Annual Report (ESEF) • Apr 7, 2023
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All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of the accompanying documents takes precedence over this translation. Table of contents Company details 1 Management’s statement on the consolidated and parent company’s separate annual financial statements 2 Consolidated and separate statements of financial position 3 Consolidated and separate statements of profit or loss 4 Consolidated and separate statements of other comprehensive income 5 Separate statement of changes in equity 6 Consolidated statement of changes in equity 7 Consolidated and separate statements of cash flows 8 Notes to the consolidated and separate financial statements 10 Annual report of “Vilvi Group” for 2022 76 AB Vilkyškių pieninė corporate governance report form 114 Independent auditor‘s report 135 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 1 Company details VILKYŠKIŲ PIENINĖ AB Telephone: +370 441 55330 Company code: 277160980 Registered office address: P. Lukošaičio g. 14, Vilkyškiai, LT-99254 Pagėgiai Country of incorporation: Lithuania municipality, Lithuania Board Gintaras Bertašius (Chairman) Sigitas Trijonis Rimantas Jancevičius Vilija Milaševičiutė Andrej Cyba Linas Strėlis Management Gintaras Bertašius, General Manager Vaidotas Juškys, Executive Director Sigitas Trijonis, Technical Director Rimantas Jancevičius, Director for Purchasing Raw Materials Arvydas Zaranka, Production Director Vilija Milaševičiutė, Director for Economic and Financial Affairs Rita Juodikienė, Director for Corporate Governance and Quality Auditor PricewaterhouseCoopers UAB Banks SEB Bankas AB Swedbank AB Luminor Bank AB Šiaulių Bankas AB OP Corporate Bank plc Lithuania branch AS "Citadele banka" Lithuania branch SC "Citadele bank" VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 2 Management’s statement on the consolidated and parent company’s separate annual financial statements On this day the management has discussed and authorised for issue the following set of separate and consolidated annual financial statements. The separate and consolidated annual financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. In our opinion, the accounting policies applied are appropriate and the separate and consolidated annual financial statements give a true and fair view, in all material respects, in accordance with International Financial Reporting Standards as adopted by the European Union. We recommend that the General Meeting of Shareholders approve the separate and consolidated annual financial statements. Vilkyškiai, 7th April 2023 Gintaras Bertašius General Manager (The document has been signed by a qualified electronic signature) Vilija Milaševičiutė Director for Economic and Financial Affairs (The document has been signed by a qualified electronic signature) VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 3 Consolidated and separate statements of financial position EUR ‘000 GROUP At 31 December Note COMPANY At 31 December 2022 2021 Assets 2022 2021 - - Investment property 12,14 6,527 6,780 48,365 48,771 Property, plant and equipment 12 13,052 11,090 1,082 1,108 Right-of-use assets 12,13 1,050 1,129 4,175 4,186 Intangible assets 15 5 14 - - Investments in subsidiaries 16 10,918 10,984 111 288 Non-current amounts receivable 17 1,008 1,116 - 304 Deferred income tax assets 26 - 470 53,733 54,657 Non-current assets 32,560 31,583 25,493 17,625 Inventories 18 9,188 8,046 17,875 14,271 Trade and other receivables 19 27,795 18,600 741 622 Prepayments 20 596 456 621 799 Cash and cash equivalents 21 325 579 44,730 33,317 Current assets 37,904 27,681 98,463 87,974 Total assets 70,464 59,264 Equity 3,463 3,463 Share capital 3,463 3,463 3,301 3,301 Share premium 3,301 3,301 2,068 2,174 Reserves 1,400 1,445 40,749 30,510 Retained earnings 39,096 28,841 49,581 39,448 Equity attributable to owners of the Company 22 47,260 37,050 321 133 Non-controlling interest - - 49,902 39,581 Equity 22 47,260 37,050 Liabilities 12,978 17,050 Borrowings 23 1,499 2,285 399 403 Lease liabilities 23 374 414 3,743 4,125 Government grants 24 520 685 42 53 Trade and other payables 25 - - 790 - Deferred income tax liabilities 518 - ___ _ _ _ 17,952 21,631 Non-current liabilities 2,911 3,384 9,238 6,420 Borrowings 23 3,483 3,941 314 290 Lease liabilities 23 309 301 344 179 Income tax payable 146 - 20,713 19,873 Trade and other payables 27 16,355 14,588 30,609 26,762 Current liabilities 20,293 18,830 48,561 48,393 Liabilities 23,204 22,214 98,463 87,974 Total equity and liabilities 70,464 59,264 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. General Manager (The document has been signed by a qualified electronic signature) Gintaras Bertašius Director for Economic and Financial Affairs (The document has been signed by a qualified electronic signature) Vilija Milaševičiutė 7 April 2023 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 4 Consolidated and separate statements of profit or loss EUR ‘000 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. GROUP COMPANY 2022 2021 EUR ’000 Note 2022 2021 234,083 156,045 Revenue 1 288,643 196,442 -209,809 -138,849 Cost of sales 2 -271,448 -187,411 24,274 17,196 Gross profit 17,195 9,031 313 228 Other operating income 3 11,592 10,959 -4,149 -3,167 Distribution expenses 6 -3,843 -2,987 -5,427 -4,301 Administrative expenses 7 -3,855 -3,064 - -2,749 Impairment of goodwill 15 - - -179 -118 Other operating expenses 4 -6,951 -2,908 89 45 Other gain (loss) - net 5 -245 419 14,921 7,134 Results of operating activities 13,893 11,450 127 209 Finance income 193 208 -868 -1,187 Finance costs -353 -464 -741 -978 Finance costs, net 9 -160 -256 14,180 6,156 Profit (loss) before income tax 13,733 11,194 -1,481 -656 Income tax 10 -1,134 -420 12,699 5,500 Profit (loss) for the reporting year 12,599 10,774 Attributable to: 12,511 5,536 Shareholders of the Company 12,599 10,774 188 -36 Non-controlling interest - - 12,699 5,500 Profit (loss) for the reporting year 12,599 10,774 1.05 0.46 Basic and diluted earnings per share (in EUR) 11 1.05 0.90 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 5 Consolidated and separate statements of other comprehensive income EUR ‘000 GROUP COMPANY 2022 2021 EUR ‘000 2022 2021 12,699 5,500 Profit (loss) for the reporting year 12,599 10,774 Other comprehensive income - - Items that will not be reclassified to profit or loss - - - - Items that are or may be subsequently reclassified to profit or loss - - - - Other comprehensive income for the year, net of income tax - - 12,699 5,500 Total comprehensive income for the year 12,599 10,774 Attributable to: 12,511 5,536 Shareholders of the Company 12,599 10,774 188 -36 Non-controlling interest - - 12,699 5,500 Total comprehensive income for the year 12,599 10,774 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 6 Separate statement of changes in equity EUR ‘000 Note Share capital Share premium Revaluation reserve Legal reserve Retained earnings Total Balance at 1 January 2021 22 3,463 3,301 1,167 346 18,954 27,231 Profit (loss) for the period - - - - 10,774 10,774 Other comprehensive income - - - - - - Total comprehensive income for the year - - - - 10,774 10,774 Depreciation, write-off of revalued assets - - -68 - 68 - Transactions with owners recognised directly in equity Dividends - - - - -955 -955 Total transactions with owners recognised directly in equity - - - - -955 -955 Balance at 31 December 2021 22 3,463 3,301 1,099 346 28,841 37,050 Balance at 1 January 2022 22 3,463 3,301 1,099 346 28,841 37,050 Profit (loss) for the period - - - - 12,599 12,599 Other comprehensive income - - - - - - Total comprehensive income for the year 12 - - - - 12,599 12,599 Depreciation, write-off of revalued assets - - -45 - 45 - Transactions with owners recognised directly in equity Dividends - - - - -2,389 -2,389 Total transactions with owners recognised directly in equity - - - - -2,389 -2,389 Balance at 31 December 2022 22 3,463 3,301 1,054 346 39,096 47,260 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 7 Consolidated statement of changes in equity Equity attributable to owners of the Company EUR ‘000 Note Share capital Share premium Revalua- tion re- serve Legal reserve Retained earnings (deficit) Total Non- con- trolling inte- rest Total equity At 1 January 2021 22 3,463 3,301 2,001 346 25,809 34,920 53 34,973 Comprehensive income for the year Net profit (loss) - - - - 5,536 5,536 -36 5,500 Other comprehensive income - - - - - - - - Total comprehensive income for the year - - - - 5,536 5,536 -36 5,500 Depreciation, write-off of revalued assets - - -173 - 173 - - - Transactions with owners recognised directly in equity: Dividends - - - - -955 -955 - -955 Change in fair value of put option - - - - -53 -53 - -53 Total transactions with owners recognised directly in equity: - - - - -1,008 -1,008 - -1,008 Changes in the Group not resulting in a loss of control Non-controlling interests on acquisition of subsidiary - - - - - - 116 116 Total transactions with owners - - - - -1,008 -1,008 116 -892 At 31 December 2021 22 3,463 3,301 1,828 346 30,510 39,448 133 39,581 At 1 January 2022 22 3,463 3,301 1,828 346 30,510 39,448 133 39,581 Comprehensive income for the year Net profit (loss) - - - - 12,511 12,511 188 12,699 Other comprehensive income - - - - - - - - Total comprehensive income for the year - - - - 12,511 12,511 188 12,699 Depreciation, write-off of revalued assets - - -106 - 106 - - - Transactions with owners recognised directly in equity: Dividends - - - - -2,389 -2,389 - -2,389 Change in fair value of put option - - - - 11 11 - 11 Total transactions with owners recognised directly in equity - - - - -2,378 -2,378 - -2,378 At 31 December 2022 3,463 3,301 1,722 346 40,749 49,581 321 49,902 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 8 Consolidated and separate statements of cash flows EUR ‘000 GROUP COMPANY 2022 2021 EUR ‘000 2022 2021 Cash flows from operating activities 12,699 5,500 Profit (loss) for the year 12,599 10,774 Adjustments for: 4,742 4,813 Depreciation of property, plant and equipment 1,793 1,804 - - Loss (gain) on change in fair value of investment property 280 -375 11 16 Amortisation of intangible assets 9 13 -394 -590 Amortisation and write-off of grants -165 -188 2,593 37 Change in inventory write-down allowance 521 37 - 2,749 Impairment of goodwill - - -28 -11 Loss (gain) from disposal and write-off of property, plant and equipment 29 -71 - - Losses (gain) from the transfer of investments 2 - - - Other operating income -3,931 -7,373 1,481 656 Income tax expenses 1,134 420 741 978 Finance costs, net 160 256 21,845 14,148 12,431 5,297 -10,461 -5,755 Change in inventories -1,663 -1,648 177 -62 Change in non-current amounts receivable 108 -890 -4,159 -3,396 Change in trade and other receivables and prepayments -8,070 -5,984 365 2,794 Change in trade and other payables 2,881 5,993 7,767 7,729 5,687 2,768 -393 -687 Interest paid -178 -321 -222 - Income tax paid - - 7,152 7,042 Net cash flows generated from operating activities 5,509 2,447 Cash flows from investing activities -3,958 -1,474 Payments for acquisition of property, plant and equipment -3,384 -750 - -17 Payments for acquisition of intangible assets 1 -7 83 400 Proceeds from sale of property, plant and equipment 8 341 - - Proceeds from the disposal of investments 63 - - - Acquisition of ownership interest in subsidiary - -271 -800 -2,125 Loans granted -800 -2,955 13 51 Government grants - - - - Dividends received 1,000 2,571 1,361 1,044 Repayment of loans 1,361 1,044 - -271 Outflow of cash to acquire subsidiary, net of cash acquired - - -3,301 -2,392 Net cash flows generated used in investing activities -1,751 -27 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 9 Consolidated and separate statements of cash flows (continued) EUR ‘000 GROUP Note COMPANY 2022 2021 EUR ‘000 2022 2021 Cash flows from financing activities 6,911 4,475 Proceeds from borrowings 23 669 1,951 -8,165 -7,058 Repayments of borrowings 23 -1,913 -2,500 -386 -535 Lease payments -379 -533 -2,389 -914 Payment of dividends -2,389 -914 -4,029 -4,032 Net cash flows generated from (used in) financing activities -4,012 -1,996 -178 618 Net increase (decrease) in cash and cash equivalents -254 424 799 181 Cash and cash equivalents as at 1 January 579 155 621 799 Cash and cash equivalents as at 31 December 21 325 579 The notes on pages 10 to 73 are an integral part of these separate and consolidated financial statements. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 10 Notes to the consolidated and separate financial statements General information The following companies are part of the Vilvi Group (hereinafter the “Group”): • VILKYŠKIŲ PIENINĖ AB, a parent company (hereinafter the “Parent” or the “Company”); • Modest AB, a subsidiary (hereinafter the “subsidiary Modest AB” or “Modest AB”); • Kelmės Pieninė AB, a subsidiary (hereinafter the “subsidiary Kelmės Pieninė AB” or “Kelmės Pieninė AB“). • Kelmės Pienas UAB, a subsidiary of Kelmės pieninė AB (hereinafter the “Kelmės Pienas UAB). • Pieno Logistika AB, a subsidiary of Kelmės pienas UAB (hereinafter “Pieno Logistika AB”). • Baltic Dairy Board SIA, a subsidiary (hereinafter the “subsidiary Baltic Dairy Board SIA“ or “Baltic Dairy Board SIA“). VILKYŠKIŲ PIENINĖ AB was established in 1993. The Parent has no branches or representative offices. VILKYŠKIŲ PIENINĖ AB is a Lithuanian company listed on Nasdaq OMX Vilnius AB stock exchange. As at 31 December 2022, the Company’s shareholder structure was as follows: Shareholder Number of shares held Nominal value, EUR Total value, EUR Swisspartners Versicherung AG Zweigniederlassung Österreich 6,994,316 0.29 2,028,352 Multi Asset Selection Fund 2,035,729 0.29 590,361 Mr. Gintaras Bertašius 219,364 0.29 63,616 Other minority shareholders 2,693,591 0.29 781,141 Total capital 11,943,000 0.29 3,463,470 As at 31 December 2021, the Company’s shareholder structure was as follows: Shareholder Number of shares held Nominal value, EUR Total value, EUR Swisspartners Versicherung AG Zweigniederlassung Österreich 6,067,206 0.29 1,759,490 Multi Asset Selection Fund 2,035,729 0.29 590,361 Mr. Gintaras Bertašius 927,110 0.29 268,862 Other minority shareholders 2,912,955 0.29 844,757 Total capital 11,943,000 0.29 3,463,470 The Company’s ultimate controlling party is Mr Gintaras Bertašius and persons related to him. As at 31 December 2022, Gintaras Bertašius held 219,364 shares of Vilkyškių pieninė AB granting 60.4 percent of voting rights at the general meeting of shareholders (a joint life insurance policy has been drawn up with insurance company Swisspartners Versicherung AG Zweigniederlassung Österreich, which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). As at 31 December 2021, he held 927,110 shares of Vilkyškių pieninė AB granting 58.55 percent of voting rights at the general meeting of shareholders (since April 2018, ownership rights to 6,067,206 shares (50.8 per cent of total share capital and votes) of Vilkyškių pieninė AB have been taken over by Swisspartners Versicherung AG Zweigniederlassung Österreich). VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 11 Notes to the consolidated and separate financial statements General information (continued) The Parent’s core line of business is production and sale of different types of cheese. The Company also produces and sells whey products, raw milk and cream. Business activities are carried out at the main production facilities located in Vilkyškiai, Pagėgiai region municipality. The Parent also has a milk distribution centre located in Eržvilkas, Jurbarkas region municipality. The Parent controls the subsidiary Modest AB, which is engaged in milk processing and production of milk products. The Company owns 99.7% of shares with voting rights in the subsidiary Modest AB. Modest AB produces Mozzarella cheese, blue-veined cheese, other cheese products. The Parent also controls the subsidiary Kelmės Pieninė AB, which is engaged in whey processing and production of dried milk products. The Company owns 100% of shares with voting rights in the subsidiary Kelmės Pieninė AB. Before 28 February 2021, Kelmės Pieninė AB was engaged in two types of activities: production of fresh milk products; whey processing and production of dried milk products. For the purpose of ensuring a more efficient operation of those two types of activities, at the end of 2020 Kelmės Pieninė AB founded the subsidary Kelmės Pienas UAB, which acquired the business of production of fresh milk products (curd, yougurt, sour cream, cream, butter) as continued business activities and a complex. Kelmės Pieninė AB transferred to Kelmės Pienas UAB the agreements, assets and related rights and obligations solely pertaining to fresh milk products. The transfer was completed on 28 February 2022. Kelmės Pieninė AB owns 100% of shares of Kelmės Pienas UAB. . Kelmės Pienas UAB controls the subsidiary Pieno Logistika AB engaged in lease of buildings. Kelmės Pienas UAB owns 58.9% of shares with voting rights in the subsidiary Pieno Logistika AB (31 December 2021: Vilkyškių Pieninė AB owned 58.9% of shares of Pieno Logistika AB). Since 1 April 2021, the group also includes the subsidiary Baltic Dairy Board SIA, which is engaged in production of milk products with high value-added dairy ingredients (GOS), as well as in milk and whey separation, which involves separation of proteins and lactose, resulting in two different types of products. The Company owns 70% of shares with voting rights in the subsidiary Baltic Dairy Board SIA (31 December 2022 and 31 December 2021). As at 31 December 2022, the Group had 884 (31 December 2021: 867) employees. As at 31 December 2022, the Company had 462 (31 December 2021: 440) employees. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 12 Notes to the consolidated and separate financial statements Basis of preparation Statement of compliance The Group’s consolidated and the Company’s separate financial statements (hereinafter the “financial statements” or the “consolidated and separate financial statements”) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (hereinafter “the EU”). Pursuant to the Law on Companies of the Republic of Lithuania, the annual financial statements prepared by management have to be approved by the General Meeting of Shareholders. The shareholders of the Company have a statutory right to approve these financial statements or not to approve and to require preparation of a new set of the annual financial statements. These financial statements include the consolidated financial statements of the Group and the separate financial statements of the Company. Measurement basis The financial statements have been prepared on a historical cost basis except for: • buildings that are a part of property, plant and equipment and measured at fair value, less any subsequent accumulated depreciation and impairment losses; • buildings that a part of investment property and measures at fair value. Functional and presentation currency All amounts in these financial statements are presented in the euros (EUR) and they have been rounded to the nearest thousand. Foreign currency transactions Foreign currency transactions are translated into the euros using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in a foreign currency are translated in the euros using the exchange rate prevailing at the date of the preparation of the statement of financial position. All foreign currency transactions have been translated in accordance with the provisions of the Law on Accounting using the exchange rate of the euro against the foreign currency prevailing at the date of the transaction. Foreign exchange differences arising from the settlement of such transactions are recognised in the statement of profit or loss. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated into the euros using the official exchange rate prevailing at the date of the transaction. Consolidation Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of the subsidiaries are included in the Group’s consolidated financial statements from the date on which the Group obtains control, and continue to be included until the date that such control ceases All intra-group transactions and balances are eliminated for the purpose of the consolidated financial statements. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 13 Notes to the consolidated and separate financial statements Basis of preparation (continued) Consolidation (continued) The acquisition method is used to account for business combinations. The consideration transferred in return for the acquisition of the subsidiary is the fair value of the assets transferred, the liabilities assumed and the Group‘s equity interest. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed when incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Under the acquisition method, the Group recognises the non-controlling interest in the acquiree either at the fair value or at the non-controlling interest’s proportionate share of net assets in the acquiree. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of net assets in the acquiree, the difference is recognised directly in the statement of profit and loss as negative goodwill. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 14 Notes to the consolidated and separate financial statements Summary of significant accounting policies The accounting policies, set out below, have been consistently applied by the Group and the Company to all the periods presented in these financial statements, except for those which have changed due to the IFRS amendments and the new IFRS, as presented in the section below ‘Effect on financial statements of application of new standards and amendments and new interpretations to standards’. Property, plant and equipment Property, plant and equipment, excluding buildings, is stated at acquisition cost, less subsequent accumulated depreciation and impairment losses. Costs related to the acquisition of the assets are included in the acquisition cost. The cost of assets produced internally by the Parent and the subsidiaries comprises the cost of materials, direct labour costs and indirect labour costs allocated on a proportionate basis. When parts of the items of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. The net book value of the item of property, plant and equipment of the Group and the Company includes the cost of the replaced parts of such asset, only when it is probable that future economic benefits associated with the item will flow to the Group and the Company and the cost of the item can be measured reliably. Other expenses related to property, plant and equipment are recognised in the statement of profit or loss during the reporting period in which they are incurred. Buildings are recorded at revalued amounts, being their fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Revaluations are carried out at regular intervals, i.e. at least every five years, to ensure that the carrying amount of buildings does not materially differ from their fair value at the date of the preparation of the statement of financial position. The fair value of buildings is determined by certified independent property valuers. Depreciation is calculated on a straight-line basis over the estimated useful lives of assets. The revaluation reserve for buildings is transferred to retained earnings in proportion to the depreciation of revalued buildings. In case of revaluation, when the estimated fair value of an asset is lower than its net book value, the net book value of the asset is immediately reduced to the fair value and such impairment is recognised as expenses. However, such impairment is deducted from the previous revaluation increase of the asset accounted for in the revaluation reserve, to the extent it does not exceed the amount of such increase. In case of revaluation, when the estimated fair value of an asset is higher than its net book value, the net book value of the asset is increased to the fair value and such increase is recorded in the revaluation reserve of property, plant and equipment under the shareholder’s equity in the statement of other comprehensive income. Depreciation is recognised on a straight-line basis to write down the cost of the asset over its useful life, less its residual amount. Depreciation is recognised in the statement of profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives are as follows: Buildings 8-40 years Plant and machinery 4-20 years Other assets 3-15 years VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 15 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Property, plant and equipment (continued) The useful lives, residual values and depreciation methods are reviewed regularly to ensure that the deprecation period and other estimates are consistent with the expected pattern of economic benefits from property, plant and equipment. Investment property Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the Company, is classified as investment property. Investment property also includes property that is being constructed or developed for future use as investment property. Investment property is measured initially at its cost, including related transaction costs and where applicable borrowing costs. After initial recognition, investment property is carried at fair value. Investment property that is being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value. Investment property under construction is measured at fair value if the fair value is considered to be reliably determinable. Investment properties under construction for which the fair value cannot be determined reliably, but for which the Company expects the fair value of the property will be reliably determinable when construction is completed, are measured at cost less impairment until the fair value becomes reliably determinable or construction is completed - whichever is earlier. It may sometimes be difficult to determine reliably the fair value of the investment property under construction. In order to evaluate whether the fair value of an investment property under construction can be determined reliably, management considers the following factors, among others: • the provisions of the construction contract; • the stage of completion; • whether the project/property is standard (typical for the market) or non-standard; • the level of reliability of cash inflows after completion; • the development risk specific to the property; Fair value is based on active market prices, adjusted, if necessary, for differences in the nature, location or condition of the specific asset. If this information is not available, the Company uses alternative valuation methods, such as recent prices on less active markets or discounted cash flow projections. Valuations are performed as at the financial position date by professional valuers who hold recognised and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. These valuations form the basis for the carrying amounts in the Company’s financial statements. The fair value of investment property reflects, among other things, rental income from current leases and other assumptions market participants would make when pricing the property under current market conditions. Subsequent expenditure is capitalised to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the cost of the replacement is included in the carrying amount of the property, and the fair value is reassessed. Changes in fair values are recognised in the statement of profit and loss. Investment properties are derecognised when they have been disposed of. Where the Company disposes of a property at fair value in an arm’s length transaction, the carrying value immediately prior to the sale is adjusted to the transaction price, and the adjustment is recorded in the income statement within net gain from fair value adjustment on investment property. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 Notes to the consolidated and separate financial statements Investment property (continued) If an investment property becomes owner occupied, it is reclassified as property, plant and equipment. Its fair value as at the date of reclassification becomes its cost for subsequent accounting purposes. If an item of owner-occupied property becomes an investment property because its use has changed, any difference resulting between the carrying amount and the fair value of this item as at the date of transfer is treated in the same way as a revaluation under IAS 16. Any resulting increase in the carrying amount of the property is recognised in the income statement to the extent that it reverses a previous impairment loss, with any remaining increase recognised in other comprehensive income and increased directly to equity in revaluation surplus within equity. Any resulting decrease in the carrying amount of the property is initially charged in other comprehensive income against any previously recognised revaluation surplus, with any remaining decrease charged to the income statement. Where an investment property undergoes a change in use, such as commencement of development with a view to sell, the property is transferred to inventories. A property’s deemed cost for subsequent accounting as inventories is its fair value at the date of change in use. 16 Intangible assets Intangible assets with a finite useful life that are acquired by the Parent Company and its subsidiaries are stated at cost less accumulated amortisation and impairment losses. Amortisation is recorded in the statement of profit or loss on a straight-line basis over the useful life of 3 years. Goodwill Goodwill is an asset representing the future economic benefits arising from assets that cannot be separated from other assets and recognised on a business combination. Goodwill arising on acquisition of subsidiaries is recognised as intangible assets. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses (tested on an annual basis). For the purposes of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Cash-generating units are operations of Modest AB relating to production and sale of cheese and cheese products, and operations of Kelmės Pienas UAB relating to production and sale of fresh milk products. Where goodwill is a portion of a cash-generating unit, and a portion of an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the carrying amounts of the operation disposed of and the portion of the cash-generating unit retained. Non-controlling interest Non-controlling interest is the equity in a subsidiary not attributable directly or indirectly to the Parent. Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. Adjustments to non-controlling interest not resulting in a loss of control are based on a proportionate amount of the controlled net assets of the subsidiary. Non-controlling interest in Baltic Dairy Board SIA is measured at fair value. The Group decided to recognise non-controlling interest in proportion to its share of net identifiable assets acquired. Summary of significant accounting policies (continued) VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 17 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Non-controlling interest (continued) Non-controlling interest’s put option The Group has signed a written put option, under which the non-controlling shareholders of Baltic Dairy Board SIA have a right to sell the shares of Baltic Dairy Board SIA to AB Vilkyškių Pieninė AB as from 1 April 2023. The transaction price was determined with reference to the fair value estimated by an independent expert at the date of execution. The terms do not provide a present ownership interest in the shares subject to the put. The amount that may become payable upon exercising the put option is initially recognised at the present value of redemption amount and accounted for in the Parent’s liabilities and equity. For as long as the put option remains not exercised, the non-controlling interest is recognised at the end of each reporting period, whereas the changes in liabilities relating to non-controlling interest’s put option are accounted for in the Parent’s equity. In case the put option remains not exercised, the liability is derecognised and the Parent‘s equity is adjusted accordingly. Investments in subsidiaries Investments in the subsidiaries in the separate financial statements are stated at acquisition cost, less impairment losses. Inventories Inventories comprise finished products, work in progress, and goods and materials. Inventories are initially measured at acquisition or production cost. The production cost includes direct labour costs, costs of materials and conversion costs incurred during the production period. Production costs also include a systematic allocation of fixed and variable production overheads. At the end of the reporting period inventories are measured at the lower of cost or net realisable value, less any write-downs. Net realisable value is the estimated selling price, less the estimated costs of completion and selling expenses. Write-downs of inventories to net realisable value are included in the cost of sales. The utilisation of inventories is determined using the first-in, first-out (FIFO) method. Financial assets and liabilities The Group and the Company classify their financial assets into the following categories: • financial assets subsequently measured at fair value (either at fair value through other comprehensive income or at fair value through profit or loss), and the Group and the Company have no such assets; • financial assets measured at amortised cost. The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. The Group reclassifies debt instruments when and only when its business model for managing those assets changes. All regular way purchases and sales of financial assets are recognised on trade-date, the date on which the group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 18 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Financial assets and liabilities (continued) On initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Financial assets measured at amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Trade receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are generally due for settlement within 30 to 60 days, and therefore, are all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional. The Group and Company holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. The carrying amounts of the trade receivables include receivables which are subject to a factoring arrangement. Under this arrangement, Group and Company has transferred the relevant receivables to the factor in exchange for cash and is prevented from selling or pledging the receivables. Under factoring with recourse agreements, Group and Company has retained late payment and credit risk. The Group and Company therefore continues to recognise the transferred assets in their entirety in its statement of financial position. The amount repayable under the factoring agreement is presented as secured borrowing. The Group and Company considers the held to collect business model to remain appropriate for these receivables and hence continues measuring them at amortised cost. Under factoring without recourse agreements Group and Company does not retain any risks, therefore these assets are derecognised from statement of financial position and at year-end there is no balances outstanding. Impairment The Group and Company assess on a forward-looking basis the expected credit losses associated with its debt instruments measured at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the trade receivables and contract assets. To measure the expected credit losses, trade and other receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the profiles of receivables from sale of goods over the period of 48 months before 31 December 2022 or 31 December 2021, respectively, and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to the amounts due. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, failure of a debtor to engage in a repayment plan with the Group, and contractual payments past due more than 180 days. Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 19 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Trade and other payables These amounts represent outstanding liabilities for goods and services provided to the Group prior to the end of financial year. The amounts payable are unsecured and are usually paid within 30 days after their recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. Borrowing costs General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Other borrowing costs are expensed in the period in which they are incurred. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest rate method. Costs incurred in relation to collateralisation of borrowing facilities are recognised as transaction costs of the borrowings to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the related costs are capitalised as a prepayment for liquidity services and amortised over the period of the loan facility to which it relates. Financial assets or financial liabilities at fair value through profit or loss Financial assets and financial liabilities at fair value through profit or loss are recorded at fair value in the statement of financial position. Gains or losses on reassessment are recognised directly in profit or loss. Interest income and expense and dividends on such investments are recognised as interest income and dividend income or interest expenses, respectively. Interest-bearing amounts Interest-bearing amounts are recognised initially at fair value, plus transaction costs. Subsequently, interest- bearing amounts are recognised at amortised cost using the effective interest method. Reversal of impairment An impairment loss on amounts receivable carried at amortised cost is reversed, if, in a subsequent period, the increase in the recoverable amount can be related to an event occurring after the impairment loss was recognised. The impairment loss is reversed to the extent that the carrying value of the asset does not exceed its value that would have been determined had no impairment loss been recognised. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 20 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Fair value measurement The fair value of investments traded in an active market is based on quoted market prices at the reporting date. If the market for a financial asset is not active (and for unlisted securities), the Group and the Parent establish fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis or other valuation models. In determining the fair value of assets or liabilities the Group and the Company use as much as possible inputs that are observable in the market. A fair value hierarchy categorises into three levels the inputs to valuation techniques used to measure fair value: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); Level 3: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). 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. In those cases, 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 Group and the Company recognise the amounts transferred within the fair value hierarchy levels at the end of the reporting period in which the change occurred. Fair values measured for the purposes of assessment and (or) disclosure are calculated using the below presented methods. When applicable, further information on assumptions used in determining fair values is disclosed in the note related to specific assets or liabilities. Derecognition of financial assets and financial liabilities Financial assets A financial asset (or a part of a financial asset or part of a group of similar financial assets) is derecognised when: − the rights to receive cash flows from the asset have expired; or − the Group and the Company have retained the right to receive cash inflows from the asset, but have assumed an obligation to pay them in full without material delay to a third party under a “pass through” arrangement; or − the Group and the Company have transferred their rights to receive cash flows from the asset and/or (a) have transferred all the risks and rewards of the asset, or (b) have neither transferred nor retained all the risks and rewards of the asset, but have transferred control of the asset. Where the Group and the Company have transferred their rights to receive cash flows from the asset and have neither transferred nor retained all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Parent’s/subsidiary’s continuing involvement in the asset. Financial liabilities A financial liability is derecognised when the obligation under the liability is settled, cancelled or expires. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 21 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and cash at bank. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, demand deposits in bank accounts and other short-term liquid investments. Bank overdrafts are recognised in the statement of financial position as current borrowings and are not attributed to cash equivalents in the statement of cash flows as usually their balance is negative. Interest and dividends received are attributed to cash flows of investing activities, interest paid are attributed to cash flows from operating activities, whereas dividends paid – to cash flows from financing activities. Impairment Non-financial assets Non-financial assets, except for inventories and deferred tax assets, are reviewed for impairment whenever events or changes in circumstance indicate that the asset may be impaired. If such an indication exists, the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the higher of its value in use and its fair value, less costs to sell. The asset’s value in use is calculated by discounting future cash flows to their present value using a pre-tax discount rate reflecting current market assumptions regarding time value of money and risk specific to the asset concerned. For the purpose of impairment testing, assets that cannot be tested individually are grouped into the smallest group of assets that generates cash inflows through the asset’s continuous use and is independent from cash flows generated by other assets or the groups of assets (“the cash generating unit” or “CGU”). Whenever the net book value of an asset exceeds its recoverable amount, an impairment loss is recognised in the statement of profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of goodwill allocated to the unit and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased. Reversal is accounted for in the statement of profit or loss under the same caption as impairment loss. An impairment loss allocated to goodwill is not reversed. Provisions Provisions for liabilities are recognised in the statement of financial position when there are commitments as a result of past events and it is probable that additional funds will be required to settle these obligations. If the impact is material, provisions are estimated by discounting future cash flows to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. Leases Where the Group/Company is a lessee The Group and the Company lease out buildings, motor vehicles, plant and machinery, and other assets. The Group‘s term of lease ranges up to 8 years, but they contain an extension option. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 22 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Leases (continued) As the management determines the lease term, it considers all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease. The extension option is included in the lease term only when it is reasonably certain that the lease will be extended (or will not be terminated). The lease terms and conditions are negotiated individually, however, there are no non-standard terms and conditions. The lease contracts do not stipulate any financial performance covenants that the Group and the Company would be required to comply with. The lease liabilities arising from a lease are measured by a lessee at the commencement date on a present value basis, including the following payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date • amounts expected to be payable by the group under residual value guarantees • payments of penalties for terminating the lease, if the lease term reflects the group exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee’s incremental borrowing rate is used. The interest rate implicit in the lease is the interest rate as a result of which the present value of the lease payments and unguaranteed residual value is equal to the sum of fair value of leased assets and any other initial direct costs of the lessor. The lease liability is measured at amortised cost using the effective interest rate, which represents the discount rate used in discounting of lease payments. Interest expenses relating to the lease liability are allocated over the lease period and recognised through profit or loss. Right-of-use assets are initially measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs incurred by a lessee; and • restoration costs. Subsequently the right-of-use assets are recognised by the lessee at cost less accumulated depreciation and impairment losses. When the title of ownership is transferred to the lessee at the end of the lease period or when the price of the right-of-use assets shows that the lessee will exercise the buy option, then the lessee estimates depreciation of right-of-use assets from the commencement date to the end of the useful life of the leased assets. Otherwise, the lessee estimated depreciation for right-of-use assets from the commencement date to the end of the useful life of the right-of-use assets or the end of the lease period, depending on which occurs earlier. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases that, at the commencement date, have a lease term of 12 months or less, and that do not contain a purchase option. Low-value assets mostly represent milk products. Operating lease -– where the Group/Company is a lessee Operating lease payments are recognised as expenses in profit or loss using the straight-line method over the lease term. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 23 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Dividends Dividends are recorded as a liability or an amount receivable in the period in which they are declared. Government grants Grants received as a compensation for the costs incurred are recognised in profit or loss over the period in which the costs are incurred. Government and the European Union grants and third-party compensations received in the form of non-current assets or intended for the purchase of non-current assets are considered as asset-related grants. Grants are initially recorded at the fair value of the asset received and subsequently amortised. Amortisation costs of grants are included in the cost of production or administrative expenses as well as in the depreciation charge of property, plant and equipment for which the grant was received. Revenue The Group and Company manufactures and sells a range of cheese and milk products in the wholesale market. Sales are recognised when control of the products has been transferred, being when the products are delivered to the wholesaler, the wholesaler has full discretion over the channel and price to sell the products, and there is no unfulfilled obligation that could affect the wholesaler’s acceptance of the products. Delivery occurs when the products have been shipped to the specific location, the risks of obsolescence and loss have been transferred to the wholesaler, and either the wholesaler has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group and the Company has objective evidence that all criteria for acceptance have been satisfied. Income from transport services is recognised in the period in which the services are rendered. The goods are sometimes sold with retrospective volume discounts based on aggregate sales over a month or a 12-months period. Revenue from these sales is recognised based on the price specified in the contract, net of the estimated volume discounts. Accumulated historical experience is used to estimate and provide for the discounts, using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A refund liability is recognised for expected volume discounts payable to customers in relation to sales made until the end of the reporting period. It is considered that there is no significant financing component, since customers are offered a credit period of 30 days to settle their obligations, which is in line with the market practice. Receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. The Group and Company does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. Contract liabilities are recognised and presented as advance amounts received. Cost of sales Cost of sales consists of direct and indirect costs, including depreciation and remuneration expenses incurred in order to achieve the turnover set for a respective year. Expenses are recognised on an accrual basis and matching principle. Distribution and administrative expenses Distribution and administrative expenses comprise expenses related to transportation, administrative staff, coordination activities, office supplies, etc. and also comprise depreciation and amortisation expenses. Operating expenses are recognised on an accrual basis. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 24 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Other operating income and expenses Other operating income and expenses comprise gain or loss from the disposal of non-current assets as well as other income and expenses not directly related to the principal activities of the Group and the Company. Finance income and costs Income and expenses of financing activities include interest receivable and payable, realised and unrealised foreign exchange gain and loss related to borrowings and financial liabilities denominated in foreign currencies. Interest income is recognised in profit or loss using the effective interest method. Interest expenses on leases is recognised in profit or loss using the effective interest method. Employee benefits Short-term employee benefits are recognised as current expenses of the period in which the services have been rendered. Such employee benefits include wages and salaries, social security contributions, extra pays, paid vacation, contributions to pension funds, and other benefits. There are no long-term employee benefits. The Group and the Company pay social security contributions to the state Social Security Fund (the Fund) on behalf of its employees based on the defined contribution plan in accordance with the local legal requirements. A defined contribution is a plan under which the Group and the Company pay fixed contributions into the Fund and will have no legal or constructive obligations to pay further contributions if the Fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior period. Social security contributions are recognised as expenses on an accrual basis and included in payroll expenses. The Company also pays contributions to Pillar III investment fund on behalf of its employees based on the defined contribution plan. The contributions are recognised as expenses on an accrual basis and included in general and administrative expenses. Income tax Income tax comprises current and deferred tax. Income tax is recognised in the statement of profit or loss, except to the extent that it relates to line items recognised directly in equity or through other comprehensive income, in which case the tax is recognised in equity through other comprehensive income. Current income tax is calculated in accordance with the tax legislation, using the tax rates enacted and effective as at the reporting date in the countries where the Company and its subsidiaries generate revenue. A standard income tax rate of 15% is applied to companies registered in the Republic of Lithuania. Tax losses, except for those arising on disposal of securities and/or derivative financial instruments, can be carried forward for unlimited period, provided the entity continues the operations, which generated these tax losses. Tax losses available for carry forward cannot exceed 70% of income for the tax period, calculated by deducting non- taxable income, allowable deductions and limited allowable deductions. The procedure of carrying forward losses arising on disposal of securities and/or derivative financial instruments has not changed, therefore, these losses can be carried forward for the period of 5 years and can only be used to reduce taxable income earned from transactions of the similar nature. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 25 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Income tax (continued) The Group companies operating in the Republic of Latvia pay income tax upon distribution of profit for the reporting year. Income tax rate of 20% is payable on distributed profit (calculated dividends, dividend equivalent income and conditional dividends) and conditional distributed profit (non-operating expenses, etc.). Income tax rate of 20% is applied to gross taxable amount. Gross tax base for the tax period is calculated as net tax base (distributed profit and conditionally distributed profit) divided by 0.8 coefficient. Deferred income tax is calculated on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts reported in the financial statements. Deferred income tax is not calculated on temporary differences arising on initial recognition of an asset or liability, which at the time of the transaction affect neither accounting nor taxable profit. Deferred income tax is determined using the tax rates that are expected to apply when the related temporary differences are expected to reverse and that are known at the date of the preparation of the statement of financial position. Deferred income tax assets are recognised only when the Group and the Company and expect that future taxable profit will be available against which tax assets can be utilised. Deferred income tax is reviewed at each date of the statement of financial position and reduced by the amount of tax assets that will not be utilised. Earnings per share The Group and the Company disclose information on basic and diluted earnings per share. Basic earnings per share are calculated by dividing profit or loss attributable to the shareholders of the Parent by the weighted average number of ordinary shares during the period. Diluted earnings per share are calculated by adjusting profit or loss attributable to the shareholders, and the weighted average number of ordinary shares during the year, for the effects of all potential ordinary shares. During the reporting periods the Group and the Company did not issue potential ordinary shares. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board making strategic decisions, and the General Manager. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including intra-segment revenues and expenses. The Group has three reportable segments established on the basis of different groups of products (cheese, cheese products and other, dry milk products, fresh milk products). Impact on the financial statements of adoption of new standards, amendments and interpretations Except for the changes described below, accounting policies applied in the current financial year are consistent with those of the previous financial year. The accounting policies set out below have been consistently applied by the Group and the Company to all the periods presented in these consolidated financial statements. a) The following amendments to standards have been endorsed by the EU and effective from 1 January 2022 The Company adopted the following amendments to standards with effect from 1 January 2022 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 26 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Impact on the financial statements of adoption of new standards, amendments and interpretations (continued) - Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022). - Covid-19-Related Rent Concessions – Amendments to IFRS 16 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021). The Company and the Group have assessed the impact of the amendments and concluded that they have no impact on their financial statements. b) The following new standards and amendments are not yet effective, but have been endorsed by the EU A number of amendments to new standards and interpretations are effective for annual periods beginning on 1 January 2023 and have not been adopted in the preparation of these consolidated financial statements. Standards, interpretations and amendments that may be relevant to the Group and the Company are presented below. The Group and the Company do not intend to early adopt these standards. - Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). - Amendments to IAS 8: Definition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). - Deferred tax related to assets and liabilities arising from a single transaction – Amendments to IAS 12 (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023). - IFRS 17 "Insurance Contracts" (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2023). - Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). - Transition option to insurers applying IFRS 17 – Amendments to IFRS 17 (issued on 9 December 2021 and effective for annual periods beginning on or after 1 January 2023). - Amendments to IFRS 16 Leases: Lease Liability in a Sale and Leaseback (issued on 22 September 2022 and effective for annual periods beginning on or after 1 January 2024). - Classification of liabilities as current or non-current – Amendments to IAS 1 (originally issued on 23 January 2020 and subsequently amended on 15 July 2020 and 31 October 2022, ultimately effective for annual periods beginning on or after 1 January 2024). The Company and the Group are currently assessing the impact of the amendments. c) The following standards have been issued, but not yet endorsed by the EU There are no other amended IFRSs, IASs, or IFRIC interpretations that are not yet effective and that would be expected to have a significant impact on the Company and the Group. Contingencies Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognised in the financial statements but disclosed when an inflow of economic benefits is probable. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 27 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Events after the reporting period Events after the reporting period that provide additional information about the Group’s and 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 to the financial statements when material. Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. Accounting estimates and assumptions The preparation of financial statements in conformity with IFRS as adopted by the European Union requires the use of accounting estimates and assumption by management that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The accounting estimates and the related assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the net book amounts of assets and liabilities that are not readily apparent from other sources. The actual results may ultimately differ from those estimates. The accounting estimates and underlying assumptions are regularly reviewed and are based on historical experience, other factors reflecting a current situation and reasonably possible future events. The Group and the Company make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant effect on the amounts of assets and liabilities and can cause a significant adjustment to these amounts within the next financial year are addressed below. Impairment losses on property, plant and equipment and intangible assets The Company and the Group did not identify any impairment indications in respect of property, plant and equipment as at 31 December 2022 and 2021, and therefore, no impairment test was performed. Assumptions and results of impairment test performed by the Group in respect of goodwill as at 31 December 2022 and 2021 are disclosed in Note 15. Measurement of inventories The Group and the Company review the movement in the inventory account, assess carrying amount on a quarterly basis. The carrying amount of inventories should not exceed future economic benefits expected to be received from the disposal or use of inventories. Loss of inventory write-down to net realisable value is recognised in the statement of profit or loss during the period in which the inventory measurement, write-down were performed. Inventory write-down is assessed taking into account historical data and actual sales of inventories below cost. For more information refer to Note 18 ‘Inventories’. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 28 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) Useful life of property, plant and equipment Useful lives of the assets are reviewed annually and revised when there are grounds for believing that the remaining useful lives do not reflect technical conditions, economic utilisation or physical conditions of the assets. Financial risk management The use of the financial instruments exposes the Group and the Company to the following risks: • credit risk; • liquidity risk; • market risk. Information on each type of the above-mentioned risks to which the Group and the Company are exposed, objectives, policies and processes for managing the risk and the methods used to measure the risk is set out in this section. Note 30 ‘Financial instruments and risk management’ discloses quantitative information on each type of the above-mentioned risks and on the Group’s and the Company’s capital management. Risk management framework The Board is responsible for the development and monitoring of the Group’s and the Company’s overall risk management programme. The Group’s and the Company’s risk management policy defines and analyses risks to which the companies are exposed, establishes appropriate risk limits, controls risks and adherence to risk limits. The risk management policy and systems are reviewed on a regular basis to reflect market conditions and the Group’s and the Company’s operational changes. The Group and the Company, through training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Credit risk In conducting trading activities, the Group and the Company apply deferred payment in respect of sale of products and services, and therefore, a risk may arise that clients will not pay for products and services provided by the Group and the Company. The Group and the Company aim to minimise credit risk through credit limit approach, based on which the amounts of credits granted to clients and the types of credit enhancements are established as follows: • limit, • guarantees, • insurance. The Group and the Company have insurance for their sales to foreign clients under the credit insurance agreement concluded with the company Euler Hermes for the term of two years. On November 2022, the insurance was extended for additional two years. For each client, the credit risk is assessed individually. Trade receivables are regularly monitored by the Finance Department. In the event of overdue amounts receivable, the sale is suspended and debt recovery procedures are initiated. Liquidity risk Liquidity risk is a risk that the Group and the Company will not be able to meet their financial liabilities in due time. The Group and the Company manage liquidity risk with the aim to achieve the best possible liquidity of the Group and the Company which enables to settle obligations both in the ordinary course of business and under complicated operating conditions and prevents from incurring unacceptable losses and damaging the Group’s and the Company’s reputation. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 29 Notes to the consolidated and separate financial statements Summary of significant accounting policies (continued) The Group’s and the Company’s policy is aimed at maintaining sufficient cash and cash equivalents or ensuring funding through an adequate amount of committed credit facilities in order to meet their commitments at a given date in accordance with the strategic plans. The Group’s and the Company’s objective is to maintain balance between the continuity and flexibility of funding. The Group and the Company generate a sufficient amount of cash form their activities, therefore management is responsible for ensuring a sufficient level of the Group’s and the Company’s liquidity. Market risk Market risk is a risk that changes in market prices, e.g. foreign exchange rates and interest rates, will affect the Group’s and the Company’s results of operations or the value of financial instruments held. The aim of market risk management is to manage open risk positions in order to optimise rate of return. The Group and the Company manage foreign exchange risk by minimising the open position in a foreign currency. Further information on hedging against foreign exchange risk is disclosed in Note 30 ‘Financial instruments and risk management’. The Group’s and the Company’s income and operating cash flows are substantially independent of market interest rates. