2021 were denominated in EUR. All loans bear variable interest rates that are calculated as EURIBOR plus fixed margin. Interest rates are restated every 3 or 6 months depending on the loan contract, and for this reason the carrying amounts of the mentioned loans are assumed to approximate their fair values. The bank loans are secured by pledging property, plant and equipment (Note 8), inventories (Note 10), part of current and future cash flows in bank accounts (Note 12) and the right of rent of commercial land. All interest calculated during 2022 and 2021 is recognised in profit or loss of a respective year. Special terms and conditions of the loan agreement As at 31 December 2022 the Company has not complied with capital financing ratio of the syndicated loan agreement. Therefore, syndicated loan amounting to EUR 16,280 thousand was classified as short-term in the Company’s financial statements as at 31 December 2022. For some of the covenants breached during the year (net debt/EBITDA), amendments to the agreements between the Company and the banks were executed and values of covenants ratios were reviewed and adjusted by the end of 2022. As at the date of approval of these financial statements, the Company has signed agreements with the banks regarding the postponement of maturity for short-term credits amounting to EUR 10,146 thousand to 2024 and has received the waivers from the banks that due to non-compliance with the covenant determined in the syndicated loan agreement as at 31 December 2022 banks will not request to repay the long-term part of syndicated loan earlier. As at 31 December 2021, the Company complied with all special covenants of loan agreements. In 2021, amendment to the agreement between the Company and the banks was executed and values of covenants ratios were reviewed and adjusted. Effective interest rates of the loans can be presented as follows: % 2022 2021 Long-term loans 2.7% 2.5% Loan repayment schedules The contractual repayment of loans (subject to reclassifications for the reasons mentioned above) is as follows: thousand EUR 2022 2021 Within a year (Note 20, Liquidity risk) 28,426 4,920 From one to five years - 16,280 Total liabilities 28,426 21,200 43 2022 16. Right-of-use assets and lease liabilities The Company has lease contracts for various assets (buildings and vehicles) used in its operations. The Company’s liabilities under its leases are secured by the lessor’s title to the leased assets. The Company also has certain leases with lease terms of 12 months or less and leases of office equipment with low value. The Company applies the “short-term lease” and “lease of low-value assets” recognition exemptions for these leases. There are no covenants set in the lease agreements. Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period: Buildings Vehicles Total thousand EUR thousand EUR thousand EUR As at 1 January 2021 485 2,274 2,759 Additions 60 265 325 Depreciation charge (152) (912) (1,064) Termination of lease - (5) (5) As at 31 January 2021 393 1,622 2,015 As at 1 January 2022 393 1,622 2,015 Additions 206 422 628 Depreciation charge (224) (840) (1,064) Termination of lease - (37) (37) Reclassification to non-current assets (Note 8) - (115) (115) As at 31 December 2022 375 1,052 1,427 Depreciation expense of right-of-use assets EUR 1,064 thousand is distributed as follows: - The amount of EUR 938 thousand is recorded in Selling, distribution and administrative expenses. - The amount of EUR 126 thousand is recorded in cost of sales. Set out below are the carrying amounts of lease liabilities (included under the caption “Lease liabilities”) and the movements during the period: 2022 2021 thousand EUR thousand EUR As at 1 January 2,068 2,804 Additions 1,054 325 Interest 50 63 Payment (fees) (1,364) (1,061) Payments (interest) (50) (63) As at 31 December 1,758 2,068 Current 1,120 987 Non-current 638 1,081 In 2022 the Company has sold premises in Vilnius to a third party for EUR 2,770 thousand and signed lease agreement for two years for the same premises. The transaction was assessed as sale and leaseback transaction. Related right of used asset in EUR 188 thousand was recognised in proportion to the right of used asset retained, whereas related lease liabilities in EUR 584 thousand - based on present value of discounted future payments. Accordingly, the Company has recognized only the amount of gain that relates to the rights transferred to the buyer (Note 2). 44 2022 16. Right-of-use assets and lease liabilities (continued) The following are the amounts recognised in profit or loss: 2022 2021 thousand EUR thousand EUR Depreciation expenses of right-of-use assets 1,064 1,064 Lease liability interest expenses 50 63 Expenses relating to short-term leases (included in cost of sales) 129 39 Expenses related to low-value assets (included in administrative expenses) 58 56 Total amount recognized in profit or loss 1,301 1,222 17. Employee benefits Employee benefits comprise liabilities to employees leaving the Company on normal retirement date, provisions for anniversary bonuses and severance payments to the management. The present value of these obligations is estimated by the Company at the end of each reporting year. The provision amount equals discounted future payments, taking into account the employee rotation, and relates to the period ended at the last day of the reporting year. thousand EUR Net defined benefit liability 2022 Balance as at January 1 1,212 Retirement benefit 483 Provision for anniversary bonus 38 Severance payments 691 Total non-current employee benefits as at 1 January 1,212 Changes during the year Recognised in profit or loss: Used provision (92) Increase (decrease) in provision during the period 625 Amounts recognised in other comprehensive income - Balance as at 31 December 1,745 Retirement benefit 586 Provision for anniversary bonus 186 Severance payments 973 Total employee benefits provision as at 31 December 1,745 Short term 250 Long term 1,495 The following main assumptions were used for the calculation of benefit obligation in 2022: discount rate 4.2%; inflation of 3%; employees’ turnover of 30% (in 2021: discount rate 0.6%; inflation of 3.00%; employees’ turnover of 39%). Sensitivity of the discount rate, salaries and employee turnover rate change to the defined benefit obligation (thousand EUR): 2022 2021 Discount rate +0,5% (9) (2) Discount rate -0,5% 9 2 Salary change +0,5% 5 2 Salary change -0,5% (5) (2) Employee turnover rate +5% (65) (27) Employee turnover rate -5% 86 36 45 2022 18. Deferred tax assets and liabilities The deferred tax assets and liabilities calculated applying the 15% tax are attributed to the following items: thousand EUR Assets Liabilities Net value 2022 2021 2022 2021 2022 2021 Property, plant and equipment - - 12 14 12 14 Write down of inventories (482) (41) - - (482) (41) Non-utilized investment incentive (1,351) (1,205) - - (1,351) (1,205) Impairment of receivables (36) (33) - - (36) (33) Vacation reserve and employee benefits provision (269) (189) - - (269) (189) Tax loss carried forward (211) - - - (211) - Tax (asset)/liability (2,349) (1,468) 12 14 (2,337) (1,454) Movements in temporary differences during the year can be presented as follows: thousand EUR As at 01/01/2022 Stated in profit or loss Stated in equity As at 31 December 2022 Property, plant and equipment 14 (2) - 12 Write down of inventories (41) (442) - (482) Non-utilized investment incentive (1,205) (145) - (1,351) Impairment of receivables (33) (3) - (36) Vacation reserve and employee benefits provision (189) (80) - (269) Tax loss carried forward - (211) - (211) Tax (asset)/liability (1,454) (883) - (2,337) thousand EUR As at 01/01/2021 Stated in profit or loss Stated in equity As at 31 December 2021 Property, plant and equipment 15 (1) - 14 Write down of inventories (33) (8) - (41) Non-utilized investment incentive (938) (267) - (1,205) Impairment of receivables (70) 37 - (33) Accrued costs (183) (6) - (189) Tax (asset)/liability (1,209) (245) - (1,454) The Company’s management expects to generate sufficient amount of profit during 2023–2024 and to utilise current investment incentive and tax loss carried forward in full, therefore there was no allowance formed for deferred tax asset as at 31 December 2022 and 2021. As of 31 December 2022 and 2021 the Company has recognised deferred tax asset. 46 2022 19. Trade and other payables thousand EUR 2022 2021 Financial instruments Payable to suppliers 13,735 16,481 Other payables 396 390 14,131 16,871 Non-financial instruments Advances received 474 1,000 Vacation reserve 2,617 2,744 Payable taxes and social security 1,252 989 Wages and salaries payable 910 1,004 Grants (Note 14) 335 - 5,588 5,737 19,719 22,608 Less: non-current portion - - 19,719 22,608 20. Financial instruments Included below is a change in liabilities arising from cash flows of financial activities: As at 31 December 2021 Dividends declared Dividends paid Subsidies received Subsidies amortisation Loan received Loans repaid New lease agreements Lease payments Interest expenses accrued Interest paid As at 31 December 2022 Borrowings 21,200 - - - - 12,146 (4,920) - - - - 28,426 Lease liabilities 2,068 - - - - - - 1,054 (1,364) - - 1,758 Interest - - - - - - - - - 960 (952) 8 Subsidies 1,189 - - 320 (167) - - - - - - 1,342 Dividends 365 - (2) - - - - - - - - 363 Total 24,822 - (2) 320 (167) 12,146 (4,920) 1,054 (1,364) 960 (952) 31,897 As at 31 December 2020 Dividends declared Dividends paid Subsidies received Subsidies amortisation Loan received Loans repaid New lease agreements Lease payments Interest expenses accrued Interest paid As at 31 December 2021 Borrowings 18,620 - - - - 16,000 (13,420) - - - - 21,200 Lease liabilities 2,804 - - - - - - 325 (1,061) - - 2,068 Interest - - - - - - - - - 781 (781) - Subsidies 1,336 - - 12 (159) - - - - - - 1,189 Dividends 316 6,319 (6,270) - - - - - - - - 365 Total 23,076 6,319 (6,270) 12 (159) 16,000 (13,420) 325 (1,061) 781 (781) 24,822 Credit, interest rate and foreign exchange risks arise in the course of the Company’s activities carried out on normal business conditions. 47 2022 20. Financial instruments (continued) Credit risk The Company has established a credit policy and credit risk is being monitored on a continuous basis. The Company applies factoring to major trade receivables, which is non-recourse factoring, i.e. the Company does not assume the risk of non-payment by its customers and all amounts received under factoring agreement are immediately accounted for as a decrease in trade debts. As at 31 December 2022, the Company had no customers from which outstanding trade receivables were higher than 10% calculated from total gross trade receivables. As at 31 December 2021, the Company had one customer from which outstanding trade receivables were higher than 10% calculated from total gross trade receivables. The composition of trade receivables is stated in the table below. 2022 2021 Customer No 1 8.5% 10.6% Customer No 2 7.2% 9.8% The carrying amount of financial assets represents the maximum credit exposure, which was as follows at the date of the statement of financial position: thousand EUR Carrying amount 2022 2021 Non-current receivables 411 317 Short term receivables (Note 11) 6,907 5,821 Cash and cash equivalents 272 1,736 7,590 7,874 The maximum credit risk related to amounts receivable (both short-term and long-term) at the reporting date could be distributed per geographic zones in the following way: thousand EUR Carrying amount 2022 2021 1,383 Lithuania 2,063 European Union countries 2,739 2,467 Other countries 2,516 2,077 7,318 5,927 Impairment losses The following impairment losses of financial assets were recognised in profit or loss: Impairment losses of financial assets 2022 2021 Impairment (reversal) of trade receivables 22 (245) (Reversal) of impairment of loans granted - (116) Bad debts write-off 16 70 Total 38 (291) 48 2022 20. Financial instruments (continued) Credit risk (continued) The Company’s exposure to credit risk is mainly determined by individual characteristics of each customer. However, the management considers also the factors that may affect the credit risk base of the customers, including the default risk related to the customer‘s country of operation and etc. Information about expected credit losses of trade receivables as at 31 December 2022 is presented in the table below: thousand EUR Average loss amount As at 31 December 2022 Impairment recognised Total Not past due 0.10% 6,182 (6) 6,176 Overdue 0–30 days 0.10% 699 (1) 698 Overdue 30–60 days 0.10% 31 - 31 Overdue 61–90 days 0.10% 1 - 1 Overdue 90–180 days 50.00% 2 (1) 1 More than 180 days 100.00% 234 (234) - 7,149 (242) 6,907 thousand EUR Average loss amount As at 31 December 2021 Impairment recognised Total Not past due 0.17% 5,177 (9) 5,168 Overdue 0–30 days 0.17% 501 (1) 500 Overdue 30–60 days 0.17% 5 - 5 Overdue 61–90 days 0.17% 122 - 122 Overdue 90–180 days 56.25% 16 (10) 6 More than 180 days 91.08% 220 (200) 20 6,041 (220) 5,821 Although the economic circumstances may have an impact on the recoverability of trade and other receivable amounts, as to the management, the Company is not exposed to material risk to incur losses which would exceed the impairment that has already been recognised. Majority of granted loans are issued to the member of management of the Company. A suretyship agreement is signed between the Company, one of the Company’s managers and one of the Company’s shareholders (Surety), based on which Surety has a liability to redeem all possible losses in case of default. Therefore, according to the management, the credit risk related to the granted loans is minimal, because the potential losses from non-compliance are insignificant. Cash and cash equivalents include cash at bank. The banks are belonging to international financial groups with high credit ratings assigned by international credit-rating agencies, therefore, the related credit risk is minimal. See S&P ratings below: Banks Short-term funding Long-term funding SEB A-1 A+ Luminor A-1 AA- Swedbank A-1 A+ 49 2022 20. Financial instruments (continued) Foreign exchange risk Major currency risks of the Company occur due to the fact that the Company is involved in imports and exports. The Company’s policy is to match cash flows arising from highly probable future sales and purchases in each foreign currency. The Company does not use any financial instruments to manage its exposure to foreign exchange risk other than aiming to borrow in EUR. As at 31 December 2022 and 2021, there are no significant monetary assets and liabilities denominated in other currencies than EUR. Liquidity risk The Company’s liquidity (total current assets/total current payables and current liabilities) and quick ratios ((total current assets – inventories)/total current payables and current liabilities) as at 31 December 2022 were 0.55 and 0.16, respectively (as at 31 December 2021, 0.9 and 0.3, respectively). Actions made by the management to solve the shortage of liquidity are presented in “Basis of preparation” note of these financial statements. The following are the contractual maturities of financial liabilities, including the estimated interest payments (undiscounted): As at 31 December 2022 Carrying amount Contractual net cash flows Up to 6 months 6–12 months 2–5 years thousand EUR Financial liabilities Loans 28,426 29,926 21,444 8,481 - Lease liabilities 1,758 1,805 598 553 654 Trade and other payables (Note 19) 14,131 14,131 14,131 - - 44,315 45,862 36,173 9,034 654 As at 31 December 2021 Carrying amount Contractual net cash flows Up to 6 months 6–12 months 2–5 years thousand EUR Financial liabilities Loans 21,200 22,287 2,708 2,681 16,898 Lease liabilities 2,068 2,129 525 502 1,102 Trade and other payables (Note 19) 16,871 16,871 16,871 - - 40,139 41,287 20,104 3,183 18,000 By the date of signing these financial statements, the Company has signed agreements with the banks regarding postponement of maturity for short-term credits to 2024 and had received the waivers from the banks that due to non-compliance with the covenant determined in the syndicated loan agreement as at 31 December 2022 banks will not request to repay the long-term part earlier. Considering these circumstances, liquidity table above indicates the relevant dates for the repayment of credits based on contractual maturities of financial liabilities as at 31 December 2022 and 2021. 