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 30 Notes to the consolidated and separate financial statements Notes 1 Segment information The Group consists of 6 legal entities: Vilkyškių Pieninė AB, Kelmės Pieninė AB, Kelmės Pienas UAB, Modest AB, Baltic Dairy Board SIA, and Pieno Logistika AB. The principal activity of each entity (operating segment) is the production of milk products, except for Pieno Logistika AB, which is engaged in lease of buildings. The Group has several operating segments which are as described below. The segments represent different product groups, which are managed separately because they require different technology and marketing strategies. The Board and the General Manager review internal management reports prepared for each operating segment on a monthly basis. The following summary describes the products in each operating segment of the Group: 1. Cheese, cheese products and other. The segment comprises cheese, cheese products, cream, and liquid whey that stays during the process of cheese production; 2. Dry milk products. The segment comprises WPC, skimmed-milk, permeate, whey and GOS powder produced by the subsidiaries; 3. Fresh milk products. The segment comprises fresh milk products produced by the subsidiaries (kephir, yoghurt, sour cream, butter, curd products); Information on the results of each operating segment is presented below. Performance is assessed based on the gross profit of the segments, which is presented in the internal management reports reviewed by the Board and the General Manager. The segment’s gross profit is used to assess performance as management believes that this indicator is the most appropriate for the assessment of the results of operations. Results of operations of the operating segments at 31 December 2022: GROUP EUR ‘000 Cheese, cheese products and other Dried milk products Fresh milk products Total Revenue 170,589 36,630 26,864 234,083 Cost of sales -152,498 -33,414 -23,897 -209,809 Gross profit 18,091 3,216 2,967 24,274 Other operating income 313 Distribution, administrative and other operating expenses -9,755 Impairment of goodwill - Other gain (loss) – net 89 Operating result 14,921 Finance income 127 Finance costs -868 Finance costs, net -741 Profit (loss) before income tax 14,180 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 31 Notes to the consolidated and separate financial statements Notes (continued) 1 Segment information (continued) In 2022, gross profit of the Group‘s operating segment Cheese, cheese products and other increased by EUR 8,262 thousand compared to 2021 due to higher demand and price for cream and overall growth of export prices. In 2022 gross profit of dry milk products decreased due to higher prices of raw materials and energy. Results of operations of the operating segments at 31 December 2021: EUR ‘000 Cheese, cheese products and other Dried milk products Fresh milk products Total Revenue 109,199 28,136 18,710 156,045 Cost of sales -99,370 -22,628 -16,851 -138,849 Gross profit 9,829 5,508 1,859 17,196 Other operating income 228 Distribution, administrative and other operating expenses -7,586 Impairment of goodwill -2,749 Other gain (loss) – net 45 Operating result 7,134 Finance income 209 Finance costs -1,187 Finance costs, net -978 Profit (loss) before income tax 6,156 Information on the segments’ assets, liabilities, interest income and interest expenses, depreciation, results of operations before tax, income tax and other non-cash line items is not provided to the Board and the General Manager. In management’s opinion the allocation of these line items to the operating segments is not reasonable. Revenue, cost of sales and gross profit are the same as reported in the financial statements. All revenue in 2022 and 2021 was recognised at the point in time. For the purpose of disclosure by geographical location, revenue is recognised with reference to the place of registration of a client. Assets are allocated according to their geographical location. Disclosure by geographical location in 2022: EUR ‘000 Revenue Assets Lithuania 26,751 80,468 European Union (excluding Lithuania) 132,771 10,515 Other countries 74,561 7,480 234,083 98,463 Disclosure by geographical location in 2021: EUR ‘000 Revenue Assets Lithuania 21,748 73,288 European Union (excluding Lithuania) 80,647 10,237 Other countries 53,650 4,449 156,045 87,974 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 32 Notes to the consolidated and separate financial statements Notes (continued) 1 Segment reporting (continued) Information on major clients. The Group had no clients with sales revenue representing more than 10% of its total revenue. 2 Cost of sales (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 -168,220 -107,460 Raw materials -147,779 -95,156 - - Resale cost of goods produced by the subsidiaries -105,268 -77,455 -9,916 -8,213 Employee expenses, including social security contributions -3,323 -2,855 -3,750 -3,818 Depreciation and grants’ amortisation -1,117 -1,148 -5,922 -4,872 Milk collection and transportation costs -5,758 -4,853 -14,186 -8,150 Gas, electricity, water -3,844 -2,227 -2,205 -1,590 Transport costs -2,205 -1,590 -5,610 -4,746 Other -2,154 -2,127 -209,809 -138,849 -271,448 -187,411 As at 31 December 2022 the Group’s and the Company’s inventory write-down to net realizable value amounted to EUR 2,593 thousand and EUR 521 thousand, respectively. In 2021 there was no write-down to net realizable value. 3 Other operating income (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 89 119 Income from rendering of services 7,300 3,341 - - Dividends 3,931 7,371 16 16 Income from accounting services 197 183 - 32 Income from transport services rendered to other entities - 18 - 32 Amounts due not yet claimed - 32 208 29 Other income 164 14 313 228 11,592 10,959 4 Other operating expenses (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 -82 -41 Cost of services rendered -6,950 -2,907 -97 -77 Other expenses -1 -1 -179 -118 -6,951 -2,908 5 Other gain (loss) – net (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 89 45 Gain (loss) from disposal of raw materials, non-current assets 35 44 - - Gain (loss) from fair value change of investment property -280 375 89 45 -245 419 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 33 Notes to the consolidated and separate financial statements Notes (continued) 6 Distribution expenses (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 -1,530 -1,197 Logistics and transport services -1,332 -1,064 -499 -342 Marketing and advertising services -446 -326 -1,126 -967 Personnel expenses, including social security contributions -1,126 -967 -65 -63 Depreciation expenses -48 -46 -929 -598 Other selling expenses -891 -584 -4,149 -3,167 -3,843 -2,987 7 Administrative expenses (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 -2,441 -1,802 Personnel expenses, including social security contributions and change in vacation reserve -1,822 -1,376 -140 -123 Depreciation and amortisation, including amortisation of subsidies -92 -126 -393 -458 Services received -175 -201 -242 -193 Taxes, other than income tax -179 -168 -126 -125 Veterinary services -80 -79 -210 -235 Consultation services -151 -150 - -37 Inventory write-down, reversal - -37 -142 -123 Security -54 -47 -22 -86 Fines and interest paid on late payments -9 -10 -52 -94 Write-off of bad debt expenses -52 -94 -205 -145 Computer expenses -194 -133 -85 -59 Fuel -46 -31 -66 -35 Repair expenses -55 -25 -44 -36 Fee for membership in association -44 -36 -31 -30 Stock exchange expenses -29 -27 -132 -65 New product development expenses -98 -2 -99 -45 Insurance -52 -21 -23 -21 Bank charges -18 -18 -974 -589 Other -705 -483 -5,427 -4,301 -3,855 -3,064 In 2022, the Group’s and the Company’s social security contributions payable by an employer amounted to EUR 420 thousand and EUR 160 thousand, respectively (2021: EUR 307 thousand and EUR 135 thousand, respectively). Social security amount includes social security contributions for vacation and pension reserves. 8 Services provided by the audit firm to the Company and the Group in 2022 (EUR ’000) GROUP COMPANY Audit of the financial statements under the agreements 94 65 Other services 2 1 Total 96 66 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 34 Notes to the consolidated and separate financial statements Notes (continued) 9 Finance costs, net (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 Finance income 19 178 Interest 87 179 95 - Foreign exchange gain 95 - 13 31 Other 11 29 127 209 Total finance income 193 208 Finance costs -671 -987 Interest -162 -299 -17 -15 Interest on lease -17 -15 -119 -121 Factoring charges -116 -121 - - Foreign exchange loss - - -61 -64 Other -58 -29 -868 -1,187 Total finance costs -353 -464 -741 -978 -160 -256 10 Income tax expenses (EUR ’000) Recognised in profit or loss GROUP COMPANY 2022 2021 2022 2021 Current year income tax expenses -386 -179 Reporting period -146 - Deferred income tax expenses -1,095 -477 Change in deferred income tax -988 -420 -1,481 -656 -1,134 -420 Reconciliation of effective income tax rate (EUR ’000) GROUP COMPANY 2022 2021 2022 2021 14,180 6,156 Profit for the year 13,733 11,194 2,127 923 Income tax calculated at a rate of -15% 2,060 1,679 - 443 Gain from inter-company disposal of business - - - - Dividend income -589 -1,106 -27 -246 Other non-taxable income -2 -8 - 412 Impairment of goodwill - - -17 -5 Charity expenses deductible twice for tax purposes -16 -4 -40 -56 R&D expenses deductible thrice for tax purposes - - -592 -727 Investment project relief -363 -174 -86 -107 Tax loss carry forward - - 402 93 Other expenses not deductible for tax purposes 44 33 -286 -74 Other expenses deductible for tax purposes - - 1,481 656 Income tax expenses (benefit) 1,134 420 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 35 Notes to the consolidated and separate financial statements Notes (continued) Income tax expenses (continued) Pursuant to the effective laws, the State Tax Inspectorate may at any time inspect the books and accounting records of the Group/Company for 3 years preceding the reporting tax period and may assess additional taxes or fines (a 5-year period is applied to some types of transactions). The Company’s management is not aware of any circumstances that might result in a potential material tax liability in this respect for the Group/Company. 11 Earnings per share GROUP COMPANY 2022 2021 2022 2021 12,511 5,536 Net profit attributable to holders of ordinary shares of the Parent, EUR ‘000 12,599 10,774 11,943 11,943 Number of issued shares calculated based on the weighted average unit cost method, in thousands 11,943 11,943 1.05 0.46 Basic earnings (loss) per share (EUR) 1.05 0.90 The diluted earnings per share are the same as basic earnings per share. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 36 Notes to the consolidated and separate financial statements Notes (continued) 12 Property, plant and equipment GROUP EUR ‘000 Right-of- use assets Land and buildings Plant and machinery Other assets Construction in progress Total Cost/revalued amount Balance at 1 January 2021 1,801 17,069 57,157 3,452 400 79,879 Additions 519 2,369 4,474 316 246 7,924 Disposals - - -692 -171 - -863 Reclassifications -334 - 531 87 -291 -7 Balance at 31 December 2021 1,986 19,438 61,470 3,684 355 86,933 Balance at 1 January 2022 1,986 19,438 61,470 3,684 355 86,933 Additions 335 26 442 150 3,383 4,336 Disposals - -133 -114 -27 - -274 Reclassifications -475 71 710 8 -314 - Balance at 31 December 2022 1,846 19,402 62,508 3,815 3,424 90,995 Depreciation and impairment losses Balance at 1 January 2021 833 3,353 26,266 2,252 - 32,704 Depreciation charge for the year 214 672 3,527 375 - 4,788 Impairment 28 - - - - 28 Disposals - - -315 -151 - -466 Reclassifications -197 - 197 - - - Balance at 31 December 2021 878 4,025 29,675 2,476 - 37,054 Balance at 1 January 2022 878 4,025 29,675 2,476 - 37,054 Depreciation charge for the year 211 679 3,523 300 - 4,713 Impairment - - - - - - Disposals - -91 -104 -24 - -219 Reclassifications -325 - 325 - - - Balance at 31 December 2022 764 4,613 33,419 2,752 - 41,548 Net book amounts At 1 January 2021 968 13,716 30,891 1,200 400 47,175 At 31 December 2021 1,108 15,413 31,795 1,208 355 49,879 At 31 December 2022 1,082 14,789 29,089 1,063 3,424 49,447 * For more details on right-of-use assets, see Note 13. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 37 Notes to the consolidated and separate financial statements Notes (continued) Property, plant and equipment (continued) COMPANY EUR ‘000 Right-of-use assets Land and buildings Plant and machinery Other assets Construction in progress Total Cost/revalued amount Balance at 1 January 2021 1,773 7,802 21,919 1,371 242 33,107 Additions 549 - 406 67 182 1,204 Increase in value 1 - - - - 1 Disposals -53 - -634 -65 - -752 Reclassifications -255 -1,010 442 - -187 -1,010 (a) Balance at 31 December 2021 2,015 6,792 22,133 1,373 237 32,550 Balance at 1 January 2022 2,015 6,792 22,133 1,373 237 32,550 Additions 289 - 248 48 3,157 3,742 Increase in value - - - - - - Disposals - -80 -97 -7 - -184 Reclassifications -476 8 487 - -83 -64 Balance at 31 December 2022 1,828 6,720 22,771 1,414 3,311 36,044 Depreciation and impairment losses Balance at 1 January 2021 813 1,315 15,609 1,214 - 18,951 Depreciation charge for the year 217 311 1,226 50 - 1,804 Impairment 28 - - - - 28 Disposals -23 - -364 -65 - -452 Reclassifications -149 - 149 - - - Balance at 31 December 2021 886 1,626 16,620 1,199 - 20,331 Balance at 1 January 2022 886 1,626 16,620 1,199 - 20,331 Depreciation charge for the year 215 274 1,256 48 - 1,793 Impairment 2 - - - - 2 Disposals - -80 -97 -7 - -184 Reclassifications -325 - 325 - - - Balance at 31 December 2022 778 1,820 18,104 1,240 - 21,942 Net book amounts At 1 January 2021 960 6,487 6,310 157 242 14,156 At 31 December 2021 1,129 5,166 5,513 174 237 12,219 At 31 December 2022 1,050 4,900 4,667 174 3,311 14,102 * For more details on right-of-use assets, see Note 13. (a) Amount of EUR 1,010 thousand is related to reclassification of assets to investment property (Note 14). Prepayments made for non-current assets are classified under additions. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 38 Notes to the consolidated and separate financial statements Notes (continued) 12 Property, plant and equipment (continued) Pledges of assets To secure the repayment of its bank borrowings, the Group has pledged the following PP&E: - buildings with the carrying amount of EUR 9,753 thousand as at 31 December 2022 (31 December 2021: EUR 11,503 thousand); - production plant and machinery, fixtures and equipment with the net book amount of EUR 24,382 thousand as at 31 December 2022 (31 December 2021: EUR 28,561 thousand) (Note 23). To secure the repayment of its bank borrowings, the Company has pledged the following PP&E: - buildings with the carrying amount of EUR 3,640 thousand as at 31 December 2022 (31 December 2021: EUR 3,344 thousand); - production plant and machinery, fixtures and equipment with the net book amount of EUR 3,792 thousand as at 31 December 2022 (31 December 2021: EUR 4,786 thousand) (Note 23). The acquisition cost of the Group’s property, plant and equipment fully depreciated but still in use amounted to EUR 12,540 thousand as at 31 December 2022 (31 December 2021: EUR 14,002 thousand). The acquisition cost of the Company’s property, plant and equipment fully depreciated but still in use amounted to EUR 11,365 thousand as at 31 December 2022 (31 December 2021: EUR 8,281 thousand). Depreciation Depreciation was included in the following line items: GROUP COMPANY 2022 2021 EUR ‘000 2022 2021 4,517 4,583 Cost of finished products 1,543 1,525 196 205 Distribution and administrative expenses 131 159 - - Other operating expenses 119 120 4,713 4,788 1,793 1,804 Valuation of buildings The Group and the Company account for the buildings at a revalued amount, less subsequent accumulated depreciation and impairment. In 2022, the Group and the Company evaluated part of their buildings, as a result of which it was concluded that the value of the assets included in the Group’s and the Company’s valuation did not differ significantly from the potential market price of the assets. On 1 December 2022, the independent property valuation corporation Matininkai UAB performed a valuation of the Group‘s and the Company‘s buildings with the net book amount of EUR 3,827 thousand as at 31 December 2022. The value of general-purpose buildings was determined using the market approach (based on analogous sales prices). The value of assets included in the special-purpose category was determined using the cost approach. Based on the evaluation as at 1 December 2022, the fair value of the evaluated buildings did not differ significantly from their carrying amounts, and accordingly, no revaluation of assets was performed. The fair value of the Group‘s buildings acquired in the course of business combination (Note 16) was determined on 1 April 2022. As at 31 December 2022, the net book amount of those buildings was EUR 5,404 thousand. The fair value was determined by an independent property valuer Newsec. The value of the buildings was determined using the discounted cash flow approach. Cash flows over the period of 2 years, discount rate of 11.0% and capitalisation rate (yields) of 10.20% were used to determine the value. In the opinion of the Group’s management, there were no significant changes in the fair value of buildings until 31 December 2022. The valuation of other buildings of the Group and the Company, the fair value of which was not determined in 2022, was performed on 23 September 2021 (the Group‘s buildings attributed to the operating segment of dry milk products) and on 1 December 2020. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 39 Notes to the consolidated and separate financial statements Notes (continued) 12 Property, plant and equipment (continued) The revaluation of the Group’s and the Company’s buildings was performed on 1 December 2020. In 2022, no revaluation was performed for the Group’s and the Company’s assets because, in the management‘s opinion, there were no significant changes in the domestic real estate market and in the Group‘s and the Company‘s operations, nor were there any significant changes in the fair value of buildings. As at 31 December 2022, the net value of the Group’s revaluation reserve amounted to EUR 1,722 thousand (31 December 2021: EUR 1,828 thousand). As at 31 December 2022, the net value of the Company’s revaluation reserve amounted to EUR 1,054 thousand (31 December 2021: EUR 1,099 thousand). If the Group’s buildings were accounted at cost, their net book amount would be EUR 9,115 thousand (revalued amount would be EUR 11,077 thousand) as at 31 December 2022 (31 December 2021: net book amount – EUR 9,388 thousand, revalued amount – EUR 11,473 thousand). If the Company’s buildings were accounted at cost, their net book amount would be EUR 2,663 thousand (revalued amount would be EUR 3,817 thousand) as at 31 December 2022 (31 December 2021: net book amount – EUR 2,776 thousand, revalued amount – EUR 3,978 thousand). 13 Leases Amounts recognised in profit or loss were as follows: EUR ‘000 GROUP COMPANY 2022 2021 2022 2021 211 217 Depreciation of right-of-use assets 215 217 - 28 Impairment of right-of-use assets 2 28 18 15 Interest expenses (included in finance costs) 17 15 34 41 Expenses related to short-term leases (included in cost of sales and general and administrative expenses) 27 40 67 49 Expenses related to leases of low-value assets not included in the above short-term leases (included in cost of sales, general and administrative expenses, other operating expenses) 15 13 37 46 Expenses related to variable lease payments not included in lease liabilities (included in cost of sales, general and administrative expenses, other operating expenses) 37 46 367 396 313 359 Movements in right-of-use assets during 2022 and 2021 are disclosed in Note 12. Lease liabilities, including the breakdown of lease liabilities by maturity are disclosed in Note 23. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 40 Notes to the consolidated and separate financial statements Notes (continued) 14 Investment property EUR ‘000 2022 2021 Balance at 1 January 6,780 5,395 Additions 64 - Disposals -37 - Net gain/(loss) on fair value adjustment -280 375 Reclassification from/(to) inventories and owner-occupied PP&E - 1,010 Balance at 31 December 6,527 6,780 () Amount of EUR 1,010 thousand is related to reclassification of investment property from owner-occupied PP&E (Note 12). Investment property is leased out to tenants under operating lease contracts. The costs incurred in relation to maintenance of investment property are covered by the tenants. The lease payments are fixed. The contracts do not contain variable lease payments that depend on an index or a rate. Investment property consists of production facilities leased out to the subsidiaries. Based on the terms and conditions of the lease contracts, the assets have been leased for the term of 5 to 7 years, and the lease term expires by 31 December 2023-2026. The fulfilment of lease contracts has not been secured with any collateral, guarantees or other pledges. Fair value of investment property Below is allocation of the Company‘s investment property to hierarchy levels for fair value measurement purposes: EUR ‘000 At 31 December 2022 At 31 December 2021 Hierarchy level 2 (a) 1,614 1,546 Hierarchy level 3 (b) 4,913 4,161 6,527 5,707 Assets with no fair value determined (c) - 1,073 6,527 6,780 (a) The Company‘s investment property, the fair value of which was determined using the market approach are attributed to level 2 in the fair value measurement hierarchy. The fair value was determined with reference to the valuation performed on 1 December 2022 by an independent property valuation corporation Matininkai UAB (the same method was applied on 1 December 2021). The market approach was used to evaluate the general-purpose buildings. The market approach was used to evaluate the differences between the subject asset and analogous or similar asset to which the subject asset is being compared, and to make adjustments (if necessary) to the transaction prices of analogous or similar asset in terms of timing, location, and other circumstances conveying the differences between the subject asset and analogous or similar comparable asset. For the purpose of valuation, the assets selected were similar to the specific subject asset. The inputs used included data on the purchase and sale transactions that occurred over the last thirty-six months. (b) The Company’s buildings leased to produce processed whey products (whey protein concentrate WPC80 and permeate) are evaluated using the income approach and attributed to level 3 in the fair value measurement hierarchy. The fair value was determined with reference to the valuation performed on 1 December 2022 by an independent property valuation corporation Matininkai UAB. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 41 Notes to the consolidated and separate financial statements Notes (continued) 14 Investment property The valuation of assets encompasses fair value measurement of a complex of assets of whey processing facilities (including buildings, plant and machinery, and other assets) constituting a cash-generating unit. The measured fair value is attributed to each item of property, plant and equipment, and accordingly, the fair value of buildings is known. The value of assets is determined using a discounted cash flow model. The value in use is determined by discounting the post-tax future cash flows to their present value based on a discount rate that reflects current market conditions, the existing time value of money and the risks specific to the asset, which was not taken into consideration. The adjusted weighted average cost of capital (pre-tax) was 15.5% (2021:12.19%). Key assumptions used in calculation of value of in use were as follows: • Future cash flows are estimated based on historical experience and 2022-2027 business forecasts based on the existing long-term contracts with the consumers of the products, and the expected expansion of sales (production) in view of growth in demand for whey processing products on a domestic and global markets. • Forecasts of production costs are estimated on the basis of factual production, including the expected fluctuations therein due to growth of production. • Depending on the current physical condition of the assets capital expenditures will be up to 40% during 2023- 2027 for renovation of old property. The same method was applied on 1 December 2021. (c) As at 31 December 2021, the fair value was not determined for the Company’s investment property that had been acquired/created during 2021, because in the opinion of management, there were no significant changes either in the domestic real estate market or the Company’s operations, nor were there any significant changes in the fair value of investment property. In 2022 a value was determined for all investment property. Minimum lease payments receivable on lease of investment property: EUR ‘000 31 12 2022 31 12 2021 Within one year 293 292 Between 1 and 5 years 878 832 After 5 years - - 1,171 1,124 In 2022, the Company‘s rental income amounted to EUR 293 thousand (2021: EUR 292 thousand). Rental income is included in other operating income. There were no direct operating expenses from investment property that generated rental income during 2022 and 2021. The Company‘s investment property with the carrying amount of EUR 6,527 thousand as at 31 December 2022 (31 December 2021: EUR 6,780 thousand) was pledged to the banks as a security for bank borrowings. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 42 Notes to the consolidated and separate financial statements Notes (continued) 15 Intangible assets GROUP EUR ‘000 Goodwill Computer software Other intangible assets Total Cost Balance at 1 January 2021 6,915 557 12 7,484 Additions - 11 5 16 Disposals - -22 - -22 Reclassifications - - - - Balance at 31 December 2021 6,915 546 17 7,478 Balance at 1 January 2022 6,915 546 17 7,478 Additions - - - - Disposals - - - - Reclassifications - - - - Balance at 31 December 2022 6,915 546 17 7,478 Amortisation and impairment Balance at 1 January 2021 - 542 7 549 Amortisation charge for the year - 13 3 16 Disposals - -22 - -22 Impairment 2,749 - - 2,749 Balance at 31 December 2021 2,749 533 10 3,292 Balance at 1 January 2022 2,749 533 10 3,292 Amortisation charge for the year - 11 - 11 Disposals - - - - Impairment - - - - Balance at 31 December 2022 2,749 544 10 3,303 Net book amounts At 1 January 2021 6,915 15 5 6,935 At 31 December 2021 4,166 13 7 4,186 At 31 December 2022 4,166 2 7 4,175 Amortisation charge for the year was included in administrative expenses. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 43 Notes to the consolidated and separate financial statements Notes (continued) 15 Intangible assets (continued) COMPANY EUR ‘000 Goodwill Computer software Other intangible assets Total Cost Balance at 1 January 2021 - 654 12 666 Additions - 2 5 7 Disposals - - - - Reclassifications - - - - Balance at 31 December 2021 - 656 17 673 Balance at 1 January 2022 - 656 17 673 Additions - - - - Disposals - - - - Reclassifications - - - - Balance at 31 December 2022 - 656 17 673 Amortisation and impairment Balance at 1 January 2021 - 636 10 646 Amortisation charge for the year - 10 3 13 Disposals - - - - Balance at 31 December 2021 - 646 13 659 Balance at 1 January 2022 - 646 13 659 Amortisation charge for the year - 8 1 9 Disposals - - - - Balance at 31 December 2022 - 654 14 668 Net book amounts At 1 January 2021 - 18 2 20 At 31 December 2021 - 10 4 14 At 31 December 2022 - 2 3 5 Amortisation charge for the year was included in administrative expenses. Recoverable amount of cash-generating units to which goodwill is attributed Goodwill is attributed to the following cash-generating units of the Group (Modest AB‘s business activities relating to production and sale of cheese and cheese products; Kelmės Pienas UAB‘s business activities relating to production and sale of fresh milk products), as specified below: EUR ‘000 31 12 2022 31 12 2021 Kelmės Pienas UAB (fresh milk products) 3,867 3,867 Modest AB (cheese, cheese products) 299 299 4,166 4,166 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 44 Notes to the consolidated and separate financial statements Notes (continued) 15 Intangible assets (continued) * Before 1 March 2021, the business activities of fresh milk products were conducted by the subsidiary Kelmės Pieninė AB. As from 1 March 2021, the business activities of fresh milk products have been transferred to Kelmės Pienas UAB. Goodwill arising on business combination is attributable mostly to synergy, which has resulted from the integration of the Companies into the existing operations of the Group relating to production of milk products. These cash-generating units were tested for impairment when calculating the recoverable amount. Recoverable amount of cash-generating unit of Kelmės Pienas UAB The recoverable amount of cash-generating unit (production of fresh milk products) of Kelmės Pienas UAB was determined by an independent property valuation corporation Matininkai UAB. The date of valuation was 31 December 2022. The recoverable amount was calculated by discounting future cash flows to their present value based on a five-year financial forecast approved by the management. Key assumptions used in the calculation of the recoverable amount were as follows: • The future cash flows were calculated based on historical experience and a 5-year business plan. Cash flows in a long-term perspective were estimated by extrapolating the fifth-year cash flows at a projected long-term growth rate of 1% (2021: growth rate of 1%). • The recoverable amount was calculated using a pre-tax discount rate that reflects current market conditions, the existing time value of money and the risks specific to the asset, which was not taken into consideration. Pre-tax rate of weighted average cost of capital was 15.5% (2021: 12.18%). • The projected revenue increase by 5% in 2023 compared to 2022 (see table below). According to Lithuanian economists, the growth of the local economy will be slower in 2023, but Vilvi group's forecasted revenue from fresh products will increase because: ➢ a favorable basket of fresh products is selected; ➢ purposeful diversion of fresh dairy products to export markets; ➢ larger production of those products with higher profitability is planned. Therefore, it is forecasted to process up to 9 percent more raw milk in 2023, compared to 2022. A 15% decrease in the price of raw milk compared to 2022 is projected (based on external data). • According to the management, in 2023 the active work with export markets and the redistribution of the product structure will offset the expected decrease in price level in 2023; • The revenue growth is expected to be 5 percent in 2023-2024 and 2 percent in 2025-2027. Revenue growth is expected due to the expected increase in production volumes, the introduction of new products to the market and expansion into new markets. The projected revenue from sales of fresh milk products (EUR ‘000): Financial year 2022 2023 2024 2025 2026 2027 Revenue 26,819 28,160 29,568 30,046 30,508 31,208 Projected growth rate -% 5.0% 5.0% 2.0% 2.0% 2.0% VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 45 Notes to the consolidated and separate financial statements Notes (continued) 15 Intangible assets (continued) • The projected increase in gross profit margin in 2023 is 3.6 p.p. (up to 12.3%). The forecasted gross profit will increase from EUR 2,352 thousand to EUR 3,470 thousand (47.5%). The gross profit margin is expected to increase due to lower prices of raw materials, and decreasing energy costs: - Milk is the basic raw material, and therefore, the company’s performance depends and is sensitive to the fluctuations in the market price of raw milk. Based on the market forecast, the price of milk is expected to decrease in 2023 compared to 2022. - Decrease of energy costs. There was a sharp increase in energy prices in spring throughout to autumn 2022, which resulted in a high level of energy prices. Because the energy costs stabilized during the fourth quarter of 2022, lower energy costs are expected in 2023. - Growth of payroll costs. Based on the market forecast, salaries are expected to grow by 5% in 2023. Since, according to the management, the selling prices of production will fall more slowly, the level of raw materials and energy prices will be lower and will not reach such heights as they were in 2022, it is projected that gross profit margin will increase in 2023. • During 2023-2027, capital expenditures of EUR 160 thousand are projected annually to support production-technological assets. When calculating the terminal value (capitalising the last activity flows), the amount of deducted capital expenditures is equal to the aggregate amount of depreciation of capital expenditures. • The basic components of working capital: required inventory, trade receivables and trade payables are taken as the factual amounts at the end of 2022. Subsequently (starting from 2023), the required working capital is calculated in view of the production growth and the required inventory, trade receivables and trade payables, as a proportionate share of the cost of sales and revenue. The sensitivity analysis of the recoverable amount of the investment in Kelmės Pienas UAB shows the effects of the change in the assumptions used in the impairment test on the evaluation result: • If the budgeted gross profit margin used in the value in use calculation for Kelmės Pienas UAB had been 3% lower than management’s estimates at 31 December 2022, no impairment of goodwill would have been recognized for the Group. A reasonably possible change of 3% reduction in budgeted gross profit margin represents a reasonably possible increase in raw milk price of 1 %. • If the pre-tax discount rate applied to the cash flow projections of Kelmės Pienas UAB had been 1% higher than management’s estimates (16.5% instead of 15.5%), no impairment of goodwill would have been recognized for the Group. Based on the above assumptions, the calculated recoverable amount of the cash-generating unit was higher than the carrying amount, and therefore, no impairment of goodwill was recognized. In 2021, EUR 2,749 thousand impairment of goodwill was recognised for fresh product activities . In 2021, the results showed that the selling prices of fresh products decreased as compared to 2020, while the price of the main raw material used for the production of products (i.e. milk) increased significantly. Key assumptions used in the calculation of the recoverable amount in 2021 were as follows: • The future cash flows were calculated based on historical experience and a 5-year business plan. Cash flows in a long-term perspective were estimated by extrapolating the fifth-year cash flows at a projected long-term growth rate of 1% (2020: growth rate of 1%). • The recoverable amount was calculated using a pre-tax discount rate that reflects current market conditions, the existing time value of money and the risks specific to the asset, which was not taken into consideration. Pre-tax rate of weighted average cost of capital was 12.18%. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 46 Notes to the consolidated and separate financial statements Notes (continued) 15 Intangible assets (continued) • The projected revenue decline by 1% in 2022 compared to 2021 (see table below). The decline in revenue is related to projected decrease in the volume of processed milk in 2022 (projected decrease in the volume of processed milk by 2.8%). As the Lithuanian and global economy started recovering after the Covid-19 pandemic, the demand for fresh milk products increased in 2021: sales of fresh milk products increased by 28% in 2021 compared to 2020 (23,064 tons sold in 2021; 18,009 tons sold in 2020). In the opinion of the management, in case of a more moderate economic growth the sales volume will decrease by 2-3% in 2022. Nevertheless, the continuing growth of prices of fresh milk products will offset the negative impact of decline in the projected sales volume on revenue. Recoverable amount of cash-generating unit of Modest AB For Modest AB, the value in use was calculated using the future cash flows discounted to their present value. Key assumptions used in the calculation of the value in use were as follows: • The future cash flows were calculated based on historical experience and a 5-year business plan. Cash flows in a long-term perspective were estimated by extrapolating the fifth-year cash flows at a projected long-term growth rate of 1% (2021: growth rate of 1%). • The value in use was calculated using a pre-tax discount rate that reflects current market conditions, the existing time value of money and the risks specific to the asset, which was not taken into consideration. Pre-tax rate of weighted average cost of capital was 15.5% (2021: 12.18%). • Based on the budget prepared by management for Modest AB, revenue budgeted for 2023 amounts to EUR 40,896 thousand. Compared to 2022, revenue is expected to decrease by 15%. Annual revenue growth of 15% is expected during 2025-2027. • During 2023, gross profit margin is expected to decrease by 2.2 p.p. compared to 2022 because of decreasing price levels in export markets. During 2024-2027 gross profit margin is expected to remain at the level of 2022, and it is expected to reach 5.3% during the entire forecast period. The projected EBITDA margin ranges between 5.13% and 5.38% during the entire forecast period. • During 2023-2027 capital expenditure of EUR 100 thousand is planned annually for the maintenance of production-technological assets. When calculating the terminal value (capitalization of the last activity flow), the amount of deductible capital expenditure is equated to aggregate amount of depreciation of capital expenditure. • The working capital requirement is calculated taking into account production growth and the corresponding inventory requirement as a proportion of the cost price. This assumes that the effect of current liabilities on working capital is neutral. Based on these assumptions, the recoverable amount of the cash-generating unit calculated for Modest AB exceeded the carrying amount, and no impairment was recognized. A sensitivity analysis for key assumptions is not presented, as a reasonable change therein will have no significant impact on the estimated value of goodwill. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 47 Notes to the consolidated and separate financial statements Notes (continued) 16 Investments in subsidiaries EUR ‘000 31 12 2022 31 12 2021 Cost of shares of Modest AB 1,991 1,991 Cost of shares of Kelmės Pieninė AB 8,656 8,656 Cost of shares of Pieno Logistika AB - 66 Cost of shares of Baltic Dairy Board SIA 271 271 10,918 10,984 The Company acquired control over Modest AB in 2006. The ownership interest held by the Company was 99.7% as at 31 December 2022 (31 December 2021: 99.7%). On 30 April 2008, the Company acquired the shares of Kelmės Pieninė AB. The ownership interest held by the Company was 100% as at 31 December 2022 (31 December 2021: 100%). On 1 April 2021, Vilkyškių Pieninė AB completed the acquisition transaction of 70% of shares in Baltic Dairy Board SIA. Overall, 544,446 shares were acquired for the total acquisition cost of EUR 271 thousand. The shares were acquired from a number of former shareholders in 3 stages during a short period. The acquisition of shares was completed on 1 April 2021, and from that date the Company became a controlling shareholder of Baltic Dairy Board SIA. Vilkyškių Pieninė AB owned 70% of Baltic Dairy Board SIA as at 31 December 2022 and 2021. The non-controlling interest of Baltic Dairy Board SIA was measured at fair value. The fair value of the non- controlling interest was determined as a proportionate share of consideration paid by the Company for 70% of shares. In the opinion of the Company’s management, the consideration paid by the Company for acquisition of 70% of shares approximated the fair value at the business acquisition date. The fair value of the non- controlling interest amounted to EUR 116 thousand. An agreement was signed between the Company and non-controlling shareholder of Baltic Dairy Board SIA, under which the controlling shareholder had a right to call option, whereas the non-controlling shareholder had a right to put option. Information on put option is provided in Note 25. Acquisition-related costs of EUR 50 thousand were included in administrative expenses in the statement of profit and loss, and cash flows from operating activities in the cash flow statement. As at 31 December 2022 (and 31 December 2021), there were no indications of impairment for investments in subsidiaries. Key financial indicators of Pieno Logistika AB: EUR ’000 31 12 2022 31 12 2021 Total assets 174 177 Shareholders’ equity 105 109 Net profit (loss) -4 -2 Key financial indicators of Modest AB: EUR ’000 2022.12.31 2021.12.31 Total assets 15,409 10,746 Shareholders’ equity 5,053 3,702 Net profit (loss) 1,351 1,244 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 48 Notes to the consolidated and separate financial statements Notes (continued) 16 Investments in subsidiaries (continued) Key financial indicators of Kelmės Pieninė AB: EUR ’000 2022.12.31 2021.12.31 Total assets 30,645 29,193 Shareholders’ equity 5,303 8,473 Net profit (loss) 761 6,893 Key financial indicators of Baltic Dairy Board SIA: EUR ’000 31 12 2022 31 12 2022 Total assets 7,913 7,760 Shareholders’ equity 1,128 510 Net profit (loss) 618 -185 17 Non-current amounts receivable (EUR ’000) GROUP COMPANY 31 12 2022 31 12 2021 Note 31 12 2022 31 12 2021 Financial instruments - 13 29 Loans granted to related parties (a) 897 843 - 13 897 843 Non-financial assets - 214 29 Prepayments made to related parties (b) - 214 111 59 Non-current amounts receivable from farmers (c) 111 59 - 2 Other non-current amounts receivable - - 111 275 111 273 111 288 1,008 1,116 (a) In December 2021, ae loan was granted to the subsidiary Baltic Dairy Board SIA. As at 31 December 2022, the outstanding balance of the loan was EUR 830 thousand (31 December 2021: EUR 830 thousand) and interest was EUR 67 thousand (31 December 2021: zero). The loan is to be repaid by 31 January 2024. (b) Non-current amounts receivable from farmers comprise prepayments made to milk suppliers for milk. An administration fee is charged on these prepayments. The Group’s and the Company’s exposure to credit and foreign exchange risks, impairment losses related to trade and other amounts receivable are disclosed in Note 30. 18 Inventories (EUR ’000) GROUP COMPANY 31 12 2022 31 12 2021 31 12 2022 31 12 2021 21,063 13,656 Finished products 7,709 6,662 21,063 13,656 7,709 6,662 449 349 Raw materials 158 64 3,661 3,208 Consumables 1,321 1,251 320 343 Work in progress - - - 69 Non-current assets held for sale - 69 25,493 17,625 9,188 8,046 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 49 Notes to the consolidated and separate financial statements Notes (continued) Inventories (continued) Raw materials include milk and other materials used in the production. As at 31 December 2022, the Group’s materials (packaging, auxiliary materials, etc.) written down to net realisable value amounted to EUR 37 thousand (31 December 2021: EUR 37 thousand). As at 31 December 2022, the Company’s materials (tare, packaging, auxiliary materials, etc.) written down to net realisable value amounted to EUR 37 thousand (31 December 2021: EUR 37 thousand). The write-down of inventories (finished products) to net realisable value and its reversal are accounted for in the cost of sales. As at 31 December 2022,, the Group's and the Company's inventories (finished products) written down to net realisable value amounted to EUR 2,593 thousand and EUR 521 thousand, respectively. (In 2021 there was no write-down to net realisable value). As at 31 December 2022, all inventories of the Group and the Company (cheese, cheese products and other, dry milk products and fresh milk products) were pledged to the financial institutions (as at 31 December 2022, the net book amount of the Group’s and the Company’s inventories was EUR 25,493 thousand and EUR 9,188 thousand, respectively. In 2021, the net book amount of inventories pledged as collateral was up to EUR 7,404 thousand for the Group, and up to EUR 4,448 thousand for the Company) (Note 23). 19 Trade and other receivables (EUR ’000) GROUP Note 31 12 2022 31 12 2021 Trade receivables 14,133 10,630 Impairment losses -99 -59 Trade receivables from related parties 30 - Loans granted to related parties, including interest charged and administration fee 29 928 1,640 Financial assets 14,992 12,211 Taxes receivable (other than income tax) 2,764 2,025 Other receivables from related parties - 12 Other receivables 119 23 Total trade and other receivables 17,875 14,271 COMPANY 31 12 2022 31 12 2021 Trade receivables 13,808 10,498 Impairment losses j -99 -59 Trade receivables from related parties 29 8,762 4,556 Loans granted to related parties, including interest charged and administration fee 29 928 1,639 Financial assets 23,399 16,634 Taxes receivable (other than income tax) 2,665 1,954 Other receivables from related parties 29 1,631 12 Other receivables 100 - Total trade and other receivables 27,795 18,600 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 50 Notes to the consolidated and separate financial statements Notes (continued) 19 Trade and other receivables (continued) Trade and other receivables are non-interest bearing and their settlement term is 30 days. Taxes receivable consist of VAT receivable. As at 31 December 2022, all receivables of the Group and the Companywere pledged as collateral (31 December 2021: EUR 50 thousand) (Note 28). The Group’s and the Company’s exposure to credit and foreign exchange risks, impairment losses related to trade and other receivables are disclosed in Note 30. The ageing analysis of trade receivables is disclosed in Note 30. 20 Prepayments (EUR ’000) GROUP COMPANY 31 12 2022 31 12 2021 Note 31 12 2022 31 12 2021 544 600 (a) Prepayments 399 434 197 22 29 Prepayments to related parties 197 22 741 622 596 456 (a) Prepayments consist of prepayments made to the companies for goods and services and to the farmers for milk. 21 Cash and cash equivalents (EUR ’000) GROUP COMPANY 31 12 2022 31 12 2021 31 12 2022 31 12 2021 596 764 Cash at bank 301 545 25 35 Cash on hand 24 34 621 799 325 579 As at 31 December 2022, all cash balances on bank accounts were pledged to secure repayment of bank borrowings (Note 28). In addition, cash inflows to bank accounts were pledged to secure repayment of bank borrowings (Note 28). The Group’s and the Company’s exposure to interest rate risk arising from cash and cash equivalents is disclosed in Note 30. 22 Capital and reserves As at 31 December 2022 and 2021, the Company’s authorised share capital was divided into 11,943,000 ordinary shares with the nominal value of EUR 0.29 each. All the shares are fully paid. Ordinary shares are stated at their nominal value. Consideration received for the shares sold in excess over their nominal value is shown as share premium. Incremental external costs directly attributable to the issue of new shares are accounted for as a deduction from share premium. Pursuant to the Law on Companies, the holders of ordinary shares have one vote per share at the Company's shareholders' meeting, the right to receive dividends, and the right to receive payments in the event of liquidation of a company. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 51 Notes to the consolidated and separate financial statements Notes (continued) Capital and reserves (continued) Legal reserve Pursuant to the Law on Companies of the Republic of Lithuania, annual transfers of 5% from distributable profit are required until the legal reserve reaches 10% of the authorised share capital. Pursuant to the Law the legal reserve may be used to cover accumulated losses only. As at 31 December 2022, the Company’s and the Group’s legal reserve amounted to EUR 346 thousand (31 December 2021: EUR 346 thousand). Share premium Share premium is the difference between the nominal value and issue price of the shares. Revaluation reserve Revaluation reserve is related to the revaluation of the buildings and is stated net of deferred income tax liability. The reserve is reduced in proportion to the depreciation and disposal of the revalued assets. Transfers from the revaluation reserve to retained earnings are performed when the revalued buildings are being depreciated. The amount transferred is determined as a difference between depreciation calculated from the revalued amount and depreciation calculated from the initial cost of the buildings. Revaluation reserve can be used to increase the share capital. Other reserves Other reserves are formed by the decision of the annual meeting of shareholders on profit appropriation, and they are established in the Company‘s Articles of Association. These reserves can be used only for the purposes approved by the general meeting of shareholders. The Group and the Company have no other reserves. Dividends In 2022, dividends of EUR 0.20 per share were paid out to the shareholders (2021: dividends of EUR 0.08 per share were paid out to the shareholders). 23 Borrowings and lease liabilities GROUP COMPANY 31 12 2022 31 12 2021 Note 31 12 2022 31 12 2021 12,978 17,050 Non-current borrowings 28, 29 1,499 2,285 399 403 Lease liabilities 13 374 414 13,377 17,453 Non-current 1,873 2,699 9,238 6,420 Current bank borrowings and other borrowings 28, 29 3,483 3,941 314 290 Lease liabilities 13 309 301 9,552 6,710 Current 3,792 4,242 22,929 24,163 Total borrowings and lease liabilities 5,665 6,941 As at 31 December 2022, under the agreements signed with the banks the Company’s and the Group’s balance of undrawn short-term credit limits amounted to EUR 465 thousand (2021: the Company’s and the Group’s balance of undrawn short-term credit limits amounted to EUR 1,134 thousand). As at 31 December 2022, the VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 52 Notes to the consolidated and separate financial statements Notes (continued) Borrowings and lease liabilities (continued) Company and the Group had no long-term credit limits, but the Company had an undrawn balance of a long- term credit limit from Swedbank AB amounting to EUR 7,408 thousand (for the purchase of production equipment). Under the agreements signed with the banks, the Company’s and the Group’s credits are subject to the following interest rates: 6-month EURIBOR + margin and 3-month EURIBOR + margin; the interest rates set for overdraft are as follows: 6-month EURIBOR + margin. Under the agreements signed with the banks, the Company and the Group have committed to comply with certain covenants, such as financial debt and net financial debt to EBITDA ratio, debt service coverage ratio and equity ratio. These ratios are calculated according to the data reported in the consolidated financial statements. Borrowings by maturity (EUR ’000): GROUP COMPANY 31 12 2022 31 12 2021 31 12 2022 31 12 2021 9,238 6,420 Within 1 year 3,483 3,941 12,978 17,050 Between 1 and 5 years 1,499 2,285 22,216 23,470 4,982 6,226 In 2022, the Group’s borrowings were subject to annual effective interest rate of 3.0% (2021: 4.15%). In 2022, the Company’s borrowings were subject to annual effective interest rate of 3.16% (2021: 4.52%). Lease liabilities (EUR ‘000): GROUP COMPANY 31 12 2022 31 12 2021 31 12 2022 31 12 2021 314 290 Within 1 year 309 301 399 403 Between 1 and 5 years 374 414 713 693 683 715 The right-of-use assets recognised in relation to lease liabilities is disclosed in Notes 12 and 13. Cash flows from financing activities COMPANY Liabilities arising from financing activities Total Current portion of lease liabilities Non-current portion of lease liabilities Current portion of non-current borrowings, current borrowings Credit lines and over- drafts Non-current portion of non-current borrowings At 1 January 2022 301 414 2,206 1,735 2,285 6,941 Cash inflows - proceeds from borrowings - - - 669 - 669 Cash outflows - repayments of borrowings - - -1,913 - - -1,913 Additions - lease - 347 - - - 347 Repayments – lease -379 - - - - -379 Other non-cash changes (reclassification of current/non-current portion, impairment, write-offs) 387 -387 786 - -786 - At 31 December 2022 309 374 1,079 2,404 1,499 5,665 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 53 GROUP Liabilities arising from financing activities Total Current portion of lease liabilities Non-current portion of lease liabilities Current portion of non-current borrowings, current borrowings Credit lines and over- drafts Non-current portion of non-current borrowings At 1 January 2022 290 403 4,685 1,735 17,050 24,163 Cash inflows - proceeds from borrowings - - 4,642 669 1,600 6,911 Cash inflows – loan offsetting - - - - - - Cash outflows - repayments of borrowings - - -3,872 - -4,293 -8,165 Additions - lease 13 393 - - - 406 Repayments – lease -386 - - - - -386 Other non-cash changes (reclassification of current/non-current portion, impairment, write-offs) 397 -397 1,379 - -1,379 - At 31 December 2022 314 399 6,834 2,404 12,978 22,929 Borrowings acquired on business combination (Note 16). COMPANY Lease liabilities Current portion of lease liabilities Non-current portion of lease liabilities Current portion of non-current borrowings, current borrowings Credit lines and over- drafts Non-current portion of non-current borrowings Total At 1 January 2021 312 345 2,754 1,242 2,779 7,432 Cash inflows - proceeds from borrowings - - 1,166 493 292 1,951 Cash outflows - repayments of borrowings - - -2,500 - - -2,500 Additions - lease - 651 - - - 651 Repayments – lease -533 - - - - -533 Other non-cash changes (loan repayment offset against amounts receivable) 522 -582 786 - -786 -60 At 31 December 2021 301 414 2,206 1,735 2,285 6,941 GROUP Lease liabilities Total Current portion of lease liabilities Non-current portion of lease liabilities Current portion of non-current borrowings, current borrowings Credit lines and over- drafts Non-current portion of non-current borrowings At 1 January 2021 303 323 16,841 1,242 2,951 21,660 Cash inflows - proceeds from borrowings - - 1,166 493 2,816 4,475 Cash inflows – loan offsetting - - - - 226 226 Cash outflows - repayments of borrowings - - -6,308 - -750 -7,058 Additions - lease - 630 - - - 630 Repayments – lease -535 - - - - -535 Outstanding balance of borrowings of subsidiary at 1 April 2021 - - - - 4,793 4,793 Other non-cash changes (reclassification of current/non-current portion, impairment, write-offs) 522 -550 -7,014 - 7,014 -28 At 31 December 2021 290 403 4,685 1,735 17,050 24,163 Loans acquired in a business combination (see Note 16). VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 54 Notes to the consolidated and separate financial statements Notes (continued) 24 Government grants EUR ’000 GROUP COMPANY 31 12 2022 31 12 2021 31 12 2022 31 12 2021 4,125 4,664 Opening net book amount 685 873 13 51 Grants received - - - - Grant receivable - - -456 -486 Amortisation recognised in profit or loss and write-off of grants -165 -188 61 -104 Write-off of grants upon disposal of assets - - 3,743 4,125 Closing net book amount 520 685 During 2007-2014, the Group and the Company received support from the EU funds under the Lithuanian Rural Development Programmes from the National Paying Agency under the Ministry of Agriculture. The support was received for the acquisition of non-current assets. The support is amortised in proportion to the depreciation of the related assets. Under the 2014-2021 programme financed from the EU funds, the Group received support of EUR 3.98 million during 2018-2020 for the acquisition of the technological lines intended for the production of dry whey milk products. The support is amortised in proportion to the depreciation of the related assets. On 8 July 2021, Kelmės Pieninė AB and public enterprise Lithuanian Business Support Agency signed an agreement for the project No. 01.2.1-LVPA-K-856-02-0037 for the Development of an innovative food supplement for the elderly to prevent senile weakness syndrome and malnutrition. For the implementation of the project, the Company will receive support in total amount of EUR 277 thousand during the period of 36 months. During 2020–2022, the amount used from the support was EUR 208 thousand (out of which EUR 123 thousand was used in 2020-2021), whereof the grant for non-current assets amounted to EUR 60 thousand. In December 2022 Vilkyškių Pieninė AB and National Paying Agency under the Ministry of Agriculture signed an agreement for the project No Nr. 17PP-KT-22-1-04217-PR001 Lithuanian Rural Development Programme 2014-2020 measure "Investments in tangible assets" of the activity area "Support for investments in the processing, marketing and/or development of agricultural products". The company has been allocated up to EUR 1 million for the implementation of this project. 25 Non-current trade and other amounts payable GROUP COMPANY 31 12 2022 31 12 2021 EUR ‘000 31 12 2022 31 12 2021 42 53 Put option - - The Group has signed a put option, under which the non-controlling shareholders of Baltic Dairy Board SIA have a right to sell the shares of Baltic Dairy Board SIA to the Company as from 1 April 2023. The transaction price will be determined with reference to the fair value estimated by an independent expert at the date of exercise. The terms do not provide a present ownership interest in the shares subject to the put option. The put option was accounted for at the present value of redemption amount within non-current liabilities and equity of the Company. It was determined that the fair value of put option amounted to EUR 42 thousand as at 31 December 2022 (EUR 53 thousand in 2021). VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 55 Notes to the consolidated and separate financial statements Notes (continued) 26 Deferred income tax assets (liabilities) Deferred income tax assets and liabilities calculated using a 15% tax rate in 2022 (2021: 15%) relate to the following line items: COMPANY Assets Liabilities Net value EUR ‘000 31 12 2022 31 12 2021 31 12 2022 31 12 2021 31 12 2022 31 12 2021 Property, plant and equipment - - 1,741 1,832 1,741 1,832 Vacation reserve -174 -117 - - -174 -117 Inventories -84 -6 - - -84 -6 Government grants -78 -103 - - -78 -103 Tax loss carry forward -887 -2,076 - - -887 -2,076 Deferred income tax (assets)/liabilities -1,223 -2,302 1,741 1,832 518 -470 The Group’s deferred income tax assets and liabilities were calculated at the effective tax rate of 15% in accordance with the Lithuanian laws and the effective tax rate of 25% in accordance with the Latvian laws. Tax rate 25% is applicable to deferred tax assets and liabilities relating to Baltic Dairy Board SIA. The Group‘s deferred tax assets and liabilities relate to the following line items: GROUP Asset Liabilities Net value EUR ‘000 31 12 2022 31 12 2021 31 12 2022 31 12 2021 31 12 2022 31 12 2021 Property, plant and equipment - - 1,896 1,903 1,896 1,903 Vacation reserve -214 -145 - - -214 -145 Inventories -84 -6 - - -84 -6 Government grants -78 -103 - - -78 -103 Tax loss carry forward -887 -2,076 - - -887 -2,076 Fair value adjustment to assets and liabilities of Baltic Dairy Board SIA - - 157 123 157 123 Deferred income tax (assets)/liabilities -1,263 -2,330 2,053 2,026 790 -304 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 56 Notes to the consolidated and separate financial statements Notes (continued) 26 Deferred income tax assets (liabilities) (continued) COMPANY EUR ‘000 01 01 2022 Recognised in profit or loss Recognised in equity 31 12 2022 Property, plant and equipment 1,832 -91 - 1,741 Vacation reserve -117 -57 - -174 Inventories -6 -78 - -84 Government grants -103 25 - -78 Tax loss carry forward -2,076 1,189 - -887 Deferred income tax (assets)/liabilities -470 988 - 518 EUR ‘000 01 01 2021 Recognised in profit or loss Recognised in equity 31 12 2021 Property, plant and equipment 1,820 12 - 1,832 Vacation reserve -98 -19 - -117 Inventories - -6 - -6 Government grants -131 28 - -103 Tax loss carry forward -2,481 405 - -2,076 Deferred income tax (assets)/liabilities -890 420 - -470 The difference between the tax base and the reported net book amount of property, plant and equipment occurred mainly due to revaluation of the buildings, different depreciation periods and recognition of tax losses as at 31 December 2022. GROUP EUR ‘000 01 01 2022 Recognised in profit or loss Recognised in equity 31 12 2022 Property, plant and equipment 1,903 -7 - 1,896 Vacation reserve -145 -69 - -214 Inventories -6 -78 - -84 Government grants -103 25 - -78 Tax loss carry forward -2,076 1,189 - -887 Adjustment to assets and liabilities of Baltic Dairy Board SIA 123 34 - 157 Deferred income tax (assets)/liabilities -304 1,094 - 790 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 57 Notes to the consolidated and separate financial statements Notes (continued) 26 Deferred income tax assets (liabilities) (continued) EUR ‘000 01 01 2021 Recognised in profit or loss Recognised in equity 31 12 2021 Property, plant and equipment 1,820 83 - 1,903 Vacation reserve -98 -47 - -145 Inventories - -6 - -6 Government grants -131 28 - -103 Tax loss carry forward -2,481 405 - -2,076 Adjustment to assets and liabilities of Baltic Dairy Board SIA - 14 109 123 Deferred income tax (assets)/liabilities -890 477 109 -304 GROUP COMPANY 31 12 2022 31 12 2021 EUR ‘000 31 12 2022 31 12 2021 Deferred income tax assets/(liability) 376/ -404 254/ -206 Deferred income tax assets (liability), which will be realised within 12 months 382/ -91 157/ -12 887/ -1,649 2,076/ -1,820 Deferred income tax assets (liability), which will be realised after 12 months 840/ -1,649 2,145/ -1,820 -790 304 Net deferred income tax assets (liability) -518 470 The Group and the Company do not recognise deferred income tax assets on investment project relief. As at 31 December 2022, the Group and the Company had no amounts of unutilised investment project relief (31 December 2021: EUR 1,433 thousand and EUR 305 thousand, respectively). 27 Trade and other amounts payable GROUP COMPANY 31 12 2022 31 12 2021 EUR ‘000 31 12 2022 31 12 2021 Financial instruments Note 14,328 12,980 Trade payables 11,162 10,238 8 47 Trade payables to related parties 29 2,831 2,428 14,336 13,027 13,993 12,666 Non-financial instruments 3,319 2,600 Employment-related liabilities 1,949 1,547 302 302 Advance amounts received 296 225 74 74 Dividends payable - - 2,560 3,599 Taxes payable (other than income tax) 71 56 122 271 Accrued expenses and provisions 45 94 - - Other amounts payable 1 - 6,377 6,846 2,362 1,922 20,713 19,873 16,355 14,588 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 58 Notes to the consolidated and separate financial statements Notes (continued) Trade and other amounts payable (continued) * Based on Order of 26 March 2021 of the State Tax Inspectorate under the Lithuanian Ministry of Finance (the “Tax Authority“) On support measures for the taxpayers affected by the negative impact of the coronavirus, in 2021 the Group was eligible to tax-related suport measures as a businesses affected by COVID- 19 pandemic. Those measures encompassed deferral of tax payments by entering into a tax credit (interest- free) agreement. In 2021, the Group received the Tax Authority‘s resolution regarding entering into a tax credit agreement for the amount of EUR 3,807 thousand (whereof: personal income tax of EUR 487 thousand; value added tax of EUR 3,311 thousand, and other taxes of EUR 9 thousand). The credit repayment dates are during the period between 25 March 2022 and 25 December 2022. Outstanding credit balance as at 31 December 2022 amounted to EUR 1,821 thousand. In December 2022, the Group received a tax credit in amount of EUR 1,900 thousand. The final tax credit repayment date is 25 December 2024. The Group undertook to pay interest at the rate determined by the Ministry of Finance of the Republic of Lithuania. The Group‘s and the Company‘s foreign exchange and liquidity risks arising from trade and other amounts payable are disclosed in Note 30. 28 Contingent liabilities Significant contractual commitments as at 31 December 2022: GROUP COMPANY 31 12 2022 31 12 2021 EUR ‘000 31 12 2022 31 12 2021 6,387 428 Acquisition of property, plant and equipment 6,353 428 7,251 6,809 Purchase of raw materials 7,251 6,809 13,638 7,237 13,604 7,237 As at 31 December 2022, the Group’s and the Company’s assets pledged to secure the repayment of bank borrowings and other collaterals were as follows (Note 23): GROUP: • cash inflows to bank accounts with Luminor Bank AS; • immovable property with the carrying amount of EUR 9,753 thousand; • movable property with the carrying amount of EUR 22,475 thousand; • all stocks in turnover; • all amounts receivable; • lease rights to state-owned land • Based on agreement signed on 29 December 2021 between Baltic Dairy Board SIA and Citadele bank, all movable and immovable property of Baltic Dairy Board SIA must be pledged in 2022 with the carrying amounts of EUR 2,329 thousand and EUR 4,291 thousand as at 31 December 2022, respectively. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 59 Notes to the consolidated and separate financial statements Notes (continued) Contingent liabilities (continued) COMPANY: • cash inflows to bank accounts with Luminor Bank AS; • the Company’s immovable property located at address: P. Lukošaičio g. 14, Vilkyškiai, P. Lukošaičio g. 3, Vilkyškiai and Sodų g, 13, Eržvilkas, Jurbarko r. sav., with the carrying amount of EUR 3,424 thousand – to secure fulfilment of the Company‘s obligations to Swedbank AB; • the Company‘s investment property located at address: Gaurės g. 23, Tauragė, with the carrying amount of EUR 6,127 thousand, to secure fulfilment of obligations of Kelmės Pieninė AB to OP Corporate Bank plc and to secure fulfilment of obligations of Modest AB to Luminor Bank AS; • the Company‘s lease rights to state-owned land; • the Company‘s movable property located at address: P. Lukošaičio g. 14, Vilkyškiai, with the carrying amount of EUR 3,792 thousand to secure fulfilment of the Company‘s obligations to Swedbank AB; • all the Company‘s inventories (stocks) to secure fulfilment of the Company‘s obligations to Swedbank AB and Luminor Bank AS; • all the Company‘s amounts receivable. Other collaterals: • sureties issued by Kelmės Pieninė AB, Modest AB and Kelmės Pienas UAB to Luminor Bank AS to secure fulfilment of overdraft obligations in amount of EUR 2,405 thousand as at 31 December 2022 (the surety agreements were signed in 2022); • sureties issued by Kelmės Pieninė AB, Modest AB and Kelmės Pienas UAB to secure a proper fulfilment of obligations of the Company under a loan agreement with Swedbank AB. The outstanding balance of the loan was EUR 2,285 thousand as at 31 December 2022 (the surety agreements were signed in 2021 and 2022); • sureties issued by Kelmės Pieninė AB and Modest AB to UAB OP Finance leasing company to secure fulfilment of finance lease obligations in amount of EUR 27 thousand (the net book amount of leased assets was EUR 162 thousand as at 31 December 2022); • a complex of property pledged by Kelmės Pieninė AB and equipment pledged by Modest AB to Luminor Bank AS to secure fulfilment of the Company‘s overdraft liabilities. Sureties and guarantees issued: • surety issued to AS Citadele banka to secure fulfilment of financial liabilities of SIA Baltic Dairy Board in amount of EUR 4,163 thousand as at 31 December 2022. (the surety agreement was signed in 2021). • surety issued to Op Corporate bank to secure fulfilment of financial liabilities of Kelmės Pieninė AB in amount of EUR 12,929 thousand as at 31 December 2022 (the surety agreement was signed in 2021). The Group’s and the Company’s management is aware that pursuant to the effective laws, the State Tax Inspectorate may at any time inspect the books and accounting records of the Group and the Company for 5 years preceding the reporting tax period and may assess additional taxes or fines. The Group’s and the Company’s management is not aware of any circumstances that might result in a potential material tax liability in this respect. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 60 Notes to the consolidated and separate financial statements Notes (continued) 29 Transactions with related parties and management personnel The parties of the Group and the Company are related when one party has a power to exercise control over the other party or make significant influence on its financial and operation decisions. The main related parties of the Group and the Company are as follows: Kelmės Pieninė AB, Modest AB, Kelmės Pienas UAB, Pieno Logistika AB, Baltic Dairy Board SIA, Management personnel, Other related parties. In 2021, one of the related parties bought up the debts of Baltic Dairy Board SIA. At the end of 2021, Baltic Dairy Board SIA entered into agreements with the Parent and AS „Citadele banka“ regarding the issue of loans to refinance the debts to the related party. The Parent issued the loan to SIA „Baltic Dairy Board“ at the end of 2022, and AS „Citadele banka“ issued loan to SIA „Baltic Dairy Board“ in 2022. (i) Transactions with related parties: Purchases of raw materials, products, non-current assets and services, interest expenses GROUP COMPANY 2022 2021 EUR ‘000 2022 2021 - - Kelmės Pieninė AB 31,071 29,756 - - Kelmės Pienas UAB 26,659 15,595 - - Modest AB 47,724 32,316 - - Baltic Dairy Board SIA 351 79 - 31 Management personnel - 31 3,085 2,971 Other related parties 3,085 2,678 3,085 3,002 108,890 80,455 (ii) Transactions with related parties: Sale of raw materials, products, non-current assets and services, interest income GROUP COMPANY 2022 2021 EUR ‘000 2022 2021 - - Kelmės Pieninė AB 14,945 10,764 - - Kelmės Pienas UAB 14,190 7,277 - - Modest AB 43,702 30,321 - - Pieno Logistika AB 1 1 - - Baltic Dairy Board SIA 5,072 126 1 6 Management personnel 1 6 45 204 Other related parties 45 204 46 206 77,956 48,699 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 61 Notes to the consolidated and separate financial statements Notes (continued) 29 Transactions with related parties and management personnel (continued) (iii) Year-end balances of transactions with related parties: GROUP COMPANY 31 12 2022 31 12 2021 EUR ‘000 31 12 2022 31 12 2021 - - Loan payable (Kelmės Pieninė AB) - - - - Trade and other amounts payable 2,824 2,381 - - (Kelmės Pieninė AB) - - - - (Kelmės Pienas UAB) 2,824 2,381 - - Trade and other amounts receivable 10,393 4,555 - - (Kelmės Pieninė AB) 2,021 - - - (Modest AB) 8,196 4,365 - - (Baltic Dairy Board SIA) 146 189 - - (From other related countries) 30 - - - Loan receivable (Baltic Dairy Board SIA, including interest) 897 831 13 23 Loan receivable (including interest from management personnel) 13 23 - 12 Other amounts receivable (from management personnel) - 12 8 47 Trade and other amounts payable (to other related parties) 8 47 36 - Trade receivables (from other related parties) 36 - 197 236 Advance amounts receivable (from other related parties) 197 236 915 1,631 Loan receivable (including interest and administration fee from other related parties) 915 1,631 - 4,567 Loan payable (including interest to other related parties) - - Assets pledged, guarantees/sureties issued by the Group and the Company to secure the fulfilment of financial liabilities of related parties, and assets pledged, guarantees/sureties issued by related parties to secure the fulfilment of financial liabilities of the Company are disclosed in Note 28. The main terms and conditions for the Group‘s and the Company‘s amounts payable and receivable under the loan agreements are as follows: - In 2021, the Company granted a loan of EUR 830 thousand to the subsidiary Baltic Dairy Board SIA. The loan has to be repaid by 31 January 2024. The outstanding balance of the loan was EUR 830 thousand as at 31 December 2022. Interest receivable in 2022 was EUR 67 thousand. - In 2021, the Group and the Company granted a loan of EUR 210 thousand to a member of management personnel. The outstanding balance of the loan was EUR 11 thousand and interest receivable was EUR 2 thousand as at 31 December 2022. The loan bears interests. - The Group‘s and the Company‘s loans receivable from other related parties amounted to EUR 915 thousand as at 31 December 2022. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 62 Notes to the consolidated and separate financial statements Notes (continued) 29 Transactions with related parties and management personnel (continued) Loan of EUR 13 thousand has to be repaid by 31 December 2023. Interest is charged on the outstanding balance of the loan. Administration fee and interest receivable amount to EUR 97 thousand. Loan of EUR 805 thousand has to be repaid by 31 December 2023. Interest is charged on the outstanding balance of the loan. In 2022, personnel expenses included payments of EUR 1,028 thousand and EUR 606 thousand to the Group‘s and the Company‘s management personnel, including social security contributions (2021: EUR 943 thousand and EUR 564 thousand, respectively). In 2022, the Group‘s and the Company‘s payments on behalf of personnel under the defined plan for contributions to Pillar III investment funds amounted to EUR 290 thousand (2021: EUR 253 thousand and EUR 231 thousand, respectively). 30 Financial instruments and risk management Credit risk The maximum exposure to credit risk is the net book amount of financial assets designated as at 31 December 2022 as financial assets measured at amortised cost. The maximum exposure to credit risk as at the reporting date was as follows: GROUP EUR ‘000 Net book amount Note 31 12 2022 31 12 2021 Non-current amounts receivable 17 - 13 Trade and other amounts receivable, net of tax 19 14,992 12,211 Cash and cash equivalents 21 621 799 15,613 13,023 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 63 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) The table below analyses by geographical region the maximum exposure to credit risk as at the reporting date arising from trade receivables: EUR ‘000 Net book amount 31 12 2022 31 12 2021 Lithuania 1,922 2,706 Great Britain 2,009 319 Israel 594 859 Saudi Arabia 2,871 2,174 Portugal 788 408 Italy 640 497 Poland 1,593 975 Latvia 556 91 Estonia 56 312 Republic of Korea - 157 Kazakhstan 76 101 Belgium 81 - Egypt 141 - Albania 170 104 Denmark 433 138 The Netherlands 254 794 Azerbaijan 192 78 Cameroon - 3 Qatar 91 - Thailand 237 69 Germany 551 1,019 Libya 94 146 Lebanon 58 70 Ireland - 2 Greece 422 160 Bosnia-Herzegovina 307 250 Slovakia 28 - Finland 186 61 Spain - 50 Czech 2 224 South Africa 86 140 Malta - 68 Norway 5 20 Sakartvelo - 58 UAE 299 87 Vietnam 226 63 USA 23 - Other 1 8 14,992 12,211 As at 31 December 2022, significant credit risk concentration was related to five customers, the receivables from which accounted for 41% of total trade receivables (31 December 2021: 31%). VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 64 Notes to the consolidated and separate financial statements 30 Financial instruments and risk management (continued) COMPANY EUR ‘000 Net book amount Note 31 12 2022 31 12 2021 Non-current amounts receivable 17 897 843 Trade and other receivables 19 23,399 16,634 Cash and cash equivalents 21 325 579 24,621 18,056 The table below analyses the maximum exposure to credit risk at the reporting date arising from trade receivables by geographical regions: EUR ‘000 Net book amount 31 12 2022 31 12 2021 Lithuania 10,572 6,950 Great Britain 2,009 319 Israel 594 859 Saudi Arabia 2,871 2,174 Portugal 788 408 Italy 640 497 Poland 1,533 975 Latvia 555 279 Estonia 56 312 Republic of Korea - 157 Kazakhstan 76 101 Belgium 81 - Egypt 141 - Albania 170 104 Denmark 433 138 The Netherlands 72 794 Azerbaijan 192 78 Cameroon - 3 Qatar 91 - Thailand 237 69 Germany 551 1,019 Libya 94 146 Lebanon 58 70 Ireland 23 - Greece 422 160 Bosnia-Herzegovina 307 250 Slovakia 28 - Finland 186 61 Spain - 50 Czech 2 224 South Africa 86 140 Malta - 68 Norway 5 20 Sakartvelo - 58 Vietnam 226 63 UAE 299 87 Luxembourg - - Other 1 1 23,399 16,634 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 65 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) As at 31 December 2022, a significant credit risk concentration was related to three customers, the receivables from which accounted for 20% of total trade receivables (31 December 2021: 36%). Impairment losses The Group and the Company establish the provision for impairment losses which represents estimate of incurred losses in respect of trade and other receivables. Such a provision includes only specific losses associated with individual significant items of trade and other receivables. The ageing analysis of trade and other receivables and non-current amounts receivable as at the reporting date is as follows: GROUP Gross amount Impairment Gross amount Impairment EUR ‘000 31 12 2022 31 12 2022 31 12 2021 31 12 2021 Related parties: Not past due 862 - 1,559 - Past due 0-30 days - - - - Past due 31-60 days - - - - More than 60 days 96 - 94 - 958 - 1,653 - Not past due 9,500 - 9,598 - Past due 0-30 days 3,935 - 902 - Past due 31-60 days 479 - 55 - More than 60 days 219 -99 75 -59 14,133 -99 10,630 -59 15,091 -99 12,283 -59 Impairment losses related to trade and other receivables amounted to EUR 99 thousand as at 31 December 2022 (2021: EUR 59 thousand). VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 66 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) COMPANY Total amount Impairment Total amount Impairment EUR ‘000 31 12 2022 31 12 2022 31 12 2021 31 12 2021 Related parties: Not past due 10,346 - 6,357 - Past due 0-30 days - - 419 - Past due 31-60 days - - 168 - More than 60 days 242 - 94 - 10,588 - 7,038 - Other parties: Not past due 9,293 - 9,474 - Past due 0-30 days 3,930 - 899 - Past due 31-60 days 471 - 52 - More than 60 days 113 -99 73 -59 13,807 -99 10,498 -59 24,395 -99 17,536 -59 Impairment losses related to trade and other receivables amounted to EUR 99 thousand as at 31 December 2022 (2021: EUR 59 thousand). Movements on the account of provision for impairment of trade and other receivables during the year were as follows: GROUP EUR ‘000 Net book amount 2022 2021 Balance at 1 January -59 -95 Impairment losses recognised -75 -59 Write-off of bad debts 11 95 Impairment losses reversed 24 - Balance at 31 December -99 -59 COMPANY EUR ‘000 Net book amount 2022 2021 Balance at 1 January -59 -95 Impairment losses recognised -75 -59 Write-off of bad debts 11 95 Impairment losses reversed 24 - Balance at 31 December -99 -59 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 67 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) Based on historical payment statistics and detailed analysis of customer solvency, the Company’s management considers that the amounts which are past due more than 30 days and not impaired are still recoverable. During the recent five years, the Company recognised amounts receivable of EUR 99 thousand as bad debts. Liquidity risk The table below analyses financial liabilities, including interest charged thereon, based on their contractual maturities: GROUP At 31 December 2022 Net book amount Contractual cash flows Less than 6 months 6-12 months 1-2 years 2-5 years EUR ’000 Financial liabilities Bank borrowings 21,781 -22,921 -1,583 -7,761 -2,486 -11,091 Other borrowings - - - - - - Lease liabilities 713 -747 -189 -142 -219 -197 Factoring 435 -448 -448 - - - Trade payables 14,336 -14,336 -14,336 - - - 37,265 -38,452 -16,556 -7,903 -2,705 -11,288 At 31 December 2021 Net book amount Contractual cash flows Less than 6 months 6-12 months 1-2 years 2-5 years EUR ’000 Financial liabilities Bank borrowings 17,758 -18,864 -1,391 -3,113 -2,496 -11,864 Other borrowings 4,293 -5,036 -648 -628 -3,760 - Lease liabilities 693 -716 -161 -141 -217 -197 Factoring 1,419 -1,426 -1,426 - - - Trade payables 13,027 -13,027 -13,027 - - - 37,190 -39,069 -16,653 -3,882 -6,473 -12,061 COMPANY At 31 December 2022 Net book amount Contractua l cash flows Less than 6 months 6-12 months 1-2 years 2-5 years EUR ’000 Financial liabilities Bank borrowings 4,690 -4,937 -414 -2,945 -827 -751 Lease liabilities 683 -717 -187 -139 -202 -190 Factoring 292 -301 -301 - - - Trade payables 13,993 -13,993 -13,993 - - - 19,658 -19,948 -14,895 -3,084 -1,029 -941 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 68 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) At 31 December 2021 Net book amount Contractu al cash flows Less than 6 months 6-12 months 1-2 years 2-5 years EUR ’000 Financial liabilities Bank borrowings 4,807 -5,039 -460 -2,190 -845 -1,544 Lease liabilities 715 -737 -167 -146 -227 -197 Factoring 1,419 -1,426 -1,426 - - - Trade payables 12,666 -12,666 -12,666 - - - 19,607 -19,868 -14,719 -2,336 -1,072 -1,741 As at 31 December 2022, the Group‘s and the Company‘s current assets exceeded the current liabilities by EUR 14,121 thousand and EUR 17,611 thousand, respectively. As at 31 December 2022, the Group‘s and the Company’s borrowings and lease liabilities totalled EUR 22,929 thousand and EUR 5,665 thousand, respectively. Under the currently effective loan and other agreements with the banks, the outstanding balances of the Group and the Company to be repaid in 2022 amounted to EUR 9,183 thousand and EUR 3,501 thousand, respectively (see Note 23). The export is particularly important for the Group, since it accounts for 89% of total annual turnover. It is expected that in 2022 the level of sale prices of products will be lower than in 2022. The fall of prices in export markets is likely to stabilize and a lower level of raw materials and energy prices will amortize lower prices in export markets. Borrowings and lease liabilities are expected to amount to EUR 30,601 thousand as at 31 December 2023. In view of all the projections for 2023, the Group’s net debt to EBITDA ratio will be around 2.2 as at 31 December 2023. Foreign exchange risk Exposure to foreign exchange risk, at the exchange rates effective as at 31 December 2022, was as follows: Exposure to foreign exchange risk, at the exchange rates effective as at 31 December 2021, was as follows: GROUP (COMPANY) ( EUR ‘000) USD PLN Trade and other receivables, net of tax 3,211 47 Cash and cash equivalents - - Trade payables - - Net exposure 3,211 47 GROUP (COMPANY) ( EUR ‘000) USD PLN Trade and other receivables, net of tax 2,174 121 Cash and cash equivalents 4 1 Trade payables - -2 Net exposure 2,178 120 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 69 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) During the year the exchange rates against the euro were as follows: Average 2022 2021 USD 1.0522 1.1831 PLN 4.6856 4.5650 The exchange rates applied against the euro as at 31 December were as follows: 2022 2021 USD 1.0666 1.1334 PLN 4.6808 4.5960 Analysis of sensitivity to changes in the exchange rates The Company’s foreign exchange risk arises from purchases and sales denominated in currencies other than the euro. In 2022, the major portion of the Company’s transactions were conducted in the euros, and therefore, the Company was not exposed to significant foreign exchange risk. Interest rate risk The Group’s and the Company’s borrowings bear variable interest rates linked to EURIBOR + margin. Interest rates applied to the Group’s and the Company’s financial instruments as at 31 December 2022 were as follows: GROUP COMPANY Net book amount EUR ‘000 Net book amount 31 12 2022 31 12 2021 31 12 2022 31 12 2021 Financial instruments with fixed interest rates - - Loan granted to Baltic Dairy Board SIA 830 830 800 1,350 Current portion of loan granted 800 1,350 11 21 Short-term loan granted to management personnel 11 21 - - Current borrowings of management personnel - - 811 1,371 1,641 2,201 GROUP COMPANY Net book amount EUR ‘000 Net book amount 31 12 2022 31 12 2021 31 12 2022 31 12 2021 Financial instruments with variable interest rates -21,781 -22,051 Bank borrowings -4,690 -4,807 - - Kelmės Pieninė AB - - -435 -1,419 Factoring -292 -1,419 -713 -693 Lease liabilities -683 -715 -22,929 -24,163 -5,665 -6,941 -22,118 -22,792 -4,024 -4,740 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 70 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) In 2022 the Group paid interest of EUR 393 thoisamd on borrowing. In 2023, at a similar level of borrowing, interest payments are projected to approximate EUR 1 million. Analysis of sensitivity of cash flows to instruments bearing variable interest rates A shift in interest rates by +/- 100 basis points (bps) would increase/decrease equity and profit/(loss) by the amounts set out in the table below. This analysis assumes that all other variables, in particular exchange rates, are held constant. The analysis for 2021 and 2022 was performed using the same basis. GROUP COMPANY Profit (loss) Impact (EUR ’000) Profit (loss) 100 bp increase 100 bp decrease 100 bp increase 100 bp decrease At 31 December 2022 -221 221 Financial instruments bearing variable interest rates -40 40 At 31 December 2021 -228 228 Financial instruments bearing variable interest rates -47 47 Fair value of financial instruments / Fair value hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the main (or most advantageous) market between market participants at the measurement date, regardless of whether the price is directly observed or determined using a valuation methodology. The table below analyses financial instruments carried at fair value, by valuation method. The following methods and assumptions are used by the Group and the Company to determine the fair value of these financial instruments: Financial instruments that are not measured at fair value The main financial instruments of the Group and the Company that are not measured at fair value are trade and other amounts receivable, term deposits, trade and other amounts payable, non-current and current borrowings. The Group’s and the Company’s management is of the opinion that the carrying amounts of these financial instruments approximate their fair values because borrowing costs are linked to an interbank lending rate EURIBOR, and other financial assets and liabilities are of short-term nature; therefore, their fair value variation is not significant. Fair value is defined as 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 hierarchy has three levels: Level 1 includes fair value of assets based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 includes fair value of assets based on directly or indirectly observable inputs; Level 3 includes fair value of assets based on unobservable inputs. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 71 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) Financial instruments measured at fair value The Group and the Company have no financial instruments measured at fair value. GROUP At 31 December 2022 EUR ’000 Level 1 Level 2 Level 3 Total Non-current amounts receivable - - - - Trade and other receivables - - 14,992 14,992 Cash and cash equivalents 621 - - 621 Borrowings and lease liabilities - - -20,601 -20,601 Trade and other payables - - -14,336 -14,336 621 - -19,945 -19,324 At 31 December 2021 EUR ’000 Level 1 Level 2 Level 3 Total Non-current amounts receivable - - 13 13 Trade and other receivables - - 12,211 12,211 Cash and cash equivalents 799 - - 799 Borrowings and lease liabilities - - -24,163 -24,163 Trade and other payables - - -13,027 -13,027 799 - -24,966 -24,167 COMPANY At 31 December 2022 EUR ’000 Level 1 Level 2 Level 3 Total Non-current amounts receivable - - 897 897 Trade and other receivables - - 23,399 23,399 Cash and cash equivalents 325 - - 325 Borrowings and lease liabilities - - -5,090 -5,090 Trade and other payables - - -13,993 -13,993 325 - 5,213 5,538 At 31 December 2021 EUR ’000 Level 1 Level 2 Level 3 Total Non-current amounts receivable - - 843 843 Trade and other receivables - - 16,634 16,634 Cash and cash equivalents 579 - - 579 Borrowings and lease liabilities - - -6,941 -6,941 Trade and other payables - - -12,666 -12,666 579 - -2,130 -1,551 VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 72 Notes to the consolidated and separate financial statements Notes (continued) 30 Financial instruments and risk management (continued) Capital management The Board's policy is aimed at maintaining a significant portion of equity compared to borrowed funds in order to avoid damaging trust of investors, creditors and the market and ensuring the development of operations in the future and compliance with externally imposed capital requirements. Capital is defined as equity attributable to equity holders The Board also aims to maintain balance between a higher rate of return, which could be achieved by obtaining more borrowed funds, and security, which is ensured by a larger amount of equity. The Group and the Company manage the capital structure and make adjustments to it in the light of changes in economic conditions and the risk characteristics of their activities. To maintain or adjust the capital structure, the Group and the Company may adjust the dividend payment to shareholders, return capital to the shareholders or issue new shares. There were no changes in the objectives, policies or processes during the financial years ended 31 December 2022 and 31 December 2021. The Law on Companies of the Republic of Lithuania require that the Group and the Company keep equity at no less than 50% of the share capital. The Group has a commitment to comply with the external capital requirements set by the banks. Based on the requirements of the banks (equity – revaluation reserve) / (total assets) ratio should not be less than 30%. Management monitors the compliance with the requirements set for the Group. Further details are given in Note 22. Risk of changes in energy prices In 2022 the Group consumed slightly less energy than in 2021, and due to the increased production volumes and technologies being implemented, energy was used extremely efficiently. In 2022 the amount of energy consumption per 1 tonne of production was significantly lower than in 2021. (3.12 MWh/t in 2022 and 3.34 MWh/t in 2021). The amount of energy consumed per 1 unit of revenue also fell from 0.64 GWh/million EUR to 0.42 GWh/million Eur. The jump in energy prices that started in the spring and continued until autumn led to a high level of energy prices. Since the energy costs stabilized in the fourth quarter of 2022, energy costs are projected to be lower in 2023. Average price of gas purchased by the Group in 2022 was 3 times higher than in 2021. In 2023 it is planned to be about 24% lower than in 2022. The average price of electricity in 2022 was twice as high as in 2021, and in 2023 a similar price level is planned as in 2021. Gas prices are influenced by many factors, including increased CNG supplies from the US, stocks in EU underground gas storage facilities and others. Thus, there is a noticeable drop in gas prices. It is also prpjected that electricity prices will gradually decrease due to the expansion of renewable energy sources. For the first time in history, the production of renewable energy power plants in the European Union has exceeded the production of power plants using natural gas. VILKYŠKIŲ PIENINĖ AB Consolidated and separate financial statements for the year ended 31 December 2022 73 Notes to the consolidated and separate financial statements Notes (continued) 31 Impact of the war in Ukraine At the end of February 2022, the Russian Federation announced a military operation in Eastern Ukraine. The regimes of Russia and Belarus were subject to economic and financial sanctions. The Group‘s and the Company's management performed an assessment of the potential effects of the invasion of Ukraine on the Group‘s and the Company's operations. In the opinion of the Group‘s and the Company‘s management, the geopolitical changes had no significant impact on the Group‘s and the Company's operations After the start of the war in Ukraine, Vilvi Group's strong and unequivocal position and support for Ukraine allowed to strengthen relations with existing partners in Ukraine and gain greater trust from new trade partners. This allowed to increase sales volumes (of blue cheese, yogurt, sour cream) in the fourth quarter of 2022. Projects frozen at the beginning of the war were renewed with the largest retailers and the product range was expanded to include new brand yogurt, butter and cheeses. In 2021 and 2022, the Group’s sales to Ukraine amounted to EUR 973 thousand– and EUR 477 thousand, respectively. In 2023 growth of sales to Ukraine is planned. The Company's and Group’s sales to Russia and Belarus were insignificant in 2021, and there were none in 2022. The management did not identify any other additional threats to business continuity of the Group and the Company. The management monitors the changing situation on a daily basis and, if necessary, makes decisions to ensure the stable operation of the Group and the Company. 32 Events after the reporting period There were no significant events after the end of the reporting period. “Vilvi Group” annual report for 2022 74 Annual report of “Vilvi Group” for 2022 I. ISSUER OVERVIEW 1. Reporting Period for this Report This consolidated annual Report is for 2022. 2. Issuer Information and Contact Details Name of Issuer Vilkyškių pieninė AB (hereinafter – Company or Issuer) Legal Form Public limited company (Lith. Akcinė bendrovė) Date and place of registration 18 May 1993, VĮ Registrų centras Date and place of re-registration 30 December 2005, VĮ Registrų centras Head office address P.Lukošaičio str. 14, Vilkyškiai, LT-99254, Pagėgių savivaldybė Registration No. 060018 Company Register Code 277160980 Telephone +370 441 55330 E-mail [email protected] Website https://vilvigroup.lt 3. Information on Subsidiaries and Contact Details: “Modest” AB Name of subsidiary “Modest” AB (hereinafter – “Modest” AB) Legal form Public limited company Date of registration 25 March 1992 Date of re-registration 31 December 2009, VĮ Registrų centras Registration No. 017745 Company register code 121313693 Head office Gaurės str. 23, LT-72340 Tauragė Telephone +370 446 72693 E-mail [email protected] Website https://vilvigroup.lt Kelmės pieninė AB Name of subsidiary Kelmės pieninė AB (hereinafter – Kelmės pieninė AB) Legal form Public limited company Date of registration 3 August 1993, VĮ Registrų centras Date of re-registration 4 July 2007 Head office Gaurės g. 23, LT-72340 Tauragė Registration No. 110109 Company register code 162403450 Telephone +370 427 61246 E-mail [email protected] Website https://vilvigroup.lt “Vilvi Group” annual report for 2022 75 “Kelmės pienas” UAB Name of Kelmės pieninė AB subsidiary “Kelmės pienas” UAB (hereinafter – “Kelmės pienas” UAB) Legal form Public limited company Date of registration 17 November 2021, VĮ Registrų centras Date of re-registration 4 July 2007 Head office Raseinių str. 2, LT-86160 Kelmė Company register code 305658215 Telephone +370 427 61246 E-mail [email protected] Website https://vilvigroup.lt “Pieno logistika” AB Name of subsidiary “Pieno logistika” AB (hereinafter – “Pieno logistika” AB) Legal form Public limited company Data and place of registration 10 December 2013, Šiauliai Division of VĮ Registrų centras Head office Pagojo str. 1, Pagojo km., Kelmės raj. Company register code 303203457 Telephone +370 427 61246 E-mail [email protected] Website https://vilvigroup.lt “Baltic Dairy Board” SIA Name of subsidiary “Baltic Dairy Board” SIA (hereinafter – “Baltic Dairy Board” SIA) Legal form Public limited company Data and place of registration 21 July 2008, Commercial register of Republic of Latvia Head office Stacijas str. 1, Bauska, LV-3901, Latvia Company register code 43603036823 Telephone +371 63026899 E-mail [email protected] Website http://www.bdb.lv/ 4. Main Types of Activity The main business activity of “Vilvi Group” is production and sale of dairy products (EVRK 10.51). The main business activity of Vilkyškių pieninė AB is production and sale of fermented cheese, cream and whey products. Subsidiary company “Modest” AB makes mozzarella cheese, mould cheese, smoked, melt cheese and other cheese products. Subsidiary company Kelmės pieninė AB produces dry milk products – WPC, SMP, permeate and whey powder. “Kelmės pienas” UAB produces fresh dairy products: kefir, sour cream, yogurts, cottage cheese, glazed curd bars, butter. Subsidiary company “Pieno logistika” AB mainly engages in the lease of buildings. Subsidiary company “Baltic Dairy Board“ SIA specializes in production of high value-added components of milk – GOS (Galactooligosaccharides) and processing of whey and milk, which separates protein and lactose into two separate products. “Vilvi Group” annual report for 2022 76 5. Agreements with Brokerages for Securities Public Turnover “Vilvi Group” has an underwriting agreement with FMĮ Orion Securities UAB brokerage (address A. Tumėno str. 4, B korp., LT-01109, Vilnius) on the accounting of Vilkyškių pieninė AB, Modest AB, Kelmės pieninė AB. AB shareholders and services associated with the accounting of the Company’s securities. FMĮ Finasta AB brokerage manages shareholder accounts for “Pieno logistika” AB. 6. Trading in the Issuer’s Securities on Regulated Exchanges The name of securities: Vilkyškių pieninė AB common registered shares. The number of securities issued: 11,943,000 units. Share face value: EUR 0.29 per share. The Company’s issue is included in the Official List of AB NASDAQ OMX Vilnius. The ISIN code of the securities: LT0000127508, Ticker symbol: VLP1L. The Company’s shares have been listed since 17 May 2006. The securities of the subsidiary companies are not publicly traded. II. OVERVIEW OF OPERATIONS “Vilvi Group” produces a wide range of delicious dairy products based on original recipes, many of them acknowledged for their taste and quality at international trade fairs. We are proudly continuing the long- standing traditions of cheese production that originated in the picturesque region of Lithuania surrounded by wonderful nature. The lush flood-meadows of the Nemunas River inspire us to create and share what nature has so generously bestowed on us. Our mission is to provide people across the whole world more opportunities to enjoy dairy products. Our Values: Quality – we produce high-quality dairy products and abide by the highest standards. Innovations – we continually delight our consumers by introducing new products and providing opportunities to experience new taste sensations. We constantly invest in new technologies and expand our product range. We are interested in creating and sharing the results of our work. After all, it is how new traditions are being born, is not it? Competence – in the hands of our dairy masters dairy foods turn into exclusive and original high-quality products. Honesty – we are open and reliable. Our customers’ trust and respect are extremely important to us. The basis of our activity includes the time-proved relations with our business partners and professionalism of our employees. 7. Issuer’s Jurisdiction In its operations, “Vilvi Group” follows the Lithuanian law, government resolutions and legal acts on companies, in particular the Lithuanian law on the securities market, as well as the Company’s own Statutes. 