50 2022 20. Financial instruments (continued) Based on subsequently signed agreements with the banks, the factual repayment of loans and credit lines is as follows: Carrying amount Up to 6 months 6–12 months 2–5 years thousand EUR Financial liabilities Loans 28,426 2,960 3,960 21,506 The Company’s policy is to have sufficient liquidity to meet current operating settlements including repayment of financial liabilities (see “Significant Accounting Policies”, “Basis of preparation”). The Company also has a credit facility agreement (Note 15, “Basis of preparation”) to obtain additional financing when needed. Interest rate risk The Company is subject to interest rate cash flow risk because interest-bearing loans are subject to variable interest, related to EURIBOR. As at 31 December 2022 and 2021, the Company did not have any fixed rate financial instruments. Interest rates applied on the Company’s financial instruments as at the reporting date were as follows: thousand EUR Carrying amount 2022 2021 Financial instruments bearing variable interest rate SEB bankas AB, Swedbank AS (long-term loan) 28,426 21,200 28,426 21,200 Factual annual interest rate applied is 2.5%. Cash flow sensitivity analysis for variable interest rate instruments A change of 100 basis points in interest rates on the reporting date would increase (decrease) profit or loss by amounts stated below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. An analysis for 2022 and 2021 is made on the same basis. Sensitivity effect on equity equals to effect on profit (loss) less tax effect. Effect in thousand EUR Profit (loss) for the year 100 bp increase 100 bp decrease As at 31 December 2022 Financial instruments on which variable interest rate was applied (284) 284 As at 31 December 2021 Financial instruments on which variable interest rate was applied (212) 212 51 2022 20. Financial instruments (continued) Fair value of financial instruments In accordance with IFRSs, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As at 31 December 2022 and 2021, the Company had no any financial instruments measured at fair value. The Company’s principal financial assets and liabilities not carried at fair value are granted loans and trade receivables, loans from financial institutions and trade payables accounted for at amortized cost. The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Trade and other receivable and payable amounts, and borrowings. The Company’s management is of the opinion that the carrying values of trade and other receivables, trade and other payables as well as borrowings approximate their fair values, because the major part of trade and other receivables, trade and other payables are short-term while the borrowings are subject to variable interest rates. According to the fair value hierarchy, these financial assets and liabilities are classified under Level 3 fair value. Cash and cash equivalents. Carrying values of cash and cash equivalents are equal to their fair values. According to the fair value hierarchy, the instrument is classified under Level 1 fair value. 21. Purchase commitments As at 31 December 2022 and 2021, the Company did not have any material purchase commitments. 22. Related parties Transactions with related parties can be presented as follows: thousand EUR 2022 2021 Support, sales and interest income Loans receivable Support, sales and interest income Loans receivable SSK VŠĮ (1) 390 - 440 - Management (3) 23 417 26 400 413 417 466 400 Management consists of General Director and Board members. The Company’s Board consists of seven members. (1) AB Pieno Žvaigždės is the sole participant of the basketball club SSK VŠĮ to which the Company’s support is provided. During the year 2022, the Company granted EUR 390 thousand of support (in 2021: EUR 440 thousand). (2) On 11 June 2020, the Company grated a loan of EUR 500 thousand to a General Director. A suretyship agreement is signed between the Company, General Director and one of the Company’s shareholders (Surety), based on which Surety has a liability to redeem all possible losses in case of default (Note 11). Interest rate applied is 5.83%. 52 2022 22. Related party transactions (continued) Remuneration to management is included under the sales, distribution and administrative expenses category Personnel costs (refer to Note 3): thousand EUR 2022 2021 Expenses of remuneration to management (including payroll taxes) 1,646 1,176 Remuneration to management comprises calculated salaries (including annual vacation pay) and social security payable by the Company. In the event of the labour contract termination with the members of management (regardless of the termination reason), the Company shall be liable to pay an employee a compensation of up to 12 average monthly salaries. The Company recognised provision for this compensation (Note 17). thousand EUR 2022 2021 Employee benefits liability to management (including vacation reserve) (Note 17 and Note 19) 974 614 The Audit Committee consists of three members. Remuneration for work in the Audit Committee in 2022 was EUR 15 thousand (including payroll taxes), in 2021 – EUR 15 thousand (including payroll taxes). 23. Contingencies The Company has no contingent liabilities as at 31 December 2022 and 2021. The tax administrator has not performed a full-scope tax investigation of the Company for the period from 2017 until 2022. In accordance with the applicable tax legislation, the tax authorities may at any time perform investigation of the Company’s accounting registers and records for the period of three – five years (depending on tax) preceding the accounting tax period, as well as calculate additional taxes and penalties. The Management of the Company is not aware of any circumstances which would cause calculation of additional tax liabilities. 24. Events after the reporting period The Company on 31 March 2023 has signed agreements with the banks regarding postponement of maturity for short-term credits and overdrafts to January – June 2024 for the amount of EUR 10,146 thousand. The Company on 31 March 2023 has received a bank waiver confirming that due to breached covenant earlier repayment of the non-current loan amounting to EUR 11,360 thousand, other than based on repayment schedule, will be not requested from the Company and no sanctions will be applied. No other significant events after the end of the financial year occurred, which could have material influence on or require disclosure in these financial statements as at and for the year ended 31 December 2022. 53 2022 Vilnius, 2023 AB „Pieno žvaigždės“ Confirmation of the Management Financial statements and the Annual Report for the year 2022 We, Aleksandr Smagin, General Director, and Audrius Statulevičius, Finance Director of AB Pieno Žvaigždės, hereby confirm that, to the best of our knowledge, the Financial Statements prepared in accordance with IFRS, as adopted by the European Union, give true and fair view of the assets, liabilities, financial position, profit or loss and cash flow of the Issuer. Annual report includes a fair review of the development and performance of the business, together with description of major risks and contingencies incurred by the Issuer. General Director / Aleksandr Smagin Finance Director / Audrius Statulevičius 54 2022 Annual report for the year 2022 (The present Report has been prepared for the financial year 2022) GENERAL INFORMATION ABOUT THE ISSUER Key Data on the Issuer Name AB Pieno Žvaigždės Legal and organizational status Stock Company Registration date The Company was registered on 23 December 1998 Company code 124665536 VAT payer‘s code LT246655314 Authorized capital 13,088,981.51 euros, comprising 45,134,419 ordinary registered shares at par value of 0.29 euro each. Address Perkūnkiemio St. 3, LT-12127 Vilnius, the Republic of Lithuania Telephone (+370 5) 246 14 14 Fax (+370 5) 246 14 15 E-mail address info@pienozvaigzdes.lt Internet website www.pienozvaigzdes.lt Type of the Issuer’s main activities The Company’s main activity is production of dairy products. Agreements with intermediaries of public trading in securities The company has an agreement with AB Šiaulių Bankas (the bank license No.: 7, dated 4 February 1992), located at Tilžės St. 149, Šiauliai, the municipality of Šiauliai, telephone (8-5) 2102477 concerning management of securities accounting. Securities admitted to the trading lists of the stock exchanges Ordinary shares of AB Pieno Žvaigždės, were admitted to the official trading list of Nasdaq Baltic Stock Exchange. Type of shares – ordinary registered shares; Number of shares – 45,134,419; Total nominal value – 13,088,981.51 euros; VP ISIN code – LT0000111676. As at 31 December 2022, AB Pieno Žvaigždės, did not acquire any own shares. 1. The objective review of the Company’s state, activity performance and development; the description of the main risk types and uncertainties encountered by the enterprise AB Pieno Žvaigždės, was established on 23 December 1998 after merger of independent milk processing companies operating in Lithuania: AB Mažeikių Pieninė and AB Pasvalio Sūrinė. Later, AB Kauno Pienas and in 2004 AB Panevėžio Pienas were also merged into AB Pieno 55 2022 Žvaigždės. The current structure of the Company enables to specialize production in separate branches and reach the highest efficiency as well as even distribution of raw milk collection capacities in the country. AB Pieno Žvaigždės, is one of the largest milk processing companies in Lithuania, which currently produces more than 500 different products. The Company operates not only in the local market but also exports production to the countries of the European Union, CIS, and Asia. Different types of ferment cheese, whey flour and fresh milk products produced by AB Pieno Žvaigždės, are the main products produced for export which are well known for their irreproachable quality. The products are awarded with quality certificates. The main activity of the Issuer is processing of milk. The mentioned business is risky due to eventual changes in product and raw materials markets, competition as well as eventual legal, political, technological and social changes, which are directly or indirectly related to the Issuer’s business and may have a negative influence on the Issuer’s cash flows and operating results. The main raw material used by the Issuer is milk, the supply of which, due to short validity period, is conditionally limited. Limitations put on supply of raw milk may result in lack of raw milk and an increase in prices for raw milk. These changes may have a negative influence on the cash flows and operating results of the Issuer. The Issuer’s business (especially collection and transportation of milk) is a labour consuming activity. The lack of human resources and an increase in salary costs may negatively affect the operating results of the Issuer. Information on financial risks is presented in the annual financial statements (note 20 of the explanatory information). AB Pieno Žvaigždės, has integrated the quality and environment management system as to the requirements of ISO 9001:2008 and ISO 14001:2004. As of March 2012 the Company is implementing the food safety management system as to ISO 22000:2005, which will be integrated into the existing management system. In December 2013, the affiliate Pasvalio Sūrinė received the certificate confirming the implementation of food safety management system complying with requirement of FSSC 22000. Other three affiliates of AB Pieno Žvaigždės, have finalized the implementation of the food management system and received certificate according to the requirements of FSSC 22000 at the beginning of the year 2015. Assurance of the quality of dairy products, especially of their safety, i.e. harmlessness to consumers, is one of the major tasks of the Company. The functioning food safety system allows to monitor risk factors and important control points that are related to milk production processes, transportation, and consumption and improves the quality control. The Company has prepared, implemented and operate the programs which provide for conditions, measures and behavior rules to prevent biological, chemical, allergic and physical contamination and ensure high quality and safety of the dairy products. During the years 1998–2002 the State Food and Veterinarian Office assigned the affiliates of AB Pieno Žvaigždės, with certificates for export to EU, which allow exporting dairy products bearing identification marks to the EU countries. Primary certification of the quality management system in the Company’s affiliates was performed in 2002. The granted certificates proved that the establishment, documentation and maintenance of the quality management system complied with the ISO 9001 standard. The certification audit in the affiliates and issuance of the certificates was performed by an international certification firm TUV CERT. During 2005–2006, the environment management system complying with the requirements of ISO 14001 standards was integrated into the quality management system, and in February 2007 AB Pieno Žvaigždės, received the certificate confirming the integrated quality and environment management system complying with the requirements of ISO 9001 and ISO 14001 standards operates in the Company. Every year, the certifying firm performs supervision audits of the Company, and every 3 years the recertification takes place. AB Pieno Žvaigždės, aims to continuous improvement and better efficiency of its operations and processes, thus, for the purpose of more efficient use of external audit results for company improvement, in 2013, AB Pieno Žvaigždės, changed the certification firm. As of 2013, external audit of management systems is performed by certifying firm DNV. In 56 2022 order to further improve the quality control, in September 2016, the branch Pasvalio Sūrinė and in September 2017, the branch Mažeikių Pieninė were certified as to the IFS Food Standard requirements. This International Food Standard (IFS) was introduced by the retail trade association IFS Food of Germany, France and Italy to meet the requirements of private retailers in Germany, France, Italy, the Benelux and other countries. A company that complies with the IFS requirements ensures that it can manage the risks throughout all the stages of food production process, can produce a safe and high-quality product. The greatest attention is paid to the products that must meet the expectations of the ultimate customer and, most importantly, the consumer. Meanwhile, in April 2017, the branch Kauno Pienas was granted a BRC certificate (Global Standard for Food Safety). In 1998, the British Retail Consortium (BRC) established and implemented the BRC food technical standard, which is used for evaluation of foodstuff manufacturers. The purpose of the standard is to assist the food processing companies in the production and supply of safe and high quality foodstuff. This ensures consumer confidence in the company’s food safety. Due to clarity and versatility of the BRC standard requirements and control, they are acknowledged globally. The Company’s affiliates Kauno Pienas and Panevėžio Pienas are certified for production of ecological products (ecological yogurts, ecological sour cream, ecological curd and cottage cheese). After each annual review, a public company Ekoagros issues a new certificate on the Company’s compliance with the requirements. Production of ecological dairy products requires adhering to strict requirements set not only for production processes but also for their compound parts. The certified ecological products are marked with the following additional information: certification mark of ecological products, code of the certifying firm, and reference to the growth place of agricultural goods used for production. Certain products of the Company are assigned with specific quality certificates HALAL (whey powder and cream) and KOSHER (whey powder). The Company’s management has undertaken to produce safe and high-quality dairy products that satisfy the clients’ needs and expectations, with low impact on environment to the maximum extent, all being defined in the Company’s policy on the safety and quality of food and environment protection. 