8. Brief History of Issuer Vilkyškių pieninė AB was revived in 1993, when a limited liability company called Vilkyškių pieninė was founded in the premises of an old dairy bearing the same name, built in 1934. The old dairy had stopped production in 1985, and all equipment had been dismantled. In 1993, the new owners of the dairy privatised the buildings and brought new production equipment from Eastern Germany. Initially, there was no other owners’ equity apart from the privatized buildings, and bank loans were taken to provide with the needed working capital. “Vilvi Group” annual report for 2022 77 Key Events in Issuer’s History 1993 – 1995: the dairy’s water tower, boiler house and milk separation unit were renovated, and milk separation was launched. The cheese production department started making of low-fat fermented cheese Peptatas. A butter production unit was also launched. Since 1997, the cheese production department started making the Tilsit-type cheese, also launching production of Gouda-type fermented cheese a year later. 1997-2000: buildings and production equipment were renovated, boiler house BWE and cold warehouse were built, also renovated electricity power substation. 1999- 2000: 2.5 MEUR was invested into the new TetraPakTebel cheese production facility. As a result, new fully computerised and automated cheese production line was installed, enabling the company to make EU- compliant products. In the same year, the Company was issued with a license to export its products to the European Union. 2001: The Company acquired the Tauragė dairy facility of the Mažeikiai branch of Pieno žvaigždės AB. Since 2007, it houses the head office of “Modest” AB, a subsidiary of Vilkyškių pieninė AB. 2003-2005: The Company adopted accounting and enterprise resource planning solution Microsoft Dynamics Nav. An EU-compliant wastewater treatment facility, made by the Dutch company NewWaterTechnology, was installed, and investments were made into cheese packaging equipment in the same year. Boiler house of Tauragė production facilities was reconstructed to use new fuel type. As of 17 May 2006, a total of 9,353,000 common registered shares of Vilkyškių pieninė AB were listed on the Current List of the NASDAQ OMX Vilnius exchange. As of 1 January 2008, the shares are listed in the Official list of NASDAQ OMX Vilnius exchange. In 2006, the Issuer acquired an 80.25 percent stake in “Modest” AB. Now Vilkyškių pieninė AB holds 99.7 percent of the “Modest” AB stock. In 2009, the share capital of “Modest” AB was increased from EUR 37,190 up to EUR 178,730 through the issue of 488,710 new common registered shares. Meanwhile, the share capital of “Modest” AB was raised from EUR 178,730 to EUR 1,626,830 by Vilkyškių pieninė AB contribution in cash in 2010. In 2006, the Company’s cheeses production facility was expanded significantly. Maximum production capacities of the Company increased from 10,000 to 14,000 tonnes per year. The Company used the support from the EU funds. In 2007, a new modern whey processing facility was launched. The total value of the whey processing facility was more than 2.3 MEUR. The investment increased the Company’s productivity, improved quality controls and reduced waste considerably. The Company had no whey processing until then. The Company used the support from the EU funds. 2007: “Modest” AB was allocated 0.6 MEUR in support from EU structural funds. “Modest” AB used the funds to upgrade its fleet of refrigerated vans for product transportation and to modernise its production processes. It installed new milk processing technologies and packaging line for its main product Mozzarella cheese. 2008: Vilkyškių pieninė AB took over Kelmės pieninė AB by acquiring 99.09 percent of the company’s stock. At present Vilkyškių pieninė AB controls 100 percent of the Kelmės pieninė AB stock. As a result of the acquisition, “Vilvi Group” entered the market of fresh dairy products. 2009: 9.5 MEUR in EU support was under an agreement with the Lithuanian National Paying Agency/ The support was awarded under the Lithuanian Rural Development Programme for 2007-2013, measure “Adding Value to Agricultural and Forestry Products”, activity “Processing and Marketing of Agricultural Products”. 2011: was invested into new cold storage equipment, expand the existing wastewater treatment and equipment washing capacities. Also, investments were mainly made into refrigeration equipment, a cheese cutting and packaging line. The installation of the Equinox warehouse management system was also started. 2012: a new cheese production line was assembled (4.6 MEUR in value), increasing output by 30 percent. In addition, 2.7 MEUR packaging and plastic-coating line was installed. “Vilvi Group” annual report for 2022 78 2013: the trademark of Vilkyškiai was recognized as Brand of the year 2013 in Lithuania. 2013: among other investments, about 1.5 MEUR was invested to expand the whey processing unit’s daily capacity to 600 tonnes. By the end of the year, the whey ultrafiltration project was also completed — it is a technology that breaks whey proteins into their basic components. In 2013 Kelmės pieninė AB installed a new TetraTop packaging line for liquid dairy products. This packaging is innovative and preserving environment. Reliable carton packaging protects product from environmental effects – light, air, microorganizms and it is more comfortable to use. 2013: after “Modest” AB completed the modernisation of its blue cheese production facility, its output is about 300 tonnes per year. 2014: Vilkyškių pieninė AB launched a new cheese-slicing line, allowing to cut the cheese in slices, and acquired new storage tanks for milk products. The project was financed from the EU funds. In 2014- 2015, Kelmės pieninė AB and “Modest” AB renovated its compressor station. In 2015, Vilkyškių pieninė AB signed a contract to connect to a gas distribution system with Lietuvos dujos AB as dry milk products production factory need gas. In 2015 the trademark of Vilkyškiai was recognized as Brand of the year 2015 in Lithuania. In 2016 Kelmės pieninė AB started the Project of dry milk products factory. For the implementation of it, Kelmės pieninė AB signed a support agreement with the National Paying Agency under the Ministry of Agriculture of the Republic of Lithuania for 4 million EUR support. On April 2017, Vilkyškių pieninė AB has been announced as the Lithuanian investor of the year 2016. The title has been gained for investing to the whey processing factory in Tauragė. In the end of 2017 production was started in the new dry milk products factory in Tauragė. Over the past two years the company invested about 28 million EUR to this project. The project was also funded by EU funds, with a budget of 4 MEUR. Kelme Pieninė AB dry milk products factory is currently the most modern in the region, with a fully automated production process and packaging line. 2017: Vilkyškių pieninė AB was awarded as “Lithuanian Export Prize 2017” winner. The Company was recognized as the most contributing to the growth of the economy and exports. 2018 Vilkyškių pieninė AB was announced as winner of prestigious award “Golden Phenix” and received nomination “Sponsor of Culture of the Year” for cultural activities. 2019 “Modest” AB has implemented the Mozzarella cheese grating line, which allows to produce large quantities of grated Mozzarella and to meet customers’ needs both in Europe and in other world markets. Company invested 0.55 MEUR. 2019 Kelmės pieninė AB has reconstructed boiler house to use natural gas instead of diesel fuel. The new boiler house is fully automated and more energy efficient therefore it is more economical and ecological. 2020: In order to strengthen the brand's global recognizability, it was decided to unify the business group’s identity in all of the markets across the world. Since September 15, 2020 AB Vilkyskiu Pienine Group begins operations under the “Vilvi Group” brand name uniting the whole group. 2020: In the largest Europe’s brand study on sustainability – Sustainable Brand Index Vilkyškių pieninė brand was 12 th in overall ranking among Lithuanian brands. It was ranked among top 5 out of 19 brands in the food and beverage category in Lithuania. 2020: In order to better manage Kelmės pieninė AB activities, its subsidiary company “Kelmės pienas” UAB (in Kelmė town) was founded which in 2021 took over fresh milk products (cottage cheese, yogurts, sour cream, cream, butter and other) business. Kelmės pieninė AB after transfer of the business segment continue production of dry milk products in Tauragė. 2020: Kelmės pieninė AB started research and experimental development project Creation of innovative food supplement for elderly people to prevent senescence weakness and insufficient nutrition. The project is carried out in cooperation with Lithuanian University of Health Sciences. Successful research and significant results are ensured by long-term experience and partnership of the Company and the University. The project is “Vilvi Group” annual report for 2022 79 financed according to 2014 – 2020 European Union investment programme Research and experimental development and innovation promotion No 01.2.1-LVPA-K-856 Experiment. In 2021 Vilkyškių pieninė AB completed the acquisition of 70% equity share stake of “Baltic Dairy Board” SIA. The investment of Vilkyškių pieninė AB to “Baltic Dairy Board” SIA share capital strengthens and develops current “Vilvi Group” high value-added product basket of milk components. “Baltic Dairy Board” SIA is company based in Latvia which specializes in production and sale of high value-added components of milk and processing of whey and milk, which separates protein and lactose into two separate products, joined the group. It also develops and produces products that are used in production of baby food – galactooligosaccharides. 2022: In the largest Europe’s brand study on sustainability – Sustainable Brand Index – Vilkyškių pieninė brand was among the most sustainable in Lithuania and was 12 h in overall ranking, and 2 rd in food category. 9. Main Investments of “Vilvi Group” During Reporting Period During 2022 the Group of companies invested 4.3 MEUR. 10. Patents & Licenses Product quality, customer needs satisfaction and food safety requirements are priorities at “Vilvi Group”. To maintain high product quality, Quality management and Food safety systems are constantly monitored, revised and improved. On 8 May 2000, Vilkyškių pieninė AB received a license to export its products to the European Union member states. The Company operates a quality management system (HACCP system). Vilkyškių pieninė AB has obtained certification of its Quality Management and Food Safety systems under the international standard ISO 22000/ FSSC 22000. This certification scheme is part of the Global Food Safety Initiative (GFSI) and is equivalent to such internationally recognised standards as BRC and IFS. Since 2013 Kelmės pieninė AB worked in accordance with ISO 22000/ FSSC 22000 standards, but in 2015 it extended the scope of certification and now covers the processing of all products. Kelmės pieninė AB in 2022 transferred fresh products business part consequently food safety management system certificates ISO 22000/FSSC 22000 related to fresh products production were transferred as well. “Modest” AB is also certified under iso 22000/FSSC 22000 certification scheme for product development, production and sale. The quality management and food safety systems are subject to continuous monitoring, review and improvements with a view to maintaining the high quality of the Company’s products. Every year “Vilvi Group” audits according to ISO 22000 / FSSC 22000 certification schemes. In order to attract buyers in Islamic countries, Vilkyškių pieninė AB, “Modest” AB and Kelmės pieninė AB (dry milk products) have been certified according to Halal rules. From year 2015 certification for Halal products continues every year. Halal products are associated with product safety, health, quality, ecology. These products are used by people of other religions as well. In 2017, factory of dry milk products of Kelmės pieninė was registered and started to operating. It received the veterinary approval number, which granted the right to export production to all EU and other third countries. The factory has established a physicochemical research laboratory equipped with state-of-the-art ultra-reliable equipment for ensuring the quality control of products. The laboratory carries out research using analyzers operating on the basis of infra-red analyzers and using reference (classical) methods of investigation. In 2018 Kelmės pieninė AB, dry milk products certified according to ISO 22000/FSSC 22000 Certification Scheme. In 2019 the laboratory of Vilkyškių pieninė AB received Food business operator laboratory approval permit. In 2020, Kelmės pieninė AB dry milk products production was certified according Kosher certificate. The certificate is renewed every year. To maintain high product quality, Quality management and Food safety systems are constantly monitored, revised and improved. Every year all “Vilvi Group” companies are certified according to ISO 22000/FSSC “Vilvi Group” annual report for 2022 80 22000 certification schemes. In 2022 Kelmės pieninė AB renewed certificates with updated versions ISO 22000:2019, FSSC 22000 and the scope of certificates was expanded including protein drink production. Vilkyškių pieninė AB, Modest AB, “Kelmės pienas” UAB were certified by updated FSSC 22000 certification scheme. In August 2022 AB Kelmės pieninė was excellently evaluated in the social audit SMETA. During the audit, the company's responsibility towards nature and society was checked - what are the company's practices in the fields of human rights, ethical employment, business transparency and environmental protection. 11. Human Resources Vilvi Group is managed on the basis of the Group's common principles and values, so human resources management is implemented in all Group companies using the same processes. Vilvi Group's main focus is on employees, their well-being, safety and health, competence development and career opportunities. Personnel policy is focused on promoting cooperation, openness, personal and professional growth. The company creates conditions for sharing knowledge and improving skills, with the help of internal and external training, and creates a supportive, open and respectful environment. The involvement of employees is encouraged, conditions are created to propose ideas, to actively participate in improving the business processes of companies. The Group is implementing a Career Management System (QMS) project with a sample of more than 200 administrative staff. The aim of the project is to assess the prospects of existing employees to pursue a career within the company In order to ensure the health and well-being of employees, every year employees are provided with the opportunity to have a free health check, vision, use of a gym, dentist, rehabilitation services, and get vaccinated against the flu. The occupational safety specialist and the medical specialist constantly monitor and ensure that workplaces comply with safety and health requirements in accordance with legislation and regulations. Special attention is paid to the analysis of psychosocial risk factors and reduction of stress at work. In the event of the spread of coronavirus (COVID-19) infection in the country, “Vilvi Group” companies regularly examine and monitor their health in order to protect their employees from the threat of the virus, frequent cleaning, ventilation and surface disinfection in all production and administrative premises. protective face masks and other personal protective equipment are worn at all times. “Vilvi Group” has an approved “Remuneration Policy”, which ensures equal and transparent remuneration conditions. In order to ensure appropriate compliance of the processing of confidential information and personal data of employees with the provisions of the General Data Protection Regulation (BDAR), the "IT Security Policy", "Rules for the Processing of Personal Data", etc. have been approved. 12. Environmental Protection “Vilvi Group” has an environmental protection policy aimed at reducing the environmental impact of its operations, ensuring integrated pollution prevention measures, minimizing the use of resources and waste generation, so that its operations do not affect air, water and soil. “Vilvi Group” performs regular environmental impact analysis and assessment. Based on the European Parliament and Council IPPC Directive 2008/1/EC, Vilkyškių pieninė AB is attributable to the Annex I installations and is required to have an IPPC permit. The Company obtained its first IPPC permit from the Klaipėda Regional Environmental Protection Department on 10 August 2004, which was renewed on 4 December 2021. Kelmės pieninė AB IPPC permit was revoked according to the criteria of the Order of the Minister of the Environment of the Republic of Lithuania D1-330 "On the Rules for Updating and Eliminating the Issues of Integrated Pollution Prevention and Control Authorization". The activities performed by the company do not meet the criteria specified in the annexes to the order, therefore the IPPC permit is revoked, instead of it was issued boiler pollution permit No. (30.3) - A4-33. in accordance with the provisions of Paragraphs 40 and 41 “Vilvi Group” annual report for 2022 81 of the Rules. In 2022 Kelmės pieninė AB transferred fresh products business part to “Kelmės pienas” UAB, consequently Environment Protection Agency transferred boiler pollution permit to “Kelmės pienas” UAB. “Modest” AB IPPC permit was revoked according to the criteria of the Order of the Minister of the Environment of the Republic of Lithuania D1-330 "On the Rules for Updating and Eliminating the Issues of Integrated Pollution Prevention and Control Authorization". The activities performed by the company do not meet the Based on the existing legal requirements, programmes have been put in place at Vilkyškių pieninė AB to monitor the impact of water source and fuel storage on underground waters and to monitor air pollutant emissions and sources of wastewater. In 2015 Vilkyškių pieninė AB finished modernisation of its wastewater treatment plant in order to boost treatment efficacy. This is being done in line with the main national strategies and legal acts on wastewater treatment: the Baltic Marine Environment Protection Strategy, the Lithuanian Law on Waters, the National Long-Term Development Strategy and the National Sustainable Development Strategy. Production wastewater is treated at the Company’s own combined biomechanical treatment facility. In 2022, Vilkyškių pieninė AB treated 436 tho m3 of wastewaters. The resulting sludge is given to local waste management bodies and is used as fertiliser in agriculture. Wastewater treatment efficacy has been estimated to be up to 99 percent. In 2021, an automatic wastewater disposal control system was installed to prevent excess sewage sludge from entering the environment together with treated waste water. “Kelmės pienas” UAB wastewater occurring during production of fresh milk products is discharged to Kelmės vanduo UAB water treatment facilities. In 2022, 94,813 m3 wastewater was discharged. Kelmės pieninė AB Tauragė Division produces powdery, dusty products therefore it is very important to minimize hard particle and waste emissions to air and environment. Air polluted with hard particles is directed towards filters and cleaned there is emitted to environment. According to drying factory equipment manufacturers’ data whey, permeate, skimmed milk are odorless materials therefore no odors are released into environment. Wastewater generated during the production is discharged to Tauragės vandenys UAB water treatment facilities. In 2022, 266,572 m3 wastewater was discharged “Modest” AB has implemented the best available techniques (BAT), and its running costs and emissions are in line with the prescribed EU levels. Wastewater of “Modest” AB is discharged into the urban wastewater system operated by Tauragės vandenys UAB. Monitoring is carried out by Tauragės vandenys UAB. Wastewater meter was installed in order to account wastewater more accurately. Rain water is collected and cleaned with oil product filter and afterwards released to Beržė river. The Companies of the “Vilvi Group” invest in environment-friendly solutions. In production we responsibly choose packaging designs and materials. We encourage consumers to sort packaging of milk products by clearly labelling the type of waste it is. Also sorting of packaging is facilitated by marking places of multilayer packaging by perforations. Production waste is managed and accounted according to approved environment requirements in GPAIS (product, packaging, and waste accounting information system). In all Companies of the Group waste is disposed according to Republic of Lithuania regulatory norms therefore there is no negative impact on environment. 13. Company Results of Operations In addition to the key indicators defined and applied in the financial statements in accordance with International Financial Reporting Standards (IFRS), AB Vilkyškių Pieninė also presents financial performance indicators not provided for in IFRS - alternative performance indicators (API), which the Company considers important, provide additional information to investors and other users of the financial statements. Alternative performance indicators should be treated as additional information prepared in accordance with IFRS. Taking into account the Guidelines on Alternative Performance Indicators published by the European Securities and Markets Authority (ESMA/2015/1415), AB Vilkyškių pieninė provides comparable historical API data, the procedure for their calculation and what useful information they provide. “Vilvi Group” annual report for 2022 82 2018 m. 2019 m. 2020 m. 2021 m. 2022 m. Revenue (EUR tho) 126,242 140,492 148,738 196,442 288,643 Gross profit (EUR tho) 3,282 325 913 9,031 17,195 Gross profit margin, pct 2.6% 0.2% 0.6% 4.6% 6.0% EBITDA (EUR tho) -1,055 -2,504 2,994 13,079 15,530 EBITDA margin, pct -0.8% -1.8% 2.0% 6.7% 5.4% EBIT (operating profit) (EUR tho) -2,974 -4,322 1,394 11,450 13,893 EBIT margin, pct -2.4% -3.1% 0.9% 5.8% 4.8% EBT (profit before tax) (EUR tho) -2,712 -5,061 640 11,194 13,733 EBT margin, pct -2.1% -3.6% 0.4% 5.7% 4.8% Net profit (EUR tho) -2,028 -4,059 1,371 10,774 12,599 Net profit margin, pct -1.6% -2.9% 0.9% 5.5% 4.4% Net profit per share (EUR) -0.17 -0.34 0.11 0.90 1.05 Share market price and net profit per share ratio 0.0 P/E ratio - - - - - Return on equity (ROE), pct -6.4% -14.6% 5.2% 33.5% 29.9% Return on assets (ROA), pct -3.7% -7.7% 2.8% 19.9% 19.4% Return on Capital employed (ROCE), pct -9.1% -15.6% 4.5% 28.3% 27.7% Debt ratio 0.45 0.49 0.44 0.37 0.33 Debt to equity ratio 0.32 0.44 0.27 0.19 0.12 The liquidity ratio 1.04 0.83 0.99 1.47 1.87 Turnover of assets 2.32 2.77 3.05 3.31 4.10 The capital to assets ratio 0.55 0.51 0.56 0.63 0.67 Financial debt (EUR tho) 9,430 11,287 7,432 6,941 5,665 Net debt (EUR tho) 9,093 11,056 7,277 6,362 5,340 Net debt /EBITDA -8.62 -4.42 2.43 0.49 0.34 Gross profit is indicator that is in company‘s profit/loss statement. It is sales revenue minus cost of goods sold. Usually, this profit is biggest among other profit types. Gross profit margin shows how much profit is for one unit of sales revenue. Indicator is calculated by dividing gross profit by sales revenue. EBITDA – earnings before interest, taxes, depreciation and amortization, it shows company‘s earnings before evaluating the effect of company‘s financial policies as well as profit tax. Vilkyškių pieninė AB calculates this indicator by adding long-term assets depreciation, amortization to and subtracting subsidies from operating profit. When calculating EBITDA elements that are not directly influenced by activities of the company may be eliminated. EBITDA margin is a profitability indicator that can be used to compare the profitability of companies (in the same sector), to monitor changes in the profitability of the same company. The higher the value of the indicator is, the higher the profitability of the company is. The indicator is calculated by dividing EBITDA by revenue. EBIT (operating profit) is profit before interest and taxes. It shows the company's profit earned during the operating and investment cycle (before assessing the impact of the company's financing policy on profit and before deducting the income tax). This indicator reflects the company's ability to generate cash flow. The indicator is calculated by adding finance costs to pre-tax profit and deducting the financial activity income EBIT margin is indicator that shows operating effectiveness, it is calculated by dividing operating profit by sales revenue. “Vilvi Group” annual report for 2022 83 EBT (profit before tax) is profit before taxation. The indicator is calculated by adding income tax expense to net profit. EBT margin is calculated by dividing EBT by income. Shows the company's profit before taxes to sales ratio. A higher value of the indicator indicates a higher profitability of the company. Net profit (loss) is the financial indicator which is calculated by deducting all expenses and taxes from income. Net profit margin is indicator of a company's profitability. Calculated by dividing net profit by income. Net profit per share is one of the most popular stock valuation indicators that shows the company's profit per share. The indicator is calculated by dividing net profit by the number of shares in the stock turnover. The P / E ratio is the ratio of the stock market price to profit per share. The indicator shows how much the company’s shares cost as compared to the net profit. The P / E indicator provides information on whether a company is expensive as compared to its earned profits. The higher the net profit is, the lower the P / E ratio is, and, therefore, the more attractive such shares are for investment. The indicator is calculated by dividing the market price of the share by the net profit per share. Return on equity (ROE) is the net profit to equity ratio. The indicator shows how efficiently the company uses shareholders' assets to earn profit. This indicator is important for shareholders in assessing the return on their investment in the company in the previous period. The higher the return on equity is, the more efficient the company's operations are, the more profit it earns for its shareholders. The ratio is calculated by dividing net profit by the average of equity at the beginning and end of the reporting period. Return on assets (ROA) is the net profit to assets ratio. Return on assets shows how much net profit a company earns per euro of assets. This value can be used as a measure of the efficiency of the use of a company's assets. The higher the ROA value is, the more efficiently the assets are employed, the more profit is earned. The indicator is calculated by dividing the net profit by the average of the assets at the beginning and end of the reporting period. Return on capital employed (ROCE) is the profitability indicator measuring the return on funds necessary for the company's continuous operations. It is often compared to the interest rates on loans in the market at that time. The company’s ROCE ratio is considered to be higher than the price of borrowed capital at that time. The indicator is calculated by dividing EBIT by the difference between total assets and short-term liabilities Debt ratio reflects the part of the company’s assets that has acquired with borrowed funds. The indicator is calculated by dividing all liabilities of the company by assets. Debt to equity ratio. This is one of the key indicators of financial leverage. The debt to equity ratio shows the amount of short-term and long-term debt in euros per euro of equity. The indicator is calculated by dividing the financial debt by the equity. The liquidity ratio shows the company's ability to meet its short-term liabilities by using its owned short-term assets. The higher the ratio is, the better the liquidity position is. The indicator is calculated by dividing short- term assets by short-term liabilities. Turnover of assets . It is an efficiency indicator that shows the sales revenue to assets ratio. This indicator shows how efficiently a company uses its capital. A higher value indicates a higher degree of overall asset management efficiency and vice versa. The indicator is calculated by dividing the sales revenue by total assets. The capital to assets ratio shows the proportion between private capital and total assets. This indicator shows the share of private capital in the capital structure. The lower this ratio is, the more the company is dependent on borrowed funds. The ratio is calculated by dividing private capital by total assets. Financial debt is the sum of short-term and long-term debt, which shows the amount of indebtedness of the company. The indicator is calculated by adding long-term and short-term lease liabilities to long-term and short- term loans. Net debt is all the financial liabilities of the company with the deduction of the available cash and cash equivalents. This indicator can be used during in a credit rating review. The indicator is calculated by deducting cash and cash equivalents from financial debt. “Vilvi Group” annual report for 2022 84 Net debt / EBITDA shows the company's ability to repay debts from earned profits. This indicator can also be used in a credit rating review. The indicator is calculated by dividing net debt by EBITDA. 14. “Vilvi Group” Results of Operations Key financial consolidated indicators of “Vilvi Group”: 2018 m. 2019 m. 2020 m. 2021 m. 2022 m. Revenue (EUR tho) 103,162 114,581 120,873 156,045 234,083 Gross profit (EUR tho) 5,773 7,096 10,629 17,196 24,274 Gross profit margin, pct 5.6% 6.2% 8.8% 11.0% 10.4% EBITDA (EUR tho) 3,140 3,698 8,271 14,122 19,280 EBITDA margin, pct 3.0% 3.2% 6.8% 9.0% 8.2% EBIT (operating profit) (EUR tho) -884 -206 4,332 7,134 14,921 EBIT margin, pct -0.9% -0.2% 3.6% 4.6% 6.4% EBT (profit before tax) (EUR tho) -1,870 -1,448 3,142 6,156 14,180 EBT margin, pct -1.8% -1.3% 2.6% 3.9% 6.1% Net profit (EUR tho) -1,186 -446 3,872 5,500 12,699 Net profit margin, pct -1.1% -0.4% 3.2% 3.5% 5.4% Net profit per share (EUR) -0.10 -0.04 0.32 0.46 1.06 Share market price and net profit per share ratio - P/E ratio - - 7.59 7.95 4.50 Return on equity (ROE), pct -3.6% -1.4% 11.7% 14.8% 28.4% Return on assets (ROA), pct -1.5% -0.6% 5.0% 6.7% 13.6% Return on capital employed (ROCE), pct -1.7% -0.4% 10.1% 11.7% 22.0% Debt ratio 0.62 0.60 0.55 0.55 0.49 Debt to equity ratio 0.88 0.88 0.62 0.61 0.46 The liquidity ratio 0.81 0.72 0.64 1.24 1.46 Turnover of assets 1.25 1.47 1.57 1.77 2.38 The capital to assets ratio 0.38 0.40 0.45 0.45 0.51 Financial debt (EUR tho) 27,824 27,483 21,660 24,163 22,929 Net debt (EUR tho) 27,417 27,185 21,479 23,364 22,308 Net debt /EBITDA 8.73 7.35 2.60 1.65 1.16 “Vilvi Group” production output, tonnes: 2018 2019 2020 2021 2022 Cheese, cheese products and other 34,306 36,095 39,187 43,970 47,575 Fresh milk products 15,120 12,277 12,696 14,048 15,174 Dry milk products 8,321 15,310 19,006 21,416 21,886 “Vilvi Group” annual report for 2022 85 In 2022 cheese, cheese product and other production output 47.6 tho tonnes, up by 8.2 percent comparing to 2021. Production of fresh milk products 15.2 tho tonnes, up by 8 percent comparing to 2021. Production of dry milk products 21.9 tho tonnes in 2022 up by 2.2 percent comparing to 2021. Basic indicators milk purchases by “Vilvi Group”: 2018 2019 2020 2021 2022 Basic indicators milk, tonnes 267,785 268,555 287,370 314,540 342,953 Cost of basic indicators milk, EUR tho 67,695 68,720 70,747 90,542 144,975 Milk price, EUR/t 252.8 255.9 246.2 287.9 422.7 In 2022, a total of 343 tho tonnes of basic indicators milk was purchased, an increase by 9 percent as compared with 2021. The price of milk in 2022 increased by 46.8 percent from the year 2021. 15. Sales and Marketing “Vilvi Group” sales by product segment, EUR thousand: 2018 m. 2019 m. 2020 m. 2021 m. 2022 m. Cheese, cheese products and other 76,870 81,909 84,134 109,199 170,589 Fresh milk products 18,721 17,803 16,252 18,710 26,864 Dry milk products 7,571 14,869 20,487 28,136 36,630 Total revenue 103,162 114,581 120,873 156,045 234,083 In 2022 “Vilvi Group” sales revenue grew by 54% in export markets and by 23% in Lithuanian market compared to year 2021. In 2022 exports amounted to 89% of total group sales, which is 3% more than in previous year. As in the previous years the largest part of export are sales of cheese, cheese products, cream and dry milk products. The main reasons for sales growth: - Cheese category. 2022 marked the dairy sector as a period of gradual price growth, as the price increase, which began back at the end of 2021, continued until November 2022. The sales prices of the cheeses produced by Vilvi Group followed the general direction of the world market, since 93% of the cheese sold was exported outside Lithuania, therefore, the pricing was influenced by the general dynamics of the market. Sales revenue grew by 56%, while the volume of sales did not rise significantly - by 6%. The number of markets and customers remained similar to that in 2021. The number of markets and customers remained similar to that in 2021. Well-established relationships with customers, knowledge of the markets, their wide geography and quick response to changes ensured favorable sales prices. - Dry dairy products. The increase in production/sales volumes back in 2020 remained similar in quantitative terms in 2022. However, the value of sales has increased by 30%. This was influenced, as in the cheese category, by the already mentioned global price rise and the shortage of products on the market, which made it possible to maintain stable and regular sales of dry milk products. The number of markets remained unchanged, with the European Union region accounting for the largest share of sales, but exports to Korea, Vietnam, India, Serbia, Egypt and other countries outside the EU increased. - Industrial cream . The increase in demand for cream led to the fact that during the reporting period its sales volume increased by 64%, when the sales volume remained very similar compared to in 2021, in 2022, the average price of cream in 2022 was 49% or 1.02 Eur / kg higher compared to the previous year. “Vilvi Group” sales revenue by geographical segments, EUR thousand: “Vilvi Group” annual report for 2022 86 2018 m. 2019 m. 2020 m. 2021 m. 2022 m. European Union 55,865 61,591 63,745 80,647 132,771 Lithuania 24,585 22,526 20,234 21,748 26,751 Other countries 22,712 30,464 36,894 53,650 74,561 Total revenue 103,162 114,581 120,873 156,045 234,083 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2018 2019 2020 2021 2022 54% 54% 53% 52% 57% 22% 26% 30% 34% 32% 24% 20% 17% 14% 11% Lithuania Other countries European Union “Vilvi Group” annual report for 2022 87 16. Exhibitions and Awards Since 2011, the Company takes part in one of the largest exhibitions ANUGA in Germany, SIAL in France and Gulfood in United Arab Emirates, where the products presented have repeatedly been among the most innovative, i.e. they have won the SIAL Innovation Award. In 2014 Vilkyškių pieninė AB named as Exporter of the Year 2014 in the Lithuanian Business Leaders 2014 contest. In 2015-2016 Company participated in the exhibitions Food Ingredients Beijing 2015 took place in China and Food Ingredients Paris 2015, SIAL China Shanghai, in the exhibition Summer Fancy Food Show in New York. In 2017-2018 Dry milk products and GymON protein powder were presented at the international sports exhibitions in Germany, Frankfurt – FIBO and Food Ingredients, GymOn products were presented and tasted, new customer search was conducted. GymON star Žydrūnas Savickas met with fans. Also a company participated in exhibition Food West Africa for the first time. The company was searching for new partners during it, Company also participated for the first time in Amsterdam at PLMA's World of Private Label private label exhibition and Food Taipei 2018 exhibition in Taiwan, where presented mozzarella cheese. In 2019-2020 Vilkyškių pieninė AB traditionally participated in the food exhibitions Gulfood 2020 in Dubai, United Arab Emirates and ANUGA 2020 in Cologne, Germany, in Gulfood Manufacturing, in Dubai, The United Arab Emirates and Food Ingredients 2020 in Paris, France and presented its industrial products. Also participated in the exhibition FHC China 2020 in Shanghai in China. The mozzarella cheese and dry milk products were presented to Chinese market. In 2021 “Vilvi Group” traditionally participated in the "ANUGA" exhibition in Germany and took part in the international exhibition of food industry "Gulfood 2021" in Dubai, The United Arab Emirates. The main focus was on mozzarella cheese and milk/whey powder, met with a customer. Also “Vilvi Group” participated in "WorldFood Ukraine", the largest annual food and beverage exhibition in Ukraine, where we presented products of the Vilkyškių black cat line and Memel blue melted cheese. “Vilvi Group” participated in the largest exhibition of food industry, equipment, processing and packaging and food logistics "Gulfood Manufacturing" in Dubai, United Arab Emirates. In February 2022 February Vilvi Group has traditionally participated in the international food and beverage exhibition Gulfood 2022 in Dubai, United Arab Emirates. The company presented mozzarella cheese at the exhibition. In November 2022 Vilvi Group's export team participated in Gulfood Manufacturing, the largest food industry, equipment, processing and packaging and food logistics exhibition in Dubai, United Arab Emirates. Whey powder and cheese products were presented during the exhibition. In December 2022 "Vilvi goup" participated in the international exhibition of food ingredients "Food Ingredients Europe". This year the exhibition was held in Paris (France). Whey powder and cheese products were presented during the exhibition. 17. Risk Factors Associated with Issuer ‘s Business The core activity of the group of companies is milk processing. The main factors that could adversely affect the Group's cash flows and activity results and create business risk for the company are possible changes in the raw materials and products markets, as well as other economic, technological, social and business environment changes directly or indirectly related to Vilvi Group's business. The Group companies operate in accordance with the approved ISO standards and the requirements of the regulatory enactments of the Republic of Lithuania, which help to identify risks and establish risk management procedures. Within the group of companies, risk identification, preventive and corrective actions are the responsibility of the company's employees involved in the respective activities, who are each responsible for their own area. Risks are assessed in internal and external aspects, taking into account stakeholders. Depending on the type, origin and complexity of the risk, preventive and / or corrective actions are identified, which are integrated into the business plan and their outcome is monitored. “Vilvi Group” annual report for 2022 88 Supply of raw materials: Raw milk. The main raw material in the production of the Group's companies is cow milk, the supply of which is relatively limited due to its short shelf life. The Group confronts with the seasonality of raw milk – small dairy farms produce more milk in summer than in winter, and there is also competition to purchase milk, which affects milk purchase prices and the amount of milk purchased. ➢ Risk management. This risk is managed by diversifying the purchase of raw milk from suppliers of different sizes in Lithuania and by importing additional raw milk from Latvia. The company enters into purchase and sale agreements with suppliers for raw milk. Milk suppliers are paid a bonus to the basic milk purchase price. Whey concentrate. Kelmės pieninė AB main raw material is whey concentrate which further is processed into whey protein concentrate and whey permeate concentrate which subsequently are processed into dry milk products. Since whey concentrate is made of milk whey and milk supply quantity is seasonally affected, the supply quantity of whey concentrate decreases in winter. As supply of whey concentrate decreases, competition on buying side increases that has effect on prices and quantity for it. ➢ Risk management. Risk is managed by diversifying purchasing of whey concentrate from suppliers in Latvia and Estonia. 50 per cent of the raw material necessary for production of dry milk products provides Vilkyškių pieninė AB. Product (non) sales risk: The production of matured cheese is a long process that can take 1-18 months. This specificity of production does not allow us to react quickly to sudden changes in the cheese market, which may adversely affect the Company's cash flow and activity results. However, this category accounts for a small share of sales. Cheese and cheese product. Sales channels cover all regions of the world. There are dominant markets, but if necessary, the Vilvi group can relocate sales to other countries, which are over 60 at this moment. In this case, the prices would have to be reduced. There is a risk of adverse changes in the demand for and / or price of the cheese on the cheese market. As the cheese-making process is short, taking up to 1 month, it is possible to switch to the production of another type of cheese very quickly once sales of this product have stopped. The risk of sales of fresh milk products arises from keeping both excessive and deficient stocks of products in storage. In the first case, a product with a shorter validity period may have to be sold cheaper, in the second case, penalties may be paid for non-delivery. The risk of sales of dry dairy products is that the products may become down on demand in the markets where they are currently sold. At this moment, the level of diversification in the category of dry dairy products is not extremely high. ➢ Risk management. The Group is constantly looking for new customers in both Lithuanian and foreign markets. The risk that partners will not meet their obligations for the purchased goods is controlled by establishing control procedures. Only guaranteed payment terms are used with all customers. Deferred payment applies only to customers to whom our partner - credit insurance company Euler Hermes - grants credit limits. Those who do not have credit limits make advance payments, we also work with such solvency risk management instruments as letters of credit, CAD, incaso, factoring, and we also have pledge of property cases. The increase in the price of energy (natural gas, fuel, electricity) increases not only the production costs of the Group companies, but also the costs of transportation of products, resulting in that the final product cost increases. In the final product cost, energy costs are up to 10%. ➢ Risk management. The Group's companies are streamlining production to maximize equipment utilization, as well as plan logistics routes efficiently. MANAGEMENT OF ECONOMIC RISK FACTORS MANAGEMENT OF OCCUPATIONAL RISK FACTORS “Vilvi Group” annual report for 2022 89 Noise. Non-compliance with minimum general requirements for work equipment. ➢ Risk management. In the Group's companies, work equipment is installed and designed to minimize the risk to the employee. Constant maintenance of such facilities is carried out. Collective protective equipment that can reduce the level of noise emitted is applied, protective, sound-insulating enclosures and partitions are made. Employees use personal protective equipment. Constant health examinations of employees are carried out. Staff training is organized. Lighting. Insufficient or poorly equipped, poorly maintained lighting in the workplace is one of the main factors of occupational risk, which directly affects the employee's emotional state, work efficiency, the number of accidents at work. ➢ Risk management. A professional workplace risk assessment has been performed in all Vilvi Group companies. Measurements of natural and artificial lighting have been performed. In order to improve the working conditions of employees, old luminaires have been replaced by new LED luminaires after the measurements. Their advantage is lower energy consumption, longer service life and higher efficiency. Chemical factors. Use of chemicals in manufacturing, washing processes and laboratory testing. All the specifics of the production of dairy products are inextricably linked to the use of chemicals in cleaning, washing and disinfection processes. ➢ Risk management. All production workshops are equipped with high-pressure cleaning equipment, which feeds, doses and controls the supply of chemicals for disinfection and room washing, thus improving and facilitating the working conditions of employees. Health examinations and use of personal protective equipment are mandatory for all employees at whose workplaces chemicals are used. Employees are trained to handle hazardous chemicals and are familiar with SDLs (safety data sheets). Wherever chemicals are used, an artificial ventilation system is installed. Ergonomic factors. Work of staff involved in manual handling of loads. ➢ Risk management. An occupational risk assessment of all workplaces has been performed to assess ergonomic risk factors. Production department managers constantly make suggestions to reduce ergonomic risk factors. Where manual work is predominant, efforts are made to use machinery (manual, electric hoists-trucks for transporting products). A robotic cheese head pallet line has been installed to prevent lifting heavy weights. A new strip packaging line for cheese blocks is being installed. All the listed measures allow avoiding heavy manual work, increase productivity and reduce the risk of accidents at work. All staff involved in manual handling of loads are trained and subjected to a mandatory medical examination Information security. Information assets are stored in physical facilities that may be lost or damaged. ➢ Risk management. The group follows an approved IT security policy. All devices use legal software that is constantly updated. Changes to the business management system are tested first, and only then they are transferred to the production base. Access to company systems and data is limited to the rights that are necessary to perform the work. To protect the data from loss, we do backups that we store for 1-2 weeks, depending on the priority of the software. All computers and servers have a centrally managed antivirus software that is constantly updated. All personal data of employees is processed and stored in accordance with the general data protection regulation (GDPR). There is a risk of cyber-attacks. ➢ Risk management. A firewall is used to protect against unauthorized access from the outside. Its maintenance and constant updating is performed by certified specialists. Food safety and quality. Risks may arise in case of insufficient assessment and management of risk factors (biological, chemical, physical). MANAGEMENT OF SOCIAL RISK FACTORS MANAGEMENT OF INFORMATION SECURITY RISK FACTORS “Vilvi Group” annual report for 2022 90 ➢ Risk management. Food safety and management standards (ISO 22000/FSSC 22000) are used to control the risk of production quality. The Group follows an approved Food Safety and Quality Policy. Monthly and quarterly factory inspections and internal audits are carried out in the companies of the Group in accordance with the quality and safety system implemented in the Group. Audits are performed by competent personnel trained by external auditors. Also controlling, certifying authorities, existing or potential customers. Annual user and customer surveys are conducted for the purpose of analyzing satisfaction and needs. In the group of companies, complaints are registered via the general quality phone and e-mail, they are registered, analyzed, and customers are communicated with in order to find out the specific reasons. Reaction time and actions are provided according to the nature of the complaint and based on the described complaint guidelines. Ensuring human rights. ➢ Risk management. Vilvi Group follows the approved policies and codes: Human Rights Policy, Ethical Employment Code, Equal Opportunities Policy, Violence and Harassment Prevention Policy. For these policies and codes, responsible persons have been appointed in the Group's management, as well as planned implementation, supervision and control processes. Employees and other interested parties have access to the Group's Internet Message Channel and Helpline, which can be used to anonymously inform about worrying situations. The group does not tolerate any manifestations of human rights and discrimination, every employee is provided with the level of employment, professional development and career opportunities, regardless of their gender, age, social status, there must be other suitable ones that are not related to the employees' professional characteristics. The remuneration policy and the Labor Payment System ensure fair remuneration. Attracting and retaining employees. The risk of attracting and retaining employees is related to the lack of employees and population decline in regions (where the group's companies are established: Taurage, Vilkyškiai, Kelmė) far from large cities. The lack of highly qualified (engineering) employees is especially felt. ➢ Risk management. The lack of employees is directly related to the smooth operation of the company, therefore various measures are applied, and special attention is paid to the management of employee attraction and retention: close cooperation with the Employment Service, educational institutions (participation in career fairs, thematic lectures), various employee search channels are used. Great attention is paid to the process of selection and introduction of employees. The company's internal resources are used: existing employees are given the opportunity to improve, acquire new competencies by organizing internal and external training, and employee careers are planned. Employees are additionally motivated by various wellness measures. The company values employee loyalty - long-term employees are additionally encouraged. Unfair work / corruption and bribery. ➢ Risk management. Vilvi Group follows the approved Code of Ethical Business, which provides basic provisions and rules for dealing with stakeholders. The Group does not tolerate any manifestations of corruption, including bribery and bribery, and adheres to the principles of fair business and transparent cooperation with state institutions and other interested parties. The group of companies trades its products in accordance with the principle of transparency, does not participate in any transactions where bribes are requested or it is offered to act in a non-transparent manner. The group evaluates the observations and suggestions of the responsible authorities, takes this into account and improves the processes. It is also politically neutral and does not provide any financial support to political parties, groups or politicians. Damage to reputation/image. Reputation and trademark risk are mainly related to the activities of employees and the decisions they make. Reputation can be damaged by low-quality dairy products, for the production and quality control of which decisions are made by employees, wrong word in public or cooperation with partners, as well as inadequate communication / advertising actions, etc. ➢ Risk management. Food safety and management standards (ISO 22000 / FSSC 22000) are used to manage product quality risks. The Group follows the approved Code of Ethical Business, which provides basic provisions and rules for dealing with stakeholders. The position of the group of “Vilvi Group” annual report for 2022 91 companies may be expressed publicly only by the general director or, in financial matters, by the economics-financial director. All other announcements in the public space shall be coordinated with the general director in accordance with the established procedure. Cooperation with external partners is based on the strategy and values of the group of companies, which act as the basis for business relations. Communication and advertising activities are coordinated with the responsible employees in advance, thus avoiding conflict with the group's goals, activities and vision. Environmental impact. In their activities, the companies of the Group consume a significant amount of energy and natural resources, which poses a risk of environmental pollution. There is also a risk that the activities carried out may cause unwanted noise and smell to the surrounding residents or businesses. Since AB Vilkyškiu's dairy production wastewater is cleaned in its own treatment facilities, there is a risk that pollutants will be released into the environment due to technical malfunctions. Improper handling of waste generated during the activity poses a threat to environmental pollution. ➢ Risk management. Vilvi Group follows an approved Environmental Protection Policy. Monitoring of the consumption of natural and energy resources is carried out in the companies, environmental impact analysis and assessment is periodically carried out, and a project for raising the goals for the assessment and reduction of greenhouse gas emissions is carried out. In accordance with the established procedure, AB Vilkyškių dairy has developed a monitoring program for the impact of the watering place on the groundwater and the observations are being carried out, as well as the possible impact of the own gas station on the groundwater is controlled according to the monitoring program, and the monitoring of pollutants emitted into the air, sources of pollution with sewage is carried out. AB Vilkyškių dairy is equipped with an automatic wastewater control system that prevents excess sewage sludge from entering the environment together with treated wastewater. From the dryers of AB Kelmės pieninė, the air contaminated with solid particles is directed to the cyclones and discharged into the environment. Waste generated during production is managed and accounted for in all Group companies in accordance with the established environmental requirements in the product, packaging and waste accounting information system - GPAIS . Physical risks of climate change. In the region of operation, risks may arise due to the frequency of extreme meteorological events, increasing gradual climate change, deterioration of the environmental condition (air, water, soil pollution) as well as water shortages, loss of biodiversity, deforestation. It is necessary to manage due to the possible influence on the continuity of operations and due to the possible financial impact. ➢ Risk management. Vilvi Group conducts climate risk assessment, reviews climate change scenarios and their possible impact on the region of operation. Climate change adaptation goals are set, plans for unexpected business interruptions, employee training and exercises are updated. Climate change transition risk. As a result of adapting to lower carbon technologies and the process of a more environmentally sustainable economy, the Group may directly or indirectly experience financial losses. Risks arise from the rapidly changing environment of climate change regulation and environmental requirements, rapid technological advances, changes in customer and investor expectations and consumer priorities. ➢ Risk management. "Vilvi Group" is guided by the approved Environmental Protection Policy, in which one of the main objectives is the assessment of environmental impact, the measurement of GHG emissions and the setting of reduction targets. Having assessed the extent of the need for energy resources, the Group strives for energy independence by planning its own sources of renewable energy. "Vilvi Group" takes the path of sustainability by carefully and consistently planning actions, actively monitoring changes in the legal environment of the European Union and Lithuania, changing reporting requirements, and implementing the evaluation process of Taxonomy activities. There is active cooperation with clients, their expectations are heard and the Group's position and aspirations are communicated. UNCERTAINTY IN THE BUSINESS ENVIRONMENT MANAGEMENT OF CLIMATE AND ENVIRONMENTAL PROTECTION RISK FACTORS “Vilvi Group” annual report for 2022 92 Politics of the country and surrounding countries, unrest. Potential financial losses that may result from the loss of sales revenue due to certain political decisions or political events. ➢ Risk management. The company maintains a sufficiently wide range of markets without focusing on one market. A sufficiently wide geography of markets can protect against adverse effects in any given country. We constantly monitor the percentage distribution of markets. Due to the diversification of markets, the loss of a market, such as China, did not result in a large loss for the “Vilvi Group”, as sales were reallocated to other markets fairly quickly. Changing EU and LR legal regulation. Increasing and rapidly changing requirements may require rapid response, human resources, implementation of additional measures, processes and tools, resulting in direct and indirect financial losses. ➢ Risk management. "Vilvi group" feels an increased acceleration of changes in legal requirements, especially in areas related to the EU Green Course (e.g. environmental requirements and non-financial reporting, taxonomy), transparency (e.g. accounting standards), social areas (e.g. changes to the labor code), etc. . Changes are being prepared consistently and in measured steps - the aim is to increase energy efficiency, optimize the use of resources, increase the involvement of human resources, and look for IT solutions that can shorten the adaptation time. Responsible persons are appointed, employees' competence is developed, legal requirements are constantly followed. When using financial instruments, the Group companies are exposed to credit, liquidity and market risks , the management of which is presented in the summary of the Significant Accounting Principles – Financial Risk Management, given in the Financial Statements of AB Vilkyškių pieninė as of 31 December 2022, and in para 30 thereof. 18. Competition Vilkyškių pieninė AB estimates that it has a 20 percent share of the Lithuanian market as measured by quantity of processed milk, i.e. it is in third place behind competitors Rokiškio sūris AB and AB and Žemaitijos pienas AB. On foreign markets, “Vilvi Group” has to compete against local manufacturers, who have the advantage of lower transportation costs. However, “Vilvi Group” compensates it by offering a range of higher value-added cheese products. “Vilvi Group” offers industrial products in dry milk product segment, which are oriented to exports. Company has developed its own brand GymOn of whey protein powder concentrate for athletes that is offered to end- consumer. This product is distributed to supermarkets, sports shops, pharmacies and sold via own internet shop www.gymon.lt. 19. Key Events After Fiscal Year-End Information regarding key events after the end of fiscal year is provided in the Vilkyškių pieninė AB financial statements for the year ended 31 December 2022, in Chapter 32. 20. Business Plans and Forecasts In 2022, “Vilvi group” exceeded the set goals and achieved very good financial results, although there were certainly no shortage of challenges. The war in Ukraine that started at the beginning of the year forced us to change plans, adapt to a serious energy crisis, and at the same time tested how resistant we are to unexpected events and ready for new and quick solutions. The challenge was not only the rising gas and electricity prices, but also the rising prices of raw materials, which also increased production prices. All these and other challenges were overcome and historically the highest added value was created. In 2023 the main goal is further create greater value for company shareholders. To achieve this goal main tasks are as follows: FINANCIAL RISK MANAGEMENT “Vilvi Group” annual report for 2022 93 • To seek 5% growth in sales revenue; • To maintain the growth in quantities of processed raw milk; • To deepen knowledge of the most modern milk processing technologies that can be applied in production of healthier products with higher value-added; •Internally seek for greater effectiveness of activities; • Keep and further develop markets diversified; • In “Baltic Dairy Board” SIA to develop production and sales of GOS products. A lot of attention in the Companies of the Group will be in the area of innovative product development, environment protection, personnel management, safe and healthy working conditions and risk management. III. OTHER INFORMATION ABOUT ISSUER 21. Structure of Issuer‘s Share Capital „Vilvi Group“ Share Capital: Type of share Number of share Share face value, EUR Total face value, EUR Type of share Vilkyškių pieninė AB Common registered shares 11,943,000 0.29 3,463,470 Kelmės pieninė AB Common registered shares 2,457,070 0.29 712,550 “Modest” AB Common registered shares 5,617,118 0.29 1,628,964 “Pieno logistika” AB Common registered shares 371,333 0.29 107,687 “Kelmės pienas” UAB Common registered shares 2,500 1.00 2,500 “Baltic Dairy Board” SIA Common registered shares 777,778 1.00 777,778 22. Information on Treasury Stock The Company does not hold its own shares. 23. Rights of Shareholders Shareholders have these non-proprietary rights: - to attend and vote in general meetings of shareholders; - to receive information about the Company as set out in Article 18 (1) of the Law on Public Companies; - to lodge a claim in a court of law for compensation of damages caused to the Company through inaction or inappropriate actions of the Company‘s director, also in other cases set out by the law; - other non-proprietary rights stipulated by legal acts. Shareholders have the following proprietary rights: - to receive a share of the Company‘s profit (dividend); - to receive a share of the assets of the Company in liquidation; - to be granted shares free of charge where the Company‘s share capital is increased from its own capital, save exceptions set out by the Law on Public Companies; - to have priority to buy new shares and share options in the Company, except for cases where a general meeting of shareholder has legitimately voted to revoke this right for all; - to transfer all or part of their shares to other persons, using a procedure set out in the Law on Public Companies; - other proprietary rights granted by the law. None of the Company‘s shareholders has any special control rights. The rights of all shareholders are equal. One common registered share grants one vote in a general meeting of shareholders. “Vilvi Group” annual report for 2022 94 24. Restrictions on Transfer of Securities There are no restrictions on the transfer of securities. 25. Information About Shareholders The total number of shareholders of Vilkyškių pieninė AB on 31 December 2022 was 1499. The following are the major shareholders: Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct Swisspartners Versicherung AG 69,94,316 58.6% - Multi Asset Selection Fund 20,35,729 17.0% 17% Gintaras Bertašius 2,19,364 1.8% 60% Minority shareholders 26,93,591 22.6% 23% Total stock 1,19,43,000 100% 100% Vilkyškių pieninė AB shareholder structure by legal subject Kelmės pieninė AB shareholders The total number of shareholders of Kelmės pieninė AB on 31 December 2022 was 1. The major shareholder, who owns more than 5 percent of the Issuer‘s stock was 1: Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct Vilkyškių pieninė AB -24,57,070 100% 100% Total stock -24,57,070 100% 100% “Kelmės pienas” UAB shareholders The total number of shareholders of “Kelmės pienas” UAB on 31 December 2022 was 1. The major shareholder, who owns more than 5 percent of the Issuer‘s stock was 1: Natural person 19% Legal person, funds 81% “Vilvi Group” annual report for 2022 95 Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct Kelmės pieninė AB 2,500 100.0% 100.0% Total stock 2,500 100.0% 100.0% “Modest” AB shareholders The total number of shareholders of “Modest” AB on 31 December 2022 was 85. The major shareholder, who owns more than 5 percent of the Issuer‘s stock was 1: Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct Vilkyškių pieninė AB 56,01,277 99.7% 99.7% Minority shareholders 15,841 0.3% 0.3% Total stock 56,17,118 100.0% 100.0% “Pieno logistika” AB shareholders The total number of shareholders of “Pieno logistika” AB on 31 December 2022 was 169. The major shareholder, who owns more than 5 percent of the Issuer‘s stock was 2: Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct Vilkyškių pieninė AB 2,18,781 58.9% 58.9% ŽŪB „Repšiai“ 35,032 9.4% 9.4% Minority shareholders 1,17,520 31.6% 31.6% Total stock 3,71,333 100.0% 100.0% “Baltic Dairy Board” SIA shareholders The total number of shareholders of “Baltic Dairy Board” SIA on 31 December 2022 was 2. The major shareholder, who owns more than 5 percent of the Issuer‘s stock was 2: Shareholder Number of shares held, units Percent of share capital, pct Share of votes at shareholder meetings, pct AB Vilkyškių pieninė 5,44,446 70.0% 70.0% KIK Asset Management SIA 2,33,332 30.0% 30.0% Total stock 7,77,778 100.0% 100.0% “Vilvi Group” annual report for 2022 96 26. Agreements Between Shareholders, Known to Issuer, Which May Lead to Restrictions on Securities Transfers or Voting Rights The Company is not aware of any direct agreements between shareholders that might result in restrictions on the transfer of securities and/or on voting rights. 27. Trading in Issuer‘s Securities on Regulated Markets The change of price of Vilkyškių pieninė AB shares and trade volume in 2020-2022. 