2. Analysis of financial and non-financial activity results, information related to environment and personnel issues Key figures, million EUR 2022 12 31 2021 12 31 Turnover 204.6 176.7 Gross profit 28.6 32.2 Profit before tax, interest, depreciation and amortization (EBITDA) 0.5 7.3 Profit (loss) before tax (6.2) 1.0 Investment in property, plant and equipment 2.7 7.1 Average number of employees 1 601 1 711 Raw milk purchased (natural milk), thousand tons 219.4 235.7 Milk purchased as to basic ratios, thousand tons 272.4 292.8 Explanation of key operational indicators: Turnover – all sales of goods and services carried out during the reporting period. More specified analysis of sales is presented in Note 1 to the financial statements. Gross profit is calculated by deducting cost of sales from the total sales of the Company‘s goods and services. Specification of the cost of sales is presented in Note 3 to the financial statements. Profit before tax, interest and amortisation (EBITDA) is calculated as the total of operating profit before the financial activity result, depreciation and amortisation costs. Profit before tax – the total profit earned by the company before calculation of the income tax. The income tax specification is presented in Note 6 to the financial statements. 57 2022 An amount of investments in property, plant and equipment is presented in the manner it is calculated and reflected in the statement of financial position of the Company. Detailed information on the investments (or non-current assets acquisitions) is presented in Notes 8 and 9. The average conditional number of employees is the sum of the average number of full-time and part-time employees recalculated to full-time employees. Quantity of purchased natural milk – actual quantity of purchased raw milk. Quantity of purchased milk according to basic indicators - restatement of actually purchased raw milk quantities as to baseline indicators. Basic rate of milk fat (R) – 3.4%, protein (B) – 3.0%. Formula for calculating the basic quantity of milk: kp = 1 + (Rf-Rb) x k1 + (Bf-Bb) x k2 where: kp – restatement of raw milk quantities into baseline ratio; Rf – fat content in purchased milk, %; Rb – baseline fat of milk, % (3.4); Bf - protein content in purchased milk, %; Bb – baseline protein of milk, % (3.0); k1 - coefficient showing the change in the amount due to change in fat by 1 percent (0.178); k2 - coefficient showing the change in the amount due to change in protein by 1 percent (0.267). Main quality management and environmental principles: • The quality management system is oriented towards a customer, thus a lot of attention is devoted to fulfilling customers’ needs and expectations; • Principles of cleaner production must be adhered to; the aspects that significantly influence the environment must be identified and managed, and proper preparation for emergency situation must be insured; • Management of the Company sets united aims and goals. Heads of the Company create environment where all employees take part in order to achieve aims; • Employees of all levels are involved in Company’s activities; • All activities of the Company, as well as the recourses related to them are managed as a process; • Interconnected processes are defined, understood and managed as a system, and this increases Company’s capacity and efficiency; • Company’s target is constant improvement. Improvement activities are integrated with Company’s strategy and every worker seeks improvement of a product, process and systems; • High-scoring solutions are based on data and information analysis; • A lot of attention is devoted to connections with suppliers. Possession of the ISO 9001 and ISO 14001 certificates proves that the structure, responsibilities and granted authorities are strictly defined in the Company, that processes and procedures are established, major documents are controlled and constantly updated, inspections and control procedures are regularly performed, discrepancies are identified, analyzed and corrected, the prevention of non-conformities and accidents is ensured, and negative impact on the environment is minimized. The Company’s management annually reviews and confirms food safety, quality and environmental policies. 3. The number of the shares acquired by the entity and the entity’s own shares as well as nominal value thereof and a part of the authorized capital made up by these shares During the year 2022, AB Pieno Žvaigždės did not acquire any own shares. 58 2022 4. The number of the own shares acquired and transferred during the reporting period, and the share of the capital, which the mentioned shares constitute During the year 2022, the Company did not acquire nor cancel any own shares. 5. Information about payment for own shares, where they are acquired or transferred against payment During the year 2022, AB Pieno Žvaigždės did not acquire any own shares. 6. Reasons for acquiring the entity’s own shares during the reporting period - 7. Information about branches and representative offices AB Pieno Žvaigždės, comprises four production branches: Branch Kauno Pienas, Taikos pr. 90, LT-51181 Kaunas; Branch Mažeikių Pieninė, Skuodo St. 4, LT-89100 Mažeikiai; Branch Pasvalio Sūrinė, Mūšos St. 14, LT-39104 Pasvalys; Branch Panevėžio Pienas, Tinklų St. 9, LT-35115 Panevėžys. 8. Significant events occurred after the end of the financial year No significant events have occurred after the end of the financial year, except those, which are disclosed in the note 24 of the explanatory note in the financial statements. 9. Operational plans and forecasts of the Company AB Pieno Žvaigždės, expected turnover for the year 2023 about 220 million EUR. 10. Information about research and development activity The Company continuously makes investments and searches for new ways how to ensure a constant and better efficiency growth of its activity. 11. The goals of financial risk management, hedging instruments used for expected transactions on which hedging accounting is applied, and the scope of price risk, credit risk, liquidity risk and cash flows risk The goals of financial risk management are presented in the general part of the explanatory note in the financial statements. The scope of market (price) risk, credit risk, liquidity risk and cash flows risk is presented in the note 20 of the explanatory note in the financial statements. The Company is not using derivative financial instruments. 12. Information about other executive positions held by the company’s supervisory and management members of the board (head of the legal entity (form, name, code, address), member of the governing or supervisory body (form, name, code, address) and key information about their main employers (position held, legal form, name, code, address of the entity). Positions held by the supervisory and boards members and the head of administration in AB Pieno Žvaigždės and other companies: 59 2022 Name, surname Position held in AB Pieno Žvaigždės Position held in other companies Stanislav Kozel Chairman of the supervisory board AD Rem UAB (Jurgio Dobkevičiaus 7, LT-02189 Vilnius, code 110537569) general manager Rolandas Petkus Mamber of the supervisory board Finrosta UAB (Austėjos 37, Vilnius. code 300051777) director; Manpetra UAB (Tilto 27-10 Vilnius. code 302570557) director Rokas Kvaraciejus Mamber of the supervisory board; Deputy COO None Julius Kvaraciejus Chairman of the board; Director for Business Development. None Aleksandr Smagin General Director; Member of the board. None Regina Kvaraciejienė Member of the board; Consultant. None Voldemaras Klovas Member of the board; Deputy General Director. None Gžegož Rogoža Member of the board; Operational Director. None Artiom Smagin Member of the board; Marketing Project Manager. Director of Cats.vc, UAB (Konstitucijos pr. 21A, LT-08130 Vilnius, company code 305376625) Vitalis Paškevičius Member of the board; Director of Logistics Director of UAB Bobketa (company code 302808827, Kelpių st. 25-1, Tarandė, Vilnius dis.) ESEF Reporting Company prepared the set of financial statements for the financial year ended on 31 December 2022 using extended hypertext markup language (XHTML). 60 2022 Corporate Governance Report of the Company for 2022 1. Reference to the applicable corporate governance code Information about compliance with the corporate governance code is presented in the annex to this Corporate Governance Report (Annex No.1). 2. Explanation of deviations from the corporate governance code Information about the reasons of non-compliance with the corporate governance code is presented together with the provisions of the corporate governance code in the annex to this Corporate Governance Report (Annex No.1). 3. Information about the scale of risk and risk management associated with financial statements, risk mitigation measures and internal control system established in the company The Company maintains its financial accounting and prepared its financial statements in accordance with International Financial Reporting Standards, as adopted in EU. Annual financial statements are subject to audit by external auditors, elected by the general shareholders meeting. The Company’s audit committee evaluates independence of the auditors. This procedure ensures relevance and transparency of the data presented in the financial statements of the Company. 4. Information about directly and indirectly governed material shareholdings According to the most recent data (as of 31 December 2022), the total number of the shareholders in the Company was 4,500. The shareholders holding more than 5 per cent of the Company’s authorized capital and votes are as follows: Shareholders Number of shares, units Share of the capital % Share of votes held personally and together with related persons, % Kvaraciejus Julius 7 085 907 15.70% 15.70% / 20.74% Kvaraciejienė Regina 2 275 086 5.04% 5.04% / 20.74% ŽŪKB „Smilgelė“ J. Tumo Vaižganto 8/27-3. Vilnius, company code 2490652 6 677 200 14,79% 14,79% UAB „Agrolitas Imeks Lesma“ Laisvės ave.125, Vilnius, company code 2191855 6 228 459 13,80% 13,80% Vikas Sachar 5 122 022 11.35% 11.35% Klovas Voldemaras 3 142 567 6.96% 6.96% / 8.91% Klovienė Danutė 878 328 1.95% 1.95% / 8.91% 5. Information about transactions with related parties Information about transactions with related parties is 61 2022 6. Information about shareholders holding special control rights and description of such rights There are no shareholder holding special control rights in the Company. 7. Information about all existing limitations on voting rights, such as limitations on voting rights of persons holding a certain percentage or amount of the voting rights, deadlines by which voting rights can be exercised, or systems where the property rights granted by securities are segregated from the securities holder There are no such limitations on the voting rights in the Company. Furthermore, the Company is not aware about any agreements concluded among the shareholders due to which the securities transfer and (or) voting rights may be restricted. There are no shareholders having special control rights in the Company. 8. Information about rules regulating election and replacement of the supervisory and management boards members as well as amendments to the company’s articles of association The Articles of Association of AB Pieno žvaigždės shall be amended and the Supervisory Board and the Management Board of the company shall be elected in accordance with the procedure laid down by the legislation of the Republic of Lithuania. The governing bodies of the Company are the General Meeting of Shareholders, the Supervisory Board, the Management Board and the Chief Executive Officer of the Company. The Supervisory Board are the Company's collegial management body. The Supervisory Board consist of three members for a period of four years. The Supervisory Board elect a Chairman from among its members. The Executive Board are the collegiate management body of the Company. The Management Board of the Company are composed of 7 (seven) members for a period of 4 years. The Management Board elect the Chairman of the Management Board from among its members. Articles of Association can be amended based on a decision of the general shareholders meeting, adopted by a majority of not less than 2/3 of the total votes, except for the exceptions provided for in the Companies Law of the Republic of Lithuania. Upon the decision of the general shareholders meeting to amend the Articles of Association, the whole text of the amended articles is drawn up and signed by the person authorized by the general shareholders meeting. The amended Articles of Association and the decision confirming their replacement shall be submitted by the Company’s Head of Administration within the time limits specified by legislation to the Register of Legal Entities. The amended Articles of Association of the Company shall come into effect only upon their registration with the Register of Legal Entities in accordance with the procedure established by the legislation. 9. Information about the authorities of the supervisory and management board members The authorities of the supervisory and management board members are prescribed in the Companies Law of the Republic of Lithuania. The Articles of Association of the Company do not prescribe any restrictions or additions to the authorities. 62 2022 10. Information about the competence of the general shareholders meeting, shareholder rights and their implementation, if such information is specified in the laws The competence of and procedure of announcement of the General shareholders’ meeting and all other issues related to the activities of the General shareholders’ meeting and their decisions are regulated by the Companies Law of the Republic of Lithuania. 11. Information about the composition of management and supervisory bodies and their committees, spheres of their activity The governing bodies of the Company are the general shareholders meeting, the supervisory board, the management board and the general director. The Supervisory Board is a collegial management body comprised of 3 (three) members. The Supervisory Board members are elected for the 4 years period. The Board elects the Chairman. The Supervisory Board Name, surname Official duties Number shares, units Share of the capital % Term of office from Term of office until Stanislav Kozel Chairman - - 2022 04 28 2026 04 28 Rolandas Petkus Member - - 2022 04 28 2026 04 28 Rokas Kvaraciejus Member 1 348 920 2.99 2022 04 28 2026 04 28 The Management Board is a collegial management body comprised of 7 (seven) members. The Board members are elected for the 4 years period. The Board elects the Chairman. The Management Board Name, surname Official duties Number shares, units Share of the capital % Term of office from Term of office until Julius Kvaraciejus Chairman 7 085 907 15.70 2022 05 04 2026 05 04 Artiom Smagin Member 550 000 1.22 2022 05 04 2026 05 04 Voldemaras Klovas Member 3 142 567 6.96 2022 05 04 2026 05 04 Aleksandr Smagin Member 773 536 1,71 2022 05 04 2026 05 04 Regina Kvaraciejienė Member 2 275 086 5.04 2022 05 04 2026 05 04 Gžegož Rogoža Member 46 150 0.10 2022 05 04 2026 05 04 Vitalis Paškevičius Member - - 2022 05 04 2026 05 04 63 2022 Administration Name, surname Official duties Number shares, units Share of the capital % Aleksandr Smagin CEO 773,536 1.71 Audrius Statulevičius CFO - - The authorities of the chairman of the board are prescribed in the Companies Law of the Republic of Lithuania. The Articles of Association of the Company do not prescribe any restrictions or additions to the authorities. Information about the remuneration to governing bodies as well as amount transactions carried out with members of the governing bodies is disclosed in Note 22 of the explanatory notes to the financial statements. Audit Committee in the Company Name, surname Official duties Number shares, units Share of the capital % From Until Aušra Joniūnienė Chairman - - 2022 04 28 2023 04 28 Gražina Buckiūnienė Member - - 2022 04 28 2023 04 28 Danutė Kairevičienė Member - - 2022 04 28 2023 04 28 Positions of the members of the Audit Committee in AB Pieno Žvaigždės and other companies Name, surname Position in AB Pieno žvaigždėse Positions in other companies Aušra Joniūnienė (independent member) - UAB Gražina Buckiūnienė ir partneriai deputy director Gražina Buckiūnienė (independent member) - UAB Gražina Buckiūnienė ir partneriai director Danutė Kairevičienė Senior Accountant - 12. Description of the variety of policies related to such aspects as e.g. age, sex, education, professional experience, applicable for election of the Company’s chief executive officer, governing and supervisory bodies; objectives and methods of realization of these policies and results for the period. Explanation of the reasons if the variety of policies is not applicable. The variety of policies is not applied in the Company when electing the Company’s chief executive officer, the members of managing and supervisory bodies, since the Company has not 64 2022 adopted such a policy. The main criterion for candidates to supervisory or management bodies is their competence. 13. Information about remuneration of each member of a management body (average salaries paid during the period, segregating bonuses, additions, tantjemes and other benefits). Information about the calculated amounts to management bodies and transactions with the members of the management bodies is disclosed in Remuneration Report below. 14. Information about all agreements among the shareholders (their essence, conditions). The Company is not aware of any agreements among the shareholders that could result in limitations on disposal of securities and (or) voting rights. There are no shareholders with special control rights in the Company. 15. Employees 2022 12 31 2021 12 31 Average number of employees 1 601 1 711 With university education 420 422 With college education 336 349 With secondary education 711 807 With not completed secondary education 134 133 Average number of employees 1 601 1 711 Management 84 86 Specialists 285 291 Workers 1 232 1 334 Average gross salary, EUR Management 3 531 3 083 Specialists 1 533 1 469 Workers 1 241 1 171 65 2022 Remuneration Report (Report is prepared for the financial year 2022) The Management Remuneration Policy of AB Pieno žvaigždės (hereinafter – the Company) was approved by the decision of the Annual General Shareholders Meeting dated 28 April 2022. The Remuneration Policy sets out the principles, structure, forms of remuneration, the basis for awarding additional benefits and the procedure for payment and review of the remuneration, and other requirements that the Company follows when determining and paying the remuneration to the Company’s General Director and the members of the Supervisory and Management Boards of the Company (hereinafter-the management). The Management Remuneration Policy is publicly available on the Company’s website. The table below provides information on the remuneration paid to the General Director and the members of the Supervisory and Boards of the Company in 2022 (in thousand EUR). Position in the Company Position in the Board Full name Remuneration for work in the Board Basic salary Bonuses Contributions into the pension fund Total in 2022 - Chairman of the Supervisory board Stanislav Kozel 40 - - - 40 - Member of the Supervisory board Rolandas Petkus 40 - - - 40 Deputy Executive director Member of the Supervisory board Rokas Kvaracijeus 40 42 7 - 87 General Director Member of the Board Aleksandr Smagin 76 244 106 57 483 Deputy Chief Executive Officer Member of the Board Voldemaras Klovas 76 179 15 67 337 Business Development Director Chairman of the Board Julius Kvaraciejus 76 213 106 67 462 Executive Director Member of the Board Gžegož Rogoža 76 68 12 0 155 Logistics Director Member of the Board Vitalis Paškevičius 76 47 4 0 126 Consultant Member of the Board Regina Kvaraciejienė 76 34 0 0 110 Marketing Project Manager Member of the Board Artiom Smagin 76 51 18 0 145 The table below provides information on the remuneration paid to the Company’s management in the past five years. The remuneration is made of base salary, compensation for work in the Board, variable pay element and contributions into pension funds. The remuneration for 2018 also includes employer’s contributions to the State Social Insurance Fund Board (hereinafter - Sodra). The information covers the period from the date the person was accepted as a member of the Board or commenced the employment with the Company. All amounts are shown in thousands of Euro. Position in the Company Position in the Board Full name 2018 2019 2020 2021 2022 66 2022 - Chairman of the Supervisory board Stanislav Kozel - - - - 40 - Member of the Supervisory board Rolandas Petkus - - - - 40 Deputy Executive director Member of the Supervisory board Rokas Kvaracijeus - - - - 87 General Director Member of the Board Aleksandr Smagin 255 334 258 285 483 Deputy Chief Executive Officer Member of the Board Voldemaras Klovas 224 308 284 300 337 Business Development Director Chairman of the Board Julius Kvaraciejus 224 308 289 300 462 Executive Director Member of the Board Gžegož Rogoža 77 118 142 138 155 Logistics Director Member of the Board Vitalis Paškevičius 26 100 109 115 126 Consultant Member of the Board Regina Kvaraciejienė 34 69 86 89 110 Marketing Project Manager Member of the Board Artiom Smagin 51 80 109 101 145 Remuneration for work in the Audit Committee is paid to the Audit Committee members. The remuneration for 2018 also includes employer’s contributions to Sodra. All amounts are shown in thousands of Euro. Position in the Audit Committee Name, surname 2018 2019 2020 2021 2022 Chairwoman Jūratė Zarankienė 1.7 - - - - Chairwoman Aušra Joniūnienė - 2.4 5.6 5,6 5,6 Member of the Committee Danutė Kairevičienė 1.2 3.3 4.7 4,7 4,7 Member of the Committee Gražina Buckiūnienė - 2.4 4.7 4,7 4,7 The table below provides information on the average annual remuneration of the Company’s employees, a comparison of the remuneration with the Company’s performance and the change in remuneration during the past five years. For comparability purposes, the remuneration for 2018 also include employer’s contributions to Sodra. EUR thousand 2018 2019 2020 2021 2022 The Company’s sales 168,662 170,596 171,061 176,692 204,553 EBITDA 9,175 10,787 14,337 7,259 511 Net profit 2,198 4,110 7,712 1,223 (5,320) The Company’s remuneration fund 24,278 26,845 27,334 28,750 28,902 Average number of employees in full-time units 1,654 1,672 1,696 1,711 1 601 67 2022 Average remuneration of all employees in the Company (for a full year) 14.7 16.1 16.1 17,1 17,2 Change in the average remuneration of all employees in the Company (each year) 15.6% 9.4% 0.4% 6,3% 0,6% Change in the average remuneration of all employees in the Company (over five years) - - - - 17,0% AB Pieno Žvaigždės is not a member of any group of companies, its financial statements are not consolidated. The remuneration to the members of the Boards and General Director is solely paid by one main company. Based on the approved Remuneration Policy, the Board of the Company must set criteria for the calculation, assessment and payment of the variable pay element for the Company’s General Director, subject to the conditions and targets set out in the Remuneration Policy. As these criteria were not set in 2022, no variable pay element was awarded to the Company’s General Director in 2022. AB Pieno Žvaigždės has implemented neither policy on management incentive scheme, nor policy on employee share based scheme. As a result there are no shares or share options granted or offered to the management and other employees of the Company. The Company has no rules for recovering, in part or in full, a variable remuneration from the Company’s management and/or employees. No deviations from the Management Remuneration Policy approved by the Annual General Meeting of Shareholders occurred in 2022. 68 2022 Addendum No. 1 Disclosure by AB Pieno Žvaigždės, of compliance with the Governance Code for the companies listed on Nasdaq Baltic PRINCIPLES/ RECOMMENDATIONS YES/NO /NOT APPLICABLE COMMENTARY Principle 1: General meeting of shareholders, equitable treatment of shareholders, and shareholders’ rights The corporate governance framework should ensure the equitable treatment of all shareholders. The corporate governance framework should protect the rights of shareholders. 1.1. All shareholders should be provided with access to the information and/or documents established in the legal acts on equal terms. All shareholders should be furnished with equal opportunity to participate in the decision-making process where significant corporate matters are discussed. Yes The Company presents forecasts announcing significant events through the centralized information system, however due to competition in the market, the Company cannot publicly disclose certain strategies in advance. 1.2. It is recommended that the company’s capital should consist only of the shares that grant the same rights to voting, ownership, dividend and other rights to all of their holders. Yes Company’s capital consist only of the shares that grant the same rights to voting, ownership, dividend and other rights to all of their holders. 1.3. It is recommended that investors should have access to the information concerning the rights attached to the shares of the new issue or those issued earlier in advance, i.e. before they purchase shares. Yes 1.4. Exclusive transactions that are particularly important to the company, such as transfer of all or almost all assets of the company which in principle would mean the transfer of the company, should be subject to approval of the general meeting of shareholders. Not applicable 1.5. Procedures for convening and conducting a general meeting of shareholders should provide shareholders with equal opportunities to participate in the general meeting of shareholders and should not prejudice the rights and interests of shareholders. The chosen venue, date and time of the general meeting of shareholders should not prevent active participation of shareholders at the general meeting. In the notice of the general meeting of shareholders being convened, the company should specify the last day on which the proposed draft decisions should be submitted at the latest. Yes 69 2022 1.6. With a view to ensure the right of shareholders living abroad to access the information, it is recommended, where possible, that documents prepared for the general meeting of shareholders in advance should be announced publicly not only in Lithuanian language but also in English and/or other foreign languages in advance. It is recommended that the minutes of the general meeting of shareholders after the signing thereof and/or adopted decisions should be made available publicly not only in Lithuanian language but also in English and/or other foreign languages. It is recommended that this information should be placed on the website of the company. Such documents may be published to the extent that their public disclosure is not detrimental to the company or the company’s commercial secrets are not revealed. Yes 1.7. Shareholders who are entitled to vote should be furnished with the opportunity to vote at the general meeting of shareholders both in person and in absentia. Shareholders should not be prevented from voting in writing in advance by completing the general voting ballot. Yes 1.8. With a view to increasing the shareholders’ opportunities to participate effectively at general meetings of shareholders, it is recommended that companies should apply modern technologies on a wider scale and thus provide shareholders with the conditions to participate and vote in general meetings of shareholders via electronic means of communication. In such cases the security of transmitted information must be ensured and it must be possible to identify the participating and voting person. No Currently, the Company does not yet provide such voting opportunities 1.9. It is recommended that the notice on the draft decisions of the general meeting of shareholders being convened should specify new candidatures of members of the collegial body, their proposed remuneration and the proposed audit company if these issues are included into the agenda of the general meeting of shareholders. Where it is proposed to elect a new member of the collegial body, it is recommended that the information about his/her educational background, work experience and other managerial positions held (or proposed) should be provided. Yes 1.10. Members of the company’s collegial management body, heads of the administration 1 or other competent persons related to the company who can provide information related to the agenda of the general meeting of shareholders should take part in the general meeting of shareholders. Proposed candidates to member of the collegial body should also participate in the general meeting of shareholders in case the election of new members is included into the agenda of the general meeting of shareholders. Yes 1 For the purposes of this Code, heads of the administration are the employees of the company who hold top level management positions. 70 2022 Principle 2: Supervisory board 2.1. Functions and liability of the supervisory board The supervisory board of the company should ensure representation of the interests of the company and its shareholders, accountability of this body to the shareholders and objective monitoring of the company’s operations and its management bodies as well as constantly provide recommendations to the management bodies of the company. The supervisory board should ensure the integrity and transparency of the company’s financial accounting and control system. 2.1.1. Members of the supervisory board should act in good faith, with care and responsibility for the benefit and in the interests of the company and its shareholders and represent their interests, having regard to the interests of employees and public welfare. Yes 2.1.2. Where decisions of the supervisory board may have a different effect on the interests of the company’s shareholders, the supervisory board should treat all shareholders impartially and fairly. It should ensure that shareholders are properly informed about the company’s strategy, risk management and control, and resolution of conflicts of interest. Yes 2.1.3. The supervisory board should be impartial in passing decisions that are significant for the company’s operations and strategy. Members of the supervisory board should act and pass decisions without an external influence from the persons who elected them. Yes 2.1.4. Members of the supervisory board should clearly voice their objections in case they believe that a decision of the supervisory board is against the interests of the company. Independent 2 members of the supervisory board should: a) maintain independence of their analysis and decision-making; b) not seek or accept any unjustified privileges that might compromise their independence. Yes 2.1.5. The supervisory board should oversee that the company’s tax planning strategies are designed and implemented in accordance with the legal acts in order to avoid faulty practice that is not related to the long-term interests of the company and its shareholders, which may give rise to reputational, legal or other risks. Yes 2.1.6. The company should ensure that the supervisory board is provided with sufficient resources (including financial ones) to discharge their duties, including the right to obtain all the necessary information or to seek independent professional advice from external legal, accounting or other experts on matters pertaining to the competence of the supervisory board and its committees. Yes 2 For the purposes of this Code, the criteria of independence of members of the supervisory board are interpreted as the criteria of unrelated parties defined in Article 31(7) and (8) of the Law on Companies of the Republic of Lithuania. 71 2022 2.2. Formation of the supervisory board The procedure of the formation of the supervisory board should ensure proper resolution of conflicts of interest and effective and fair corporate governance. 2.2.1. The members of the supervisory board elected by the general meeting of shareholders should collectively ensure the diversity of qualifications, professional experience and competences and seek for gender equality. With a view to maintain a proper balance between the qualifications of the members of the supervisory board, it should be ensured that members of the supervisory board, as a whole, should have diverse knowledge, opinions and experience to duly perform their tasks. Yes 2.2.2. Members of the supervisory board should be appointed for a specific term, subject to individual re- election for a new term in office in order to ensure necessary development of professional experience. Yes 2.2.3. Chair of the supervisory board should be a person whose current or past positions constituted no obstacle to carry out impartial activities. A former manager or management board member of the company should not be immediately appointed as chair of the supervisory board either. Where the company decides to depart from these recommendations, it should provide information on the measures taken to ensure impartiality of the supervision. Yes 2.2.4. Each member should devote sufficient time and attention to perform his duties as a member of the supervisory board. Each member of the supervisory board should undertake to limit his other professional obligations (particularly the managing positions in other companies) so that they would not interfere with the proper performance of the duties of a member of the supervisory board. Should a member of the supervisory board attend less than a half of the meetings of the supervisory board throughout the financial year of the company, the shareholders of the company should be notified thereof. Yes 2.2.5. When it is proposed to appoint a member of the supervisory board, it should be announced which members of the supervisory board are deemed to be independent. The supervisory board may decide that, despite the fact that a particular member meets all the criteria of independence, he/she cannot be considered independent due to special personal or company-related circumstances. Yes 72 2022 2.2.6. The amount of remuneration to members of the supervisory board for their activity and participation in meetings of the supervisory board should be approved by the general meeting of shareholders. Yes 2.2.7. Every year the supervisory board should carry out an assessment of its activities. It should include evaluation of the structure of the supervisory board, its work organization and ability to act as a group, evaluation of the competence and work efficiency of each member of the supervisory board, and evaluation whether the supervisory board has achieved its objectives. The supervisory board should, at least once a year, make public respective information about its internal structure and working procedures. No The Supervisory Board does not publish information on its internal organization and operational procedures. Principle 3: Management Board 3.1. Functions and liability of the management board The management board should ensure the implementation of the company’s strategy and good corporate governance with due regard to the interests of its shareholders, employees and other interest groups. 3.1.1. The management board should ensure the implementation of the company’s strategy approved by the supervisory board if the latter has been formed at the company. In such cases where the supervisory board is not formed, the management board is also responsible for the approval of the company’s strategy. Yes 3.1.2. As a collegial management body of the company, the management board performs the functions assigned to it by the Law and in the articles of association of the company, and in such cases where the supervisory board is not formed in the company, it performs inter alia the supervisory functions established in the Law. By performing the functions assigned to it, the management board should take into account the needs of the company’s shareholders, employees and other interest groups by respectively striving to achieve sustainable business development. Yes 3.1.3. The management board should ensure compliance with the laws and the internal policy of the company applicable to the company or a group of companies to which this company belongs. It should also establish the respective risk management and control measures aimed at ensuring regular and direct liability of managers. Yes 3.1.4. Moreover, the management board should ensure that the measures included into the OECD Good Yes 73 2022 Practice Guidance 3 on Internal Controls, Ethics and Compliance are applied at the company in order to ensure adherence to the applicable laws, rules and standards. 3.1.5. When appointing the manager of the company, the management board should take into account the appropriate balance between the candidate’s qualifications, experience and competence. Yes 3.2 Formation of the management board 3.2.1. The members of the management board elected by the supervisory board or, if the supervisory board is not formed, by the general meeting of shareholders should collectively ensure the required diversity of qualifications, professional experience and competences and seek for gender equality. With a view to maintain a proper balance in terms of the current qualifications possessed by the members of the management board, it should be ensured that the members of the management board would have, as a whole, diverse knowledge, opinions and experience to duly perform their tasks. Yes 3.2.2. Names and surnames of the candidates to become members of the management board, information on their educational background, qualifications, professional experience, current positions, other important professional obligations and potential conflicts of interest should be disclosed without violating the requirements of the legal acts regulating the handling of personal data at the meeting of the supervisory board in which the management board or individual members of the management board are elected. In the event that the supervisory board is not formed, the information specified in this paragraph should be submitted to the general meeting of shareholders. The management board should, on yearly basis, collect data provided in this paragraph on its members and disclose it in the company’s annual report. Yes 3.2.3. All new members of the management board should be familiarized with their duties and the structure and operations of the company. Yes 3.2.4. Members of the management board should be appointed for a specific term, subject to individual re- Yes 3 Link to the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance: https://www.oecd.org/daf/anti-bribery/44884389.pdf 74 2022 election for a new term in office in order to ensure necessary development of professional experience and sufficiently frequent reconfirmation of their status. 3.2.5. Chair of the management board should be a person whose current or past positions constitute no obstacle to carry out impartial activity. Where the supervisory board is not formed, the former manager of the company should not be immediately appointed as chair of the management board. When a company decides to depart from these recommendations, it should furnish information on the measures it has taken to ensure the impartiality of supervision. Yes 3.2.6. Each member should devote sufficient time and attention to the duties of a board member. If a board member attended less than half of the board meetings during the financial year of the company, the company's supervisory board should be informed or, if the company is not formed, the general meeting of shareholders. Yes 3.2.7. In the event that the management board is elected in the cases established by the Law where the supervisory board is not formed at the company, and some of its members will be independent 4 , it should be announced which members of the management board are deemed as independent. The management board may decide that, despite the fact that a particular member meets all the criteria of independence established by the Law, he/she cannot be considered independent due to special personal or company-related circumstances. No The shareholders did not elect any independent members in this tenure of the Board. 3.2.8. The general meeting of shareholders of the company should approve the amount of remuneration to the members of the management board for their activity and participation in the meetings of the management board. Yes 3.2.9. The members of the management board should act in good faith, with care and responsibility for the benefit and the interests of the company and its shareholders with due regard to other stakeholders. When adopting decisions, they should not act in their personal interest; they should be subject to no-compete agreements and they should not use the business information or opportunities related to the company’s operations in violation of the company’s interests. Yes 3.2.10. Every year the management board should carry out an assessment of its activities. It should include evaluation of the structure of the management board, its work organization and ability to act as a group, evaluation of the competence and work efficiency of each member of the management board, and evaluation whether the management board has achieved its objectives. The management board should, at least once a year, make public respective information about its internal structure and working procedures in observance of the legal acts regulating the processing of personal data. No The Management Board does not publish information on its internal organization and operational procedures. 4 For the purposes of this Code, the criteria of independence of the members of the board are interpreted as the criteria of unrelated persons defined in Article 33(7) of the Law on Companies of the Republic of Lithuania. 75 2022 Principle 4: Rules of procedure of the supervisory board and the management board of the company The rules of procedure of the supervisory board, if it is formed at the company, and of the management board should ensure efficient operation and decision-making of these bodies and promote active cooperation between the company’s management bodies. 4.1. The management board and the supervisory board, if the latter is formed at the company, should act in close cooperation in order to attain benefit for the company and its shareholders. Good corporate governance requires an open discussion between the management board and the supervisory board. The management board should regularly and, where necessary, immediately inform the supervisory board about any matters significant for the company that are related to planning, business development, risk management and control, and compliance with the obligations at the company. The management board should inform he supervisory board about any derogations in its business development from the previously formulated plans and objectives by specifying the reasons for this. Yes 4.2. It is recommended that meetings of the company’s collegial bodies should be held at the respective intervals, according to the pre-approved schedule. Each company is free to decide how often meetings of the collegial bodies should be convened but it is recommended that these meetings should be convened at such intervals that uninterruptable resolution of essential corporate governance issues would be ensured. Meetings of the company’s collegial bodies should be convened at least once per quarter. Yes 4.3. Members of a collegial body should be notified of the meeting being convened in advance so that they would have sufficient time for proper preparation for the issues to be considered at the meeting and a fruitful discussion could be held and appropriate decisions could be adopted. Along with the notice of the meeting being convened all materials relevant to the issues on the agenda of the meeting should be submitted to the members of the collegial body. The agenda of the meeting should not be changed or supplemented during the meeting, unless all members of the collegial body present at the meeting agree with such change or supplement to the agenda, or certain issues that are important to the company require immediate resolution. Yes 76 2022 4.4. In order to coordinate the activities of the company’s collegial bodies and ensure effective decision-making process, the chairs of the company’s collegial supervision and management bodies should mutually agree on the dates and agendas of the meetings and close cooperate in resolving other matters related to corporate governance. Meetings of the company’s supervisory board should be open to members of the management board, particularly in such cases where issues concerning the removal of the management board members, their responsibility or remuneration are discussed. Yes Principle 5: Nomination, remuneration and audit committees 5.1. Purpose and formation of committees The committees formed at the company should increase the work efficiency of the supervisory board or, where the supervisory board is not formed, of the management board which performs the supervisory functions by ensuring that decisions are based on due consideration and help organise its work in such a way that the decisions it takes would be free of material conflicts of interest. Committees should exercise independent judgment and integrity when performing their functions and provide the collegial body with recommendations concerning the decisions of the collegial body. However, the final decision should be adopted by the collegial body. 5.1.1. Taking due account of the company-related circumstances and the chosen corporate governance structure, the supervisory board of the company or, in cases where the supervisory board is not formed, the management board which performs the supervisory functions, establishes committees. It is recommended that the collegial body should form the nomination, remuneration and audit committees 5 . No only the audit committee is formed in the company 5.1.2. Companies may decide to set up less than three committees. In such case companies should explain in detail why they have chosen the alternative approach, and how the chosen approach corresponds with the objectives set for the three different committees. Yes 5.1.3. In the cases established by the legal acts the functions assigned to the committees formed at companies may be performed by the collegial body itself. In such case the provisions of this Code pertaining to the committees (particularly those related to their role, operation and transparency) should apply, where relevant, to the collegial body as a whole. Yes The Audit Committee performs its functions, while the functions of the Nomination and Remuneration Committees are partly performed by the Board of the Company 5 The legal acts may provide for the obligation to form a respective committee. For example, the Law on the Audit of Financial Statements of the Republic of Lithuania provides that public-interest entities (including but not limited to public limited liability companies whose securities are traded on a regulated market of the Republic of Lithuania and/or of any other Member State) are under the obligation to set up an audit committee (the legal acts provide for the exemptions where the functions of the audit committee may be carried out by the collegial body performing the supervisory functions). 77 2022 5.1.4. Committees established by the collegial body should normally be composed of at least three members. Subject to the requirements of the legal acts, committees could be comprised only of two members as well. Members of each committee should be selected on the basis of their competences by giving priority to independent members of the collegial body. The chair of the management board should not serve as the chair of committees. Yes 5.1.5. The authority of each committee formed should be determined by the collegial body itself. Committees should perform their duties according to the authority delegated to them and regularly inform the collegial body about their activities and performance on a regular basis. The authority of each committee defining its role and specifying its rights and duties should be made public at least once a year (as part of the information disclosed by the company on its governance structure and practice on an annual basis). In compliance with the legal acts regulating the processing of personal data, companies should also include in their annual reports the statements of the existing committees on their composition, the number of meetings and attendance over the year as well as the main directions of their activities and performance. Yes 5.1.6. With a view to ensure the independence and impartiality of the committees, the members of the collegial body who are not members of the committees should normally have a right to participate in the meetings of the committee only if invited by the committee. A committee may invite or request that certain employees of the company or experts would participate in the meeting. Chair of each committee should have the possibility to maintain direct communication with the shareholders. Cases where such practice is to be applied should be specified in the rules regulating the activities of the committee. Yes 5.2. Nomination committee 5.2.1. The key functions of the nomination committee should be the following: 1) to select candidates to fill vacancies in the membership of supervisory and management bodies and the administration and recommend the collegial body to approve them. The nomination committee should evaluate the balance of skills, knowledge and experience in the management body, prepare a description of the functions and capabilities required to assume a particular position and assess the time commitment expected; 2) assess, on a regular basis, the structure, size and composition of the supervisory and management bodies as well as the skills, knowledge and activity of its members, and provide the collegial body with recommendations on how the required changes should be sought; Not applicable There is no Nomination Committee in the Company 78 2022 3) devote the attention necessary to ensure succession planning. 5.2.2. When dealing with issues related to members of the collegial body who have employment relationships with the company and the heads of the administration, the manager of the company should be consulted by granting him/her the right to submit proposals to the Nomination Committee. Not applicable There is no Nomination Committee in the Company 5.3. Remuneration committee The main functions of the remuneration committee should be as follows: 1) submit to the collegial body proposals on the remuneration policy applied to members of the supervisory and management bodies and the heads of the administration for approval. Such policy should include all forms of remuneration, including the fixed-rate remuneration, performance-based remuneration, financial incentive schemes, pension arrangements and termination payments as well as conditions which would allow the company to recover the amounts or suspend the payments by specifying the circumstances under which it would be expedient to do so; 2) submit to the collegial body proposals regarding individual remuneration for members of the collegial bodies and the heads of the administration in order to ensure that they would be consistent with the company’s remuneration policy and the evaluation of the performance of the persons concerned; 3) review, on a regular basis, the remuneration policy and its implementation. Not applicable There is no Remuneration Committee in the Company 5.4. Audit committee 5.4.1. The key functions of the audit committee are defined in the legal acts regulating the activities of the audit committee 6 . Yes 6 Issues related to the activities of audit committees are regulated by Regulation No. 537/2014 of the European Parliament and the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities, the Law on the Audit of Financial Statements of the Republic of Lithuania, and the Rules Regulating the Activities of Audit Committees approved by the Bank of Lithuania. 79 2022 5.4.2. All members of the committee should be provided with detailed information on specific issues of the company’s accounting system, finances and operations. The heads of the company’s administration should inform the audit committee about the methods of accounting for significant and unusual transactions where the accounting may be subject to different approaches. Yes 5.4.3. The audit committee should decide whether the participation of the chair of the management board, the manager of the company, the chief finance officer (or senior employees responsible for finance and accounting), the internal and external auditors in its meetings is required (and, if required, when). The committee should be entitled, when needed, to meet the relevant persons without members of the management bodies present. Yes 5.4.4. The audit committee should be informed about the internal auditor’s work program and should be furnished with internal audit reports or periodic summaries. The audit committee should also be informed about the work program of external auditors and should receive from the audit firm a report describing all relationships between the independent audit firm and the company and its group. Yes 5.4.5. The audit committee should examine whether the company complies with the applicable provisions regulating the possibility of lodging a complaint or reporting anonymously his/her suspicions of potential violations committed at the company and should also ensure that there is a procedure in place for proportionate and independent investigation of such issues and appropriate follow-up actions. Yes 5.4.6. The audit committee should submit to the supervisory board or, where the supervisory board is not formed, to the management board its activity report at least once in every six months, at the time that annual and half- yearly reports are approved. No Only annual reports are reviewed 80 2022 Principle 6: Prevention and disclosure of conflicts of interest The corporate governance framework should encourage members of the company’s supervisory and management bodies to avoid conflicts of interest and ensure a transparent and effective mechanism of disclosure of conflicts of interest related to members of the supervisory and management bodies. The corporate governance framework should recognize the rights of the stakeholders as established by law and promote active cooperation between the company and its stakeholders in creating the company's well- being, jobs and financial stability. In the context of this principle, the term “interest holders” includes investors, employees, creditors, suppliers, customers, the local community and others with interests in a particular company. Any member of the company’s supervisory and management body should avoid a situation where his/her personal interests are or may be in conflict with the company’s interests. In case such a situation did occur, a member of the company’s supervisory or management body should, within a reasonable period of time, notify other members of the same body or the body of the company which elected him/her or the company’s shareholders of such situation of a conflict of interest, indicate the nature of interests and, where possible, their value. Yes Principle 7: Remuneration policy of the company The remuneration policy and the procedure for review and disclosure of such policy established at the company should prevent potential conflicts of interest and abuse in determining remuneration of members of the collegial bodies and heads of the administration, in addition it should ensure the publicity and transparency of the company’s remuneration policy and its long-term strategy. 7.1. The company should approve and post the remuneration policy on the website of the company; such policy should be reviewed on a regular basis and be consistent with the company’s long-term strategy. Yes 7.2. The remuneration policy should include all forms of remuneration, including the fixed-rate remuneration, performance-based remuneration, financial incentive schemes, pension arrangements and termination payments as well as the conditions specifying the cases where the company can recover the disbursed amounts or suspend the payments. Yes 7.3. With a view to avoid potential conflicts of interest, the remuneration policy should provide that members of the collegial bodies which perform the supervisory functions should not receive remuneration based on the company’s performance. Yes 81 2022 7.4. The remuneration policy should provide sufficient information on the policy regarding termination payments. Termination payments should not exceed a fixed amount or a fixed number of annual wages and in general should not be higher than the non-variable component of remuneration for two years or the equivalent thereof. Termination payments should not be paid if the contract is terminated due to inadequate performance. Yes 7.5. In the event that the financial incentive scheme is applied at the company, the remuneration policy should contain sufficient information about the retention of shares after the award thereof. Where remuneration is based on the award of shares, shares should not be vested at least for three years after the award thereof. After vesting, members of the collegial bodies and heads of the administration should retain a certain number of shares until the end of their term in office, subject to the need to compensate for any costs related to the acquisition of shares. Yes 7.6. The company should publish information about the implementation of the remuneration policy on its website, with a key focus on the remuneration policy in respect of the collegial bodies and managers in the next and, where relevant, subsequent financial years. It should also contain a review of how the remuneration policy was implemented during the previous financial year. The information of such nature should not include any details having a commercial value. Particular attention should be paid on the major changes in the company’s remuneration policy, compared to the previous financial year. Yes 7.7. It is recommended that the remuneration policy or any major change of the policy should be included on the agenda of the general meeting of shareholders. The schemes under which members and employees of a collegial body receive remuneration in shares or share options should be approved by the general meeting of shareholders. Yes Principle 8: Role of stakeholders in corporate governance The corporate governance framework should recognize the rights of stakeholders entrenched in the laws or mutual agreements and encourage active cooperation between companies and stakeholders in creating the company value, jobs and financial sustainability. In the context of this principle the concept “stakeholders” includes investors, employees, creditors, suppliers, clients, local community and other persons having certain interests in the company concerned. 8.1. The corporate governance framework should ensure that the rights and lawful interests of stakeholders are protected. Yes 82 2022 8.2. The corporate governance framework should create conditions for stakeholders to participate in corporate governance in the manner prescribed by law. Examples of participation by stakeholders in corporate governance include the participation of employees or their representatives in the adoption of decisions that are important for the company, consultations with employees or their representatives on corporate governance and other important matters, participation of employees in the company’s authorized capital, involvement of creditors in corporate governance in the cases of the company’s insolvency, etc. Yes 8.3. Where stakeholders participate in the corporate governance process, they should have access to relevant information. Yes 8.4. Stakeholders should be provided with the possibility of reporting confidentially any illegal or unethical practices to the collegial body performing the supervisory function. Yes Principle 9: Disclosure of information The corporate governance framework should ensure the timely and accurate disclosure of all material corporate issues, including the financial situation, operations and governance of the company. 9.1. In accordance with the company’s procedure on confidential information and commercial secrets and the legal acts regulating the processing of personal data, the information publicly disclosed by the company should include but not be limited to the following: Yes 9.1.1. operating and financial results of the company; Yes 9.1.2. objectives and non-financial information of the company; Yes 9.1.3. persons holding a stake in the company or controlling it directly and/or indirectly and/or together with related persons as well as the structure of the group of companies and their relationships by specifying the final beneficiary; Yes 9.1.4. members of the company’s supervisory and management bodies who are deemed independent, the manager of the company, the shares or votes held by them at the company, participation in corporate governance of other companies, their competence and remuneration; Yes 9.1.5. reports of the existing committees on their composition, number of meetings and attendance of members during the last year as well as the main directions and results of their activities; No Some information not fully disclosed 83 2022 9.1.6. potential key risk factors, the company’s risk management and supervision policy; Yes 9.1.7. the company’s transactions with related parties; Yes 9.1.8. main issues related to employees and other stakeholders (for instance, human resource policy, participation of employees in corporate governance, award of the company’s shares or share options as incentives, relationships with creditors, suppliers, local community, etc.); Yes 9.1.9. structure and strategy of corporate governance; Yes 9.1.10. initiatives and measures of social responsibility policy and anti-corruption fight, significant current or planned investment projects. This list is deemed minimum and companies are encouraged not to restrict themselves to the disclosure of information included into this list. This principle of the Code does not exempt companies from their obligation to disclose information as provided for in the applicable legal acts. Yes 9.2. When disclosing the information specified in paragraph 9.1.1 of recommendation 9.1, it is recommended that the company which is a parent company in respect of other companies should disclose information about the consolidated results of the whole group of companies. Not applicable The company is not a parent company. 9.3. When disclosing the information specified in paragraph 9.1.4 of recommendation 9.1, it is recommended that the information on the professional experience and qualifications of members of the company’s supervisory and management bodies and the manager of the company as well as potential conflicts of interest which could affect their decisions should be provided. It is further recommended that the remuneration or other income of members of the company’s supervisory and management bodies and the manager of the company should be disclosed, as provided for in greater detail in Principle 7. No Some information not fully disclosed 9.4. Information should be disclosed in such manner that no shareholders or investors are discriminated in terms of the method of receipt and scope of information. Information should be disclosed to all parties concerned at the same time. Yes 84 2022 Principle 10: Selection of the company’s audit firm The company’s audit firm selection mechanism should ensure the independence of the report and opinion of the audit firm. 10.1. With a view to obtain an objective opinion on the company’s financial condition and financial results, the company’s annual financial statements and the financial information provided in its annual report should be audited by an independent audit firm. Yes 10.2. It is recommended that the audit firm would be proposed to the general meeting of shareholders by the supervisory board or, if the supervisory board is not formed at the company, by the management board of the company. Yes 10.3. In the event that the audit firm has received remuneration from the company for the non-audit services provided, the company should disclose this publicly. This information should also be available to the supervisory board or, if the supervisory board is not formed at the company, by the management board of the company when considering which audit firm should be proposed to the general meeting of shareholders. Yes The audit firm will be paid 1.5 thousand. euros for the translation services. 85 2022 Environmental, Social, and Governance Report for 2022. Prepared in accordance with Nasdaq's ESG Reporting Guide 86 2022 Contents About Us ............................................................................................................................... 87 Management Commitments ............................................................................... 89 Quality .................................................................................................................................. 90 Company Policy .............................................................................................................. 91 Export ..................................................................................................................................... 92 Production ..........................................................................................................................93 Business Risks .................................................................................................................. 94 Environmental Protection ........................................................................................ 96 ESG Compliance ............................................................................................................ 99 Social Data ....................................................................................................................... 102 ESG Compliance ........................................................................................................... 104 Company Management ......................................................................................... 107 ESG Compliance ........................................................................................................... 108 87 2022 About Us We are a modern, advanced Lithuanian company that has been operating successfully for 25 years: We follow deep-rooted dairy production traditions; We are one of the largest dairy processors in the Baltic States; We have four specialised factories; We produce a wide range of products to meet the needs of even the most demanding customers; We export our products to more than 40 countries; We have been awarded for the highest quality both in Lithuania and abroad; Turnover in 2022 amounted to EUR 205 million; We have our own distribution network, including trucks and warehouses; We are developing our own milk collection network covering the entire country; Over the past 10 years, we have invested more than EUR 100 million. 88 2022 AB Pieno Žvaigždės was established in 1998 after the merger of AB Mažeikių Pieninė and AB Pasvalio Sūrinė, two dairy processing companies operating independently in Lithuania. This was followed by the merger of AB Kauno Pienas, as well as AB Panevėžio Pienas in 2004. Today, this structure makes it possible to specialise production at separate branches, achieving the highest level of efficiency and evenly distributing raw milk collection capacity in the country. AB Pieno Žvaigždės is now one of the largest and most modern dairy processing companies in the Baltic States – one that not only takes business aspects into account, but social and environmental aspects as well, and takes responsibility for the short-term and long-term effects of its activities and the consequences of its actions, as a market participant, employer and member of society. AB Pieno Žvaigždės has been operating successfully for 25 years, and not just in the Lithuanian market – it also exports its products to more than 40 countries around the world. Every year, we relish new achievements, awards and excellent consumer ratings. We hold ourselves to the highest standards and strive to anticipate the future needs of the modern consumer – today. Our motto: Natural dairy products for healthy living! Our vision: To be a modern company with strong positions in Lithuanian and foreign markets. Our mission: To anticipate the future needs of the modern consumer – today. 89 2022 Management Commitments According to the approved AB Pieno Žvaigždės quality, food safety and environmental policy, the Company's management undertakes to: Promote respect for the person, the employee, the supplier and the partner; Continuously improve product manufacturing technologies and logistics solutions; Educate and train company employees by constantly improving their qualification, informedness and awareness, updating their knowledge on quality management, environmental management and food safety, and demanding accountability for performance outcome, and to work closely with suppliers and partners; Ensure the sustainable use of natural, energy and other resources, proper and responsible waste management, and adequate preparedness for possible emergencies; Protect the environment at every step, throughout the entire cycle; Comply with the legal requirements that the Company is subject to. The quality, food safety and environmental policy is available on the AB Pieno Žvaigždės website at: https://pienozvaigzdes.lt/lt/content/22-kokybes-politika 90 2022 Quality Top quality is our top priority. We are certified according to all major quality, management and safety systems and standards: BRC EKO IFS KOSHER ISO 9001 ISO 14001 FSSC 22000 HALAL EKOAGROS 91 2022 Company Policy According to the approved AB Pieno Žvaigždės quality, food safety and environmental policy: Use the most advanced production technology and work organisation and logistics solutions which ensure the highest production quality, authenticity, hygiene level and safety; Ensure that 100% of production meets the Company's quality and food safety standards. Apply at least 30% stricter target values for product safety indicators in the Company's quality standards than those stipulated in legislation and/or regulatory documents; Continuously improve the food safety, quality management and environmental management systems; Conserve the environment and prioritise clean technology, both company-wide and throughout the entire cycle; Deliver the final product to the consumer based on the lowest cost principle. The quality, food safety and environmental policy is available on the AB Pieno Žvaigždės website at: https://pienozvaigzdes.lt/lt/content/22-kokybes-politika 92 2022 Export We export our products to more than 40 countries. In 2022, exports accounted for 45% of AB Pieno Žvaigždės revenue. The majority of these countries are in the EU. We aim to grow in export markets every year, so we are constantly looking for innovations, actively interacting with potential partners, and participating in exhibitions. 93 2022 Production Our products are inspired by nature and traditions, and made using the latest technology. We keep up with trends and produce products that meet consumer needs. Healthy lifestyle is one of the most pressing goals in today's society. AB Pieno Žvaigždės was the first company in Lithuania to start producing Bios and Biola organic yoghurt, which appeared on the market in the summer of 2006. The BIOS EKO product line is special in that the balance of nature and human farming activities is not compromised during the production process. Only organic milk is used for production – no herbicides or pesticides are used, and the cows graze freely and are not treated with antibiotics – and the milk and jam in the natural yoghurt are certified organic products. In the interest of consumer well-being, AB Pieno Žvaigždės is constantly updating its products. It is important to us that every product carrying the Pieno Žvaigždės brand is natural and has as many essential nutrients as possible. Due to its high product quality and good customer ratings, AB Pieno Žvaigždės wins various awards every year. 94 2022 Business Risks The Company's core business is milk processing. This business is risky due to potential changes in the markets for raw materials and products, competition, as well as possible legal, political, technological and social developments that are directly or indirectly related to the Company's business, which may adversely affect the Company's cash flows and operating results. The Company's primary raw material is milk, the supply of which is relatively limited due to its short shelf life. Raw material supply restrictions may lead to a shortage of raw materials or an increase in raw material prices. These changes may adversely affect the Company's cash flows and operating results. This risk is managed by diversifying the purchase of raw milk from different (different sized) suppliers in Lithuania and by additionally importing raw milk from other countries (mainly from Latvia and Estonia). The Company's business (especially milk collection and delivery) is a labour-intensive activity. Staff shortages and increases in their salaries may adversely affect the Company's operating results. The risk is managed by investing in modern equipment, which makes it possible to reduce the number of employees. Remuneration and employee motivation systems are constantly reviewed in order to retain existing employees and attract new ones. We keep up with trends and produce products that meet consumer needs. Healthy lifestyle is one of the most pressing goals in today's society. 95 Environmental Protection 96 2022 Environmental Protection AB Pieno Žvaigždės follows sustainable production criteria. In the quality, food safety and environmental policy, the Company's management is committed to ensuring the sustainable use of natural, energy and other resources, proper and responsible waste management, and adequate preparedness for possible emergencies. New products are developed and new technologies are adopted based on these provisions. At AB Pieno Žvaigždės, energy consumption control, water conservation, packaging production control, wastewater control, control of stationary sources of ambient air pollution, waste management, and transport fuel consumption control are conducted, and action plans are drawn up to reduce the use of these resources. Monitoring of significant environmental aspects is conducted at AB Pieno Žvaigždės branches: AB Pieno Žvaigždės only purchased 100% renewable energy from UAB Ignitis. An emission inventory was taken for the AB Pieno Žvaigždės compressor room, boiler room and mechanical workshops on 22 April 2021 at the branch of Mažeikių pieninė, on 21 May 2020 at the branch of Pasvalio sūrinė, on 29 April at the branch of Kauno pienas, on 13 May 2022 at the branch of Panevėžio pienas. An economiser system has been newly installed in the AB Pieno Žvaigždės steam boiler room, allowing for more efficient use of the heat that has already Type of monitoring Industrial wastewater Surface runoff Emissions from stationary sources of ambient air pollution Frequency 1 time per month 4 times per year 1 time per year 97 2022 been produced and, as a result, a reduction in fuel consumption and related emissions. In 2018, renovation of the ice water treatment equipment made it possible to reduce the amount of ammonia used in the system by about 20%. Water reuse is practiced in the production process at AB Pieno Žvaigždės branches. All AB Pieno Žvaigždės branches reuse wash/rinse water. Water is conserved in this way. At the Kauno Pienas, Mažeikių Pieninė and Panevėžio Pienas branches of AB Pieno Žvaigždės, the condensate that forms in the equipment is returned to the steam boiler, and clean rinse water is collected in the CIP stations which is then used for initial rinsing of the equipment during the next cycle. An energy water system has been installed at the Pasvalio Sūrinė branch of AB Pieno Žvaigždės, i.e. a heat exchange between raw milk heating/cooling and whey cooling/heating. The introduction of a milk protein concentration line (UF) has reduced operating costs and reliance on raw materials purchased from other countries. The introduction of an acid whey concentration line has reduced animal by-products, with whey from the production of curd products being concentrated and sent for further processing. The waste generated at AB Pieno Žvaigždės factories is sorted, accounted for in GPAIS, and taken away for recycling or disposal. There are sorting containers in the administrative premises, and the employees at AB Pieno Žvaigždės have contributed to environmental preservation for years by gladly sorting their waste. AB Pieno Žvaigždės consistently invests in environmentally significant energy efficiency improvement projects: Project Year Energy source Economy Steam boiler room modernization KP 2017 Natural gas +9% Heat distribution room modernization KP 2019 Natural gas +3% Steam boiler room modernization PS 2019 Natural gas +10% Compressor room modernization MP 2020 Electricity +10% Sterilizer modernization PP 2020 Natural gas +5% Secondary use of condensate PS 2021 Water +4.5% 98 2022 AB Pieno Žvaigždės constantly invests in more environmentally friendly vehicles. The vehicles used by the company comply with the European Union's Euro IV, Euro V and Euro VI standards, according to which CO2 emissions are minimised: 99 2022 ESG Compliance E1. GhG Emissions The Company does not yet have targets and a procedure for calculating GhG emissions. E2. Emissions Intensity The Company is always looking for ways and taking steps to reduce GhG emissions. E3. Energy Usage In 2022, the Company consumed 488.747 GJ of energy. Energy source Energy GJ 2019 Energy GJ 2020 Energy GJ 2021 Energy GJ 2022 Diff 2022/2021 Natural gas 271,973 262.188 265.605 137.294 -48.3% LPG 395 392 301 239 -20.6% Diesel 127,233 120.830 117.933 222.388 +88.6% Petrol 2,660 2.663 2.885 3.083 +6.9% Heat 495 447 526 394 -25.1% Electricity 116,490 114.924 114.333 125.349 +9.6% Total 519,246 501.443 501.582 488.747 -2.6% E4. Energy Intensity Indicator Unit of measurement Value 2019 Value 2020 Value 2021 Value 2022 Diff 2022/2021 Turnover GJ/EUR 0,003 0,003 0,003 0,002 -0.3% Milk purchased GJ/tonne 2,096 2,019 2,128 2,233 +4.9% Employees GJ/employee 310,554 295,662 293,151 305,276 +4.1% 100 2022 E5. Energy Mix Energy source Unit of measur. Quantity 2019 Quantity 2020 Quantity 2021 Quantity 2022 Diff 2022/2021 Natural gas kWh 75,548,111 72.829.889 73.779.214 38.137.359 -48.3% LPG L 15,802 15.693 12.024 9.542 -20.6% Diesel L 3,322,843 3.155.618 3.079.966 5.807.941 +88.6% Petrol L 79,320 79.400 86.005 91.919 +6.9% Heat kWh 137,581 124.237 146.089 109.407 -25.1% Electricity kWh 32,359,203 31.924.142 31.760.105 34.820.262 +9.6% E6. Water Usage In 2022, the Company consumed 942.989 m3 of water (-11,9% less than in 2021). All water is purchased from water suppliers. E7. Environmental Operations In the Company's approved quality, food safety and environmental policy, the Company is committed to ensuring the sustainable use of natural, energy and other resources, proper and responsible waste management, and adequate preparedness for possible emergencies, and to protect the environment at every step, throughout the entire cycle. E8. Climate Oversight In 2022, the Company had no legal disputes concerning negative impact on the environment. 101 2022 Social Data 102 2022 Social Data Employees are our future The average number of full-time employees at AB Pieno Žvaigždės in 2022 was 1601. Employees are our greatest asset, so we are investing in their continuous growth, safety and well-being: We organise periodic career development and personal competence development courses for employees; All employees are insured against accidents (24/7); In order to incentivise and motivate employees, we provide a significant number of them with health insurance; We have canteens at all of our factories and subsidise staff meals; In our branded stores, employees have the opportunity to buy products with a discount; We give employees gift baskets of the Company's products for various occasions; 103 2022 Science and Education We are constantly commissioning research and participating in its development at Lithuanian and foreign institutes. The KTU Food Institute is our long-standing partner. Consumer awareness is important to us, so we support the educational events and lectures organised for children at schools by the Dietetic Society about the principles of healthy eating. 104 2022 ESG Compliance S1. CEO Pay Ratio Remuneration policy of executives approved by decision of the Annual General Meeting of Shareholders in 2022: https://www.nasdaqbaltic.com/statistics/lt/issuer_documents/downl oad/1477 CEO pay ratio versus the employee average salary was 20,3. S2. Gender Pay Ratio In 2022, the ratio of salaries between men and women was 1,12. The difference was due to the employees' qualifications, competences and positions rather than their gender. S3. Employee Turnover In 2022, employee turnover at the Company was 29.8%. S4. Gender Diversity At the end of 2022, 50% of the Company's total employees were women. Women held 43% of senior positions, 69% of entry-level and mid-level positions, and 43% of various skilled worker positions. S5. Temporary Worker Ratio In 2022, an average of 5% of the people working at the Company had fixed-term employment contracts. 105 2022 S6. Non-Discrimination According to the code of ethics and business conduct approved by the Company, we do not tolerate any form of direct or indirect discrimination or instruction to discriminate on the basis of gender, race, nationality, language, origin, social status, belief, convictions or views, age, sexual orientation, disability, ethnic origin or religion. S7. Injury Rate In 2022, the Company registered 25 injuries (all of them were mild injuries). This amounts to 0.02 injury per employee. S8. Global Health & Safety According to the rules of procedure and the code of ethics and business conduct approved at the Company, every employee at the Company is provided with safe and healthy working conditions, regardless of the type of employment contract, the workplace, the work environment, the nature of work, the duration of the working day (shift), or the employee's nationality, race, nationality, gender, sexual orientation, age, social status, and political or religious beliefs. S9. Child and Forced Labour According to the code of ethics and business conduct approved by the Company, we respect and guarantee the human rights enshrined in international and Lithuanian legislation, and the Company does not tolerate harassment, psychological violence, bullying or abuse of a position that may take any form. We do not employ persons below the minimum age stipulated by the laws of the Republic of Lithuania. We do not use forced or compulsory labour. 106 2022 Company Management 107 2022 Code of Business Ethics In carrying out its activities, AB Pieno Žvaigždės takes economic and social aspects into account, and takes responsibility for the effects of its activities and the consequences of its actions, as a market participant, employer and member of society. The code of business ethics approved by the Company sets out the basic operating principles on which the business is based and which the Company's employees follow in building and maintaining relationships with customers, suppliers, partners and public authorities, as well as in interacting with each other. The Company's business ethics are based on the following principles: Respect for human rights and freedoms; Safe working conditions; Honesty and transparency; Avoiding conflicts of interest; Confidentiality. In order to ensure the effectiveness of business ethics, the Company's employees can submit reports of breaches of this code as well as questions related to this code of business ethics to their immediate supervisor, the human resources department or management, or put them in special anonymous boxes at the Company’s manufacturing branches. The management of the Company is responsible for implementation of the provisions of this code and for not tolerating actions that do not comply with the provisions of this code. 108 2022 ESG Compliance G1. Board Diversity One of the Company's board seats (of seven) is occupied by a woman. This represents 14% of the Company's board members. G2. Board Independence There is no separation between the CEO and the board in the Company. There are no independent members on the board, but there is a supervisory board. G3. Incentivised Pay All employees receiving financial incentives work in accordance with the AB Pieno Žvaigždės quality, food safety and environmental policy. G4. Collective Bargaining A work council is elected at the Company. G5. Supplier Code of Conduct The Company does not have an approved supplier code of conduct. G6. Ethics and Anti-Corruption According to the code of ethics and business conduct approved by the Company, our relations with employees, customers, partners and the state are based on honesty and transparency. We believe that honest partnerships allow us to build lasting and meaningful relationships. We comply with legislation governing labour relations. We only compete on the market in accordance with legislative requirements, and we do not 109 2022 engage in prohibited anti-competitive activities. We strongly oppose any form of corruption, bribery and extortion. In conducting business, we do not provide, offer or promise any undue reward to individuals for the purpose of directly or indirectly influencing individuals in performing their functions and taking decisions. In order to ensure transparency and objectivity in our cooperation with suppliers and business partners, we do not accept any commercial offers which cast doubt on their legitimacy. We openly set out the requirements and evaluation criteria for potential partners, and define the principal terms of cooperation in the contracts: the price, quality, and delivery and payment terms of the product or service. The company pays the taxes established by the state, settles accounts with employees in a transparent manner, and encourages other market participants to act in a transparent manner as well. The Company cooperates with public authorities and provides them with information in accordance with legislative requirements. Having regard to item 12 of the Description of the Procedure for Ensuring the Introduction of Internal Channels for Reporting Irregularities and the Functioning Thereof approved by Resolution No 1133 of 14 November 2018 of the Government of the Republic of Lithuania on Implementation of the Republic of Lithuania Law on Whistleblower Protection, the Company makes the information below regarding the competent person and the whistleblowing procedure publicly available on its website. The entire procedure is available on our website: https://pienozvaigzdes.lt/lt/content/23-praneseju-apsauga G7. Data Privacy The Company has an approved employee data retention policy and rules for applying implementing measures for the employee data retention policy. The Company also adheres to the privacy policy, which establishes the protection of personal data and privacy for its customers, website visitors and other individuals. The privacy policy is available on the Company's website: https://pienozvaigzdes.lt/lt/content/18-privatumo-politika 110 2022 G8. ESG Reporting This is the Company's third Environmental, Social and Governance Report. The report was prepared in accordance with the ESG Reporting Guide: (https://www.nasdaq.com/ESG-Guide) The company according to EU taxonomy reporting is not eligible at the moment, and will begin reporting as soon as it will be included into the mandatory list. G9. Disclosure Practices At present, the Company only prepares an Environmental, Social and Governance Report in accordance with Nasdaq's ESG Reporting Guide. G10. External Assurance The Company's Environmental, Social and Governance Report is not audited by third parties. 111 2022 Address: Perkūnkiemio st. 3, LT-12127, Vilnius, Lithuania Telephone number (+370 5) 246 14 14 E-mail info@pienozvaigzdes.lt Website www.pienozvaigzdes.lt