0 20 40 60 80 100 120 0.00 1.00 2.00 3.00 4.00 5.00 6.00 2020-01 2020-06 2020-11 2021-04 2021-09 2022-02 2022-07 2022-12 Share price, EUR Turnover, thsd., EUR “Vilvi Group” annual report for 2022 97 Comparison of Vilkyškių pieninė AB share price and Nasdaq OMX Vilnius Index, 2020-2022. Security trading history of Vilkyškių pieninė AB during 2018-2022: Price 2018 m. 2019 m. 2020 m. 2021 m. 2022 m. Open 3.72 2.09 2.26 2.46 3.67 High 3.76 3.13 2.48 3.68 4.91 Low 1.95 2.07 1.39 2.40 3.00 Average 3.09 2.47 1.93 2.90 4.12 Last 2.05 2.24 2.46 3.66 4.79 Traded volume 472,421 762,071 1,138,435 1,060,431 637,222 Turnover, million 1.46 1.88 2.20 3.08 2.63 Capitalisation, million 24.48 26.75 29.38 43.71 57.21 28. Dividend Vilkyškių pieninė AB approved a dividend policy in 2012. The following is an extract from that dividend policy: Dividends and the size of them 1. The Law on Public Companies of the Republic of Lithuania stipulates that the dividend constitutes a share of profit payable to a shareholder in proportion to the face value of the stock held by the shareholder. 2. The Company‘s shareholders cannot vote to pay a dividend at a general meeting of shareholders, if 1) the Company is insolvent 2) the distributed result for the fiscal year ended is negative 3) the Company‘s equity is smaller than the sum of its authorised capital and reserves, or in cases where it would become smaller following a dividend payout. 3. The Company‘s Board shall submit to the General Meeting of Shareholders an amount of dividend based on the audited net profit result for the fiscal year ended. 4. If the Company has been profitable, the Company‘s board shall allocate a certain part of revenue for dividend as set out in Clause 2.6, reinvesting the rest of the revenue so as to increase the Company‘s capitalisation. 5. The Company shall pay dividend in cash. 40% 60% 80% 100% 120% 140% 160% 180% 200% 220% 240% 2020-01 2020-06 2020-11 2021-04 2021-09 2022-02 2022-07 2022-12 OMX Vilnius VLP1L “Vilvi Group” annual report for 2022 98 6. The Company‘s Board should establish the amount of dividend after taking into account the consolidated net profit of the Company for the year ended. The dividend amount must be not less than 25 percent of the consolidated net profit of the Company for the year ended, but not larger than the Company‘s annual consolidated net profit 7. The Company reserves the right to diverge from the criteria for the amount of dividend, provided it gives reasons for such divergence. Vilkyškių pieninė AB dividend payments in the past 5 years: Dividends 2018 (for 2017) 2019 (for 2018) 2020 (for 2019) 2021 (for 2020) 2022 (for 2021) Dividend (EUR) 1,672,020 - - 955,440 2,388,600 Dividend per share (EUR) 0.14 - - 0.08 0.20 Number of shares 11,943,000 11,943,000 11,943,000 11,943,000 11,943,000 Kelmės pieninė AB dividend payments in the past 5 years: Dividends 2018 (for 2017) 2019 (for 2018) 2020 (for 2019) 2021 (for 2020) 2022 (for 2021) Dividend (EUR) 786,262 1,719,949 5,651,261 7,371,210 3,931,312 Dividend per share (EUR) 0.32 0.70 2.30 3.00 1.60 Number of shares 2,457,070 2,457,070 2,457,070 2,457,070 2,457,070 “Modest” AB and “Pieno logistika” AB did not pay any dividend in the last five years. 29. Employees On 31 December 2022, there were 884 employees working at “Vilvi Group”. Employee category Number of employees Education Average monthly salary (EUR) higher vocational secondary secondary incomplete Managers 30 23 7 - - 4,799 Specialists 310 115 85 106 4 1,711 Workers 544 20 153 321 50 1,209 884 158 245 427 54 1,508 On 31 December 2021, there were 867 employees working at “Vilvi Group”. Employee category Number of employees Education Average monthly salary (EUR) higher vocational secondary secondary incomplete Managers 30 23 7 - - 4,261 Specialists 310 119 89 98 4 1,434 Workers 527 18 164 298 47 1,020 867 160 260 396 51 1,281 Employees work on the basis of labour contracts, while their rights and duties are set out in their job descriptions. Employees do not have any special rights or duties, and all work is organised in compliance with the Labour Code of the Republic of Lithuania. 30. “Vilvi Group” Governing Bodies According to the Articles of Association of Vilkyškių pieninė AB, the Company‘s governing bodies are the General Meeting of Shareholders, the Board and the Chief Executive Officer. The supervisory council in the Company will be set up in 2023. The Board of the Company represents the shareholders and performs oversight “Vilvi Group” annual report for 2022 99 and control functions. The decisions taken by the General Meeting of Shareholders, where they concern issues falling within the remit of the General Meeting of Shareholders as specified in the Articles of Association, are binding to all shareholders, the Board, the CEO and other employees of the Company. Board members are elected for a term of four years. The Chairman of the Board is elected for a tenure of four years by the Board from among its own members. Members of the Board are elected by a General Meeting of Shareholders in accordance with the Law on Public Companies. The Board sets up two committees – Audit Committee and Salaries Committee – each consisting of three members. The Board elects and dismisses the Chief Executive Officer. The CEO is the head of the Company. The head of the Company is a single governing body in charge of organising the current business operations of the Company Under the Articles of association of Kelmės pieninė AB, „Kelmės pienas“ UAB, “Baltic Dairy Board” SIA AB and “Modest” AB, both companies are governed by a general meeting of shareholders, the Board and CEO. The structure of “Vilvi Group” management “Vilvi Group” annual report for 2022 100 “Vilvi Group” annual report for 2022 101 One-person management body “Pieno logistika” AB - Director 31. Procedure of Amendments to “Vilvi Group” Articles Amendments to the Group‘s Articles of Association can be adopted at a General Meeting of Shareholders. Decisions on changes to the Articles are considered adopted, if approved by two-thirds of shareholder votes. 32. Activities of the Board In 2022, Board meetings were held regularly according to the schedule, required quorum was present at each of them. During 2022, 19 ordinary board meetings took place. The Board approved the 12-month financial statements for 2021, the 2022 three-month, six-month and nine-month interim financial statements, the 2021 annual financial statements and annual report; it also called an ordinary meeting of shareholders, offered the distribution of the 2021 profit (loss) for an ordinary meeting of shareholders. In regular meetings the Board discussed investment opportunities, granting/extension of loans, and other current issues. Kelmės pieninė AB, “Kelmės pienas” UAB, “Baltic Dairy Board” SIA and “Modest” AB hold their board meetings regularly to discuss issues that are within their scope. 33. Board & Administration Members Vilkyškių pieninė AB Board Members Gintaras Bertašius – a Board Chairman since 30 January 2006, re-elected for a four-year term on 29 April 2022, CEO of Vilkyškių pieninė AB. Has higher education diploma in mechanical engineering. Membership in other companies’ governing bodies: board chairman of “Modest” AB, Kelmės pieninė AB and “Kelmės pienas” UAB, “Baltic Dairy Board” SIA member of the board. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Sigitas Trijonis – a Board Member since 30 January 2006, re-elected for a four-year term on 29 April 2022, Chief Technology Officer of Vilkyškių pieninė AB. Has higher education degree in mechanical engineering. As of 31 December 2022, he held 425,607 shares of Vilkyškių pieninė AB, 3.56 percent of the stock and voting rights. Has no seats in other companies’ governing bodies. “Vilvi Group” annual report for 2022 102 Rimantas Jancevičius – a Board Member since 30 January 2006, re-elected for a four-year term on 29 April 2022. Has college diploma in livestock engineering. Chief Purchasing Officer at Vilkyškių pieninė AB. As of 31 December 2022, he held 339,863 shares of Vilkyškių pieninė AB, 2.85 percent of the stock and voting rights. Has no seats in other companies’ governing bodies. Vilija Milaševičiutė – a Board Member since 30 April 2009, re-elected for a four-year term on 29 April 2022. Has higher education in finance and credit. Chief Economics and Financial Officer of Vilkyškių pieninė AB. Membership in other companies’ governing bodies: A board member of “Modest” AB, Kelmės pieninė AB, “Kelmės pienas” UAB and Šilumos tinklai UAB (CRN 179478621, address: Paberžių g. 16, 72324 Tauragė). As of 31 December 2022, she held 9,588 shares of Vilkyškių pieninė AB, 0.08 percent of the stock and voting rights Linas Strėlis – a Board Member since 7 March 2008, re-elected for a four-year term on 29 April 2022. Has higher education. Membership in other companies’ governing bodies: Director of LS Capital UAB (CRN 133118295, address: V. Kudirkos g. 9, Kaunas) and Biglis UAB (CRN 133688345, address: V. Kudirkos g. 9, LT-50283 Kaunas), council chairman of Association of Social Enterprises (Socialinių imonių asociacija) (CRN 300542018, address: Raudondvario pl. 107, Kaunas), board member of Umega AB (CRN 126334727, address: Metalo g. 5, LT-28216 Utena) and East West Agro AB (CRN 300588407, adrdress: Tikslo g. 10, Kumpiai, LT-54311 Kauno r.), a member of the supervisory board in SIA Preses nams. A member of EISME fund committee of Lords LB Asset Management UAB (CRN 301849625, address: Jogailos g. 4, LT-01116 Vilnius.). As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. Andrej Cyba – a Board Member since 7 March 2008, re-elected for a four-year term on 29 April 2022. Has higher degree in business administration and management. Membership in other companies’ governing bodies: Chief Business Development Officer of INVL Asset Management UAB (CRN 126263073, address: Gynėjų g. 14, LT-01109 Vilnius); chairman of the Board in FMĮ INVL Finasta UAB (CRN 304049332, address: Gynėjų g. 14, LT-01109 Vilnius); chairman of the board of “Baltic Dairy Board” SIA chairman of the supervisory Board at IPAS INVL Asset Management (CRN 40003605043, address: Smilšu iela 7-1, LV1050, Rīga) and AS Pirmais atklātais pensiju fonds (CRN 40003377918, address: Rīga, Smilšu iela 7-1, LV-1050); board member and audit committee chairman of Auga Group AB (CRN 126264360, address: Konstitucijos pr. 21C, Quadrum North, LT-08130 Vilnius); CEO of PEF GP1 UAB (CRN 302582709, address: Maironio g. 11, Vilnius), PEF GP2 UAB (CRN 302582716, address: Maironio g. 11, Vilnius), Piola UAB (CRN 120974916, address: Mindaugo g. 16-52, LT-03225 Vilnius), Ymmalu UAB (CRN 305765142, address: Šaltinių g. 24-10, LT-03233, Vilnius) and UAB „LAMA Capital“ (įm.k. 306178639, adresas: Šaltinių g. 24- 10, LT-03233, Vilnius). As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. Vilkyškių pieninė AB Members of Administration Gintaras Bertašius – CEO and Chairman of the Board. Works at the Company since 1993. Has higher education diploma in mechanical engineering. Membership in other companies’ governing bodies: board chairman of “Modest” AB, Kelmės pieninė AB and “Kelmės pienas” UAB, member of the board of “Baltic Dairy Board” SIA. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Vilija Milaševičiutė – Chief Economics and Financial Officer, a Board Member, working at the Company since 2000. Has higher education in finance and credit. Membership in other companies’ governing bodies: a board member of “Modest” AB, Kelmės pieninė AB, “Kelmės pienas” UAB and Šilumos tinklai UAB (CRN 179478621, address: Paberžių g. 16, 72324 Tauragė). As of 31 December 2022, she held 9,588 shares of Vilkyškių pieninė AB, 0.08 percent of the stock and voting rights. Vaidotas Juškys – Executive Officer, working at the Company since 2010. Has higher education in information technology. As of 31 December 2022, he held 12,279 shares of Vilkyškių pieninė AB, 0.10 percent of the stock and voting rights. Has no seats in other companies’ governing bodies. “Vilvi Group” annual report for 2022 103 Sigitas Trijonis – Chief Technology Officer, a Board Member, working at the Company since 1993. Has higher education in mechanical engineering. As of 31 December 2022, held 425,607 shares of Vilkyškių pieninė AB, 3.56 percent of the stock and voting rights. Has no seats in other companies’ governing bodies. Rimantas Jancevičius – Chief Purchasing Officer, a Board Member, working at the Company since 1996. Has college diploma in livestock engineering. As of 31 December 2022, held 339,863 shares of Vilkyškių pieninė AB, 2.85 percent of the stock and voting rights. Has no seats in other companies’ governing bodies. Arvydas Zaranka – Chief Production Officer, working at the Company since 1995. Has college degree in dairy technology. Membership in other companies’ governing bodies: a board member of “Modest” AB, CEO of Kelmės pieninė AB. As of 31 December 2022, held 1,933 shares of Vilkyškių pieninė AB, 0.02 percent of the stock and voting rights. Rita Juodikienė – Management and quality director. Working at the company since 2002. Has a master degree in business management. Membership in other companies’ governing bodies: a board member of Kelmės pieninė AB and “Kelmės pienas” UAB. As of 31 December 2022, held 2,175 shares of Vilkyškių pieninė AB, 0.02 percent of the stock and voting rights. The bonuses to the CEO and CFO totaled in 2022 144,0 tEUR. The salaries were paid out to Vilkyškių pieninė AB board members in 2022: Board members (4 members), EUR tho Average size per month, EUR salary 325 6,767 In 2022, the Company did not issue any loans, guarantees or letters of credit to members of its governing bodies which would ensure their duties. Also, the Company did not pay its board members or employees any salaries, bonuses or other payments from the profits of the Company’s subsidiaries. Members of Kelmės pieninė AB board and administration Gintaras Bertašius – Chairman of the Board, re-elected for a four-year term on 29 April 2021. Participation in the governing bodies of other companies: board chairman and CEO of Vilkyškių pieninė AB; board chairman of “Modest” AB, and “Kelmės pienas” UAB; board member of “Baltic Dairy Board” SIA. Holds higher education degree in mechanical engineering. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Vilija Milaševičiutė – a member of the board, re-elected for a four-year term on 29 April 2021. Holds higher degree in finance and credit. Participation in the governing bodies of other companies: Chief Economics and Financial Officer and a board member of Vilkyškių pieninė AB, a board member of “Modest” AB, “Kelmės pienas” UAB and Šilumos tinklai UAB (CRN 179478621, address: Paberžių g. 16, 72324 Tauragė). As 31 December 2022, held 9,588 shares in Vilkyškių pieninė AB, i.e., 0.08 percent of the stock and voting rights. Rita Juodikienė – a member of the Board, re-elected for a four-year term on 29 April 2021. Has master degree in business management. Participation in the governing bodies of other companies: Quality and management director of Vilkyškių pieninė AB and a board member of “Kelmės pienas” UAB. As of 31 December 2022, held 2,175 shares of Vilkyškių pieninė AB, 0.02 percent of the stock and voting rights. Arvydas Zaranka - CEO of Kelmės pieninė AB. Has college degree in dairy technology. Membership in other companies’ governing bodies: Chief Production Officer of Vilkyškių pieninė AB, a board member of “Modest” AB. As of 31 December 2022, held 1,933 shares of Vilkyškių pieninė AB, 0.02 percent of the stock and voting rights. In 2022, Kelmės pieninė AB did not allocate any bonuses, loans, guarantees or letters of credit to members of its governing bodies which would ensure their duties. “Vilvi Group” annual report for 2022 104 Members of “Kelmės pienas” UAB board and administration Gintaras Bertašius – Chairman of the Board, elected for a four-year term on 17 November 2021. Participation in the governing bodies of other companies: board chairman and CEO of Vilkyškių pieninė AB, board chairman of “Modest” AB and Kelmės pieninė AB; board member of “Baltic Dairy Board” SIA. Holds higher education degree in mechanical engineering. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Vilija Milaševičiutė – a member of the Board, elected for a four-year term on 17 November 2021. Holds higher degree in finance and credit. Participation in the governing bodies of other companies: Chief Economics and Financial Officer and a board member of Vilkyškių pieninė AB, a board member of “Modest” AB, Kelmės pieninė AB and Šilumos tinklai UAB (CRN 179478621, address: Paberžių g. 16, 72324 Tauragė). As 31 December 2022, held 9,588 shares in Vilkyškių pieninė AB, i.e., 0.08 percent of the stock and voting rights. Rita Juodikienė – a member of the Board, elected for a four-year term on 17 November 2021. Has master degree in business management. Participation in the governing bodies of other companies: Quality and management director of Vilkyškių pieninė AB and a board member of Kelmės pieninė AB. As of 31 December 2022, held 2,175 shares of Vilkyškių pieninė AB, 0.02 percent of the stock and voting rights. Jolita Valantinienė - CEO of “Kelmės pienas” UAB. Has master degree in management and business administration. As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. Has no seats in other companies’ governing bodies. In 2022, “Kelmės pienas” UAB did not allocate any bonuses, loans, guarantees or letters of credit to members of its governing bodies which would ensure their duties. Members of “Modest” AB board and administration Gintaras Bertašius – Chairman of the Board, re-elected for a four-year term on 29 April 2022. Holds higher education degree in mechanical engineering. Participation in the governing bodies of other companies: board chairman and CEO of AB Vilkyškių pieninė AB, a board chairman at Kelmės pieninė AB and “Kelmės pienas” UAB; board member of “Baltic Dairy Board” SIA. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Arvydas Zaranka – a member of the board, re-elected for a four-year term on 29 April 2022. Has college degree in dairy technology. Participation in the governing bodies of other companies: Chief Production Officer of AB Vilkyškių pieninė; CEO of Kelmės pieninė AB. As of 31 December 2022, held 1,933 shares in Vilkyškių pieninė AB, i.e., 0.02 percent of share capital and voting rights. Vilija Milaševičiutė – a member of the board, re-elected for a four-year term on 29 April 2022. Participation in the governing bodies of other companies: Chief Economics and Financial Officer and board member in Vilkyškių pieninė AB, Kelmės pieninė AB, “Kelmės pienas” UAB and Šilumos tinklai UAB (CRN 179478621, address: Paberžių g. 16, 72324 Tauragė). Has higher education in finance and credit. As of 31 December 2022, held 9,588 shares in AB Vilkyškių pieninė, i.e., 0.08 percent of the stock and voting rights. Matas Pozingis – CEO of “Modest” AB, working at the company since 2021. Has higher education degree in management and business administration. As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. Has no seats in other companies’ governing bodies. In 2022, “Modest” AB did not allocate any bonuses, loans, guarantees or letters of credit to members of its governing bodies which would ensure their duties. Members of “Baltic Dairy Board” SIA board and administration Andrej Cyba – Chairman of the Board. Has higher degree in business administration and management. Participation in other companies’ governing bodies: board member of Vilkyškių pieninė AB; Chief Business Development Officer of INVL Asset Management UAB (CRN 126263073, address: Gynėjų g. 14, LT-01109 “Vilvi Group” annual report for 2022 105 Vilnius); Chairman of the Board in FMĮ INVL Finasta UAB (CRN 304049332, address: Gynėjų g. 14, LT- 01109 Vilnius); chairman of the supervisory Board at IPAS INVL Asset Management (CRN 40003605043, address: Smilšu iela 7-1, LV1050, Rīga) and AS Pirmais atklātais pensiju fonds (CRN 40003377918, address: Rīga, Smilšu iela 7-1, LV-1050); board member and audit committee chairman of Auga Group AB (CRN 126264360, address: Konstitucijos pr. 21C, Quadrum North, LT-08130 Vilnius); CEO of PEF GP1 UAB (CRN 302582709, address: Maironio g. 11, Vilnius), PEF GP2 UAB (CRN 302582716, address: Maironio g. 11, Vilnius), Piola UAB (CRN 120974916, address: Mindaugo g. 16-52, LT-03225 Vilnius) and Ymmalu UAB (CRN 305765142, address: Šaltinių g. 24-10, LT-03233, Vilnius). As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. Gintaras Bertašius – Member of the Board. Participation in the governing bodies of other companies: board chairman and CEO of Vilkyškių pieninė AB, board chairman of “Modest” AB, Kelmės pieninė AB and “Kelmės pienas” UAB. Holds higher education degree in mechanical engineering. On 31 December 2022 had 219,364 shares in Vilkyškių pieninė AB, however he had 60.4 percent voting rights in shareholder’s meetings (joint life insurance policy has been drawn up at Swisspartners Versicherung AG Zweigniederlassung Österreich which has taken over ownership rights to 6,994,316 shares of AB Vilkyškių pieninė). Kaspars Kazāks – Director of “Baltic Dairy Board” SIA and board member, manages company since 2008. Participation in the governing bodies of other companies: board member of SIA „KIK Asset Management“ (CRN. 43603083832, address: Mazā Salātu g. 4-7, Bauska, Latvija). As of 31 December 2022, did not have any shares in Vilkyškių pieninė AB. 34. Committees Members of the Audit Committee: Aušra Lobinienė (The Head of Internal Audit of Tauragė Credit Union), Vilma Morkaitienė (chief accountant of Bonus Modus UAB) and Milana Buivydienė (Vilkyškių pieninė AB employee). None of the Committee members hold senior positions in the Company’s administration or have shares in the Company. In 2022, 5 meetings of the Audit Committee were held. The Audit Committee discussed and approved the following: the Company’s 2021 financial statements, the draft 2021 annual report, the draft 2021 profit (loss) distribution report, the 2022 internal audit plan and the 2022 budget, 2 times reviewed the salaries of the company's employees. Each meeting was attended by all members of the Committee. No committees are formed in subsidiary companies. 35. Agreements Enacted by Change of Control, Where Issuer is a Party There are no agreements, to which the Issuer is a party, that would take effect if control of the Issuer changed. 36. Information about Agreements Between the Issuer and its Governing Members or Employees on Compensation Payouts in Case of Their Resignation, Unfair Dismissal or Discharge Upon Change in the Control of the Issuer The Board Rules of Procedure do not provide for any compensation or payouts if a member of the Board resigns before the Board’s term has expired. All employees are employed and dismissed in conformity with the provisions of the Lithuanian Labour Code. 37. Information About the Company’s Transactions With Related Parties Information about transactions with parties that are related to the Company has been included in the Vilkyškių pieninė AB financial statements for the year ended 31 December 2022, in Chapter 29. 38. Information About Detrimental Acts Concluded by the Issuer that Could Affect Issuer’s Operations The Issuer has not concluded any detrimental transactions that had or could in the future have any negative impact on the Issuer’s operations or results. Nor has the Issuer concluded any transactions involving conflict of interest on behalf of the Issuer’s top management, major shareholders or other. 39. Social responsibility report “Vilvi Group” annual report for 2022 106 “Vilvi group“ 2022 social responsibility report is available on the company's website (link: https://vilvigroup.lt/wp-content/uploads/2023/03/VILVI-Group-Social-responsibility-and-Sustainability- Report-2022-ENG.pdf) “Vilvi Group” annual report for 2022 107 AB VILKYŠKIŲ PIENINĖ REMUNERATION REPORT FOR 2022 General information AB Vilkyškių pieninė remuneration report has been prepared for the reporting financial period of 2022, which coincides with the calendar year. The remuneration report (hereinafter referred to as - the Report) was drawn up in accordance with the Law of the Republic of Lithuania on Financial Statements of Companies, the Employee Remuneration Policy of joint-stock company “Vilvi Group” group of companies (hereinafter referred to as - the Remuneration Policy) and other regulatory enactments. The Employee Remuneration Policy of “Vilvi Group” group of companies was approved at the general meeting of shareholders on 30 April 2021. The remuneration report contains information about the remuneration of each member of the management and supervisory bodies, as well as information on other (non-)received benefits and other data. Remuneration principles Members of the Board of the Company may be paid shares of profits, which are granted by the decision of the General Meeting of Shareholders of the Company in accordance with the procedure established by regulatory enactments. Following the decision of the General Meeting of Shareholders on the payment of a share of profits, the share of profits due to a particular member of the Board is determined by the decision of the Board, taking into account the contribution of a particular member of the Board to the Company's activities. The remuneration of the manager of the Company, i.e. the General Director, is determined by the decision of the Board of the Company. When determining the amount of salary, the level of remuneration of the managers of companies of a similar size is assessed, taking into account the level of the position, as well as the personal competence, experience, knowledge and abilities of the manager. The remuneration of “Vilvi Group” group of companies: top management, II-tier management, middle-tier management and other employees - consists of two main parts: fixed and variable. Incentives may also be paid. Employees of the Company are paid: fixed part of remuneration (FPR) - the basic or hourly monthly cash salary of the employee specified in the employment contract, variable part of remuneration (VPR) - additional employee cash remuneration, determined based on the quality and results of work, achievement of goals raised by the Company and individual goals of the employee, level of competencies and compliance with the values of the Company and the Group of Companies. Other benefits (OB) are other potential benefits provided to employees as incentives. Remuneration of the members of the Board for 2021 - 2022 In AB Vilkyškių pieninė, two members of the Board do not work at the company and four members of the Board work under employment contracts; during 2022, no permanent or additional remuneration was paid to them for their work in the Board. The members of the Board working under an employment contract received remuneration only on the basis of employment. Salaries accrued and paid during 2022 correspond to the amounts provided for in the remuneration policy approved by the company. “Vilvi Group” annual report for 2022 108 Annual pre-tax remuneration of the members of the Board working under an employment contract, in thousand euros. Name, surname, position Year of 2021 Year of 2022 Fixed salary Variable salary In total Fixed salary Variable salary In total Gintaras Bertašius, general director 101.3 - 101.3 101.4 - 101.4 Vilija Milaševičiūtė, director for economy and finance 62.9 11.0 73.9 66.9 11.3 78.1 Sigitas Trijonis, technical director 62.8 11.1 73.9 66.6 11.4 78.0 Rimantas Jancevičius, director for procuring raw materials 62.5 11.3 73.8 66.0 11.8 77.8 The manager of the company, i.e. the General Director, and the members of the Board did not receive any remuneration from the companies belonging to the group of companies. The salary was paid in accordance with the procedure, scope and terms provided for in the employment contract; they did not receive any other property benefits during 2022, including the award of shares or other concluded transactions in favour of and in the interests of the managers. During the period reported on (year of 2022), no guarantees or sureties were given to the members of the Board, the manager of the Company, no assets or other property rights were transferred. Remuneration of employees of the parent company and the group of companies The salary fund of the group of companies in 2022 was equal to EUR 12.966 million (in 2021 - EUR 11.418 million). The table below shows the average monthly salary of employees in 2018-2022 before taxes, in euros. The average monthly salary of corporate group‘s employees before taxes, in euros. Employee group Year of 2018 Year of 2019 Year of 2020 Year of 2021 Year of 2022 Number of employe es Average salary Number of employ ees Average salary Number of employ ees Average salary Number of employ ees Average salary Numbe r of employ ees Average salary Managers 30 3,616 28 3,919 29 3,997 30 4,261 30 4,799 Specialists 332 1,166 298 1,258 301 1,311 310 1,434 310 1,711 Workers 572 822 502 872 500 924 527 1,020 544 1,209 934 1,026 828 1,107 830 1,166 867 1,281 884 1,508 “Vilvi Group” annual report for 2022 109 The average monthly salary of AB “Vilkyškių pieninė” employees before taxes, in euros. Employee group Year of 2018 Year of 2019 Year of 2020 Year of 2021 Year of 2022 Number of employe es Average salary Number of employ ees Average salary Number of employ ees Average salary Number of employ ees Avera ge salary Number of employee s Average salary Managers 23 3,693 22 4,020 21 4,198 19 4,565 20 5,029 Specialists 183 1,215 170 1,304 155 1,338 147 1,506 150 1,777 Workers 319 890 285 930 283 948 274 1,059 292 1,253 525 1,125 477 1,197 459 1,228 440 1,365 462 1,581 The remuneration paid to the members of the Board and employees of AB Vilkyškių pieninė in 2022 was in accordance with the principles, grounds and conditions approved in the Remuneration Policy. No fixed or additional remuneration was paid to the members of the Company's Audit Committee and Remuneration Committee for their work in the committees. Final Provisions The remuneration report for 2022 is an integral part of the consolidated annual report and is published on the Company's website https://vilvigroup.lt and https://nasdaqbaltic.com in accordance with the procedure established by regulatory enactments. “Vilvi Group” annual report for 2022 110 AB VILKYŠKIŲ PIENINĖ MANAGEMENT REPORT The Companies’ management report has been compiled according to the Law on Financial Reporting by Undertakings of the Republic of Lithuania. 1. Reference to the applicable code of corporate management and where it has been published and/or a reference to a public source of all the necessary information on corporate management practice: The Company’s management report for 2022, audited financial statements of the Company and its group, consolidated annual report, are published on the Company’s website www.vilvigroup.lt and on AB Nasdaq Vilnius securities exchange website www.nasdaqbaltic.com. 2. In case of deviations from and (or) non-compliance to the provisions of the applicable code of corporate management, the said provisions and the reasons for deviations and (or) non-compliance: Information on the Company’s non-compliance to the provisions of the code of the corporate management is provided in clauses 1.8 and 3.2.5. 3. Information on the scale of the risk and risk management – description of management of the risk, related to financial accountability, risk mitigation measures and internal control system, applicable at the company: The Company’s information on the scale of the risk and risk management, risk mitigation measures and the internal control system, applicable at the company, is provided in the clause 17 of the consolidated annual statement for 2022 and the note 30 of the financial statement. 4. Information on significant directly or indirectly managed shareholdings: Information on significant directly or indirectly managed shareholdings is provided in clause 25 of the consolidated annual statement for 2022. 5. Information on transactions with related parties, as established in the article 37 2 of the Law on Joint Stock Companies (indicating the parties of the transaction (legal form, title and code of the legal entity register, which collects and stores data on the said entity, domicile (address); name, surname and address for correspondence of a natural person) and the value of the transaction): In 2022, the company has not had any transactions with related parties, based on the criteria, indicated in the article 37 2 . More detailed information on transactions with related parties and financial relations with the company’s managers, is provided in note 29 of the financial statement for 2022. 6. Information on shareholders with special rights of control and description of these rights: The company has no shareholders with special rights of control. 7. Information on all current voting rights’ limitations, such as a limitation of voting rights for persons that have a certain percentage or number of votes, terms, when the voting rights can be used, or systems, based on which the material rights, granted by securities, are separated from the holder of the securities: The company does not apply any voting rights’ limitations. All shareholders have equal material and immaterial rights. 8. Information on rules on election and replacement of board members, also amendments of the company’s articles of association: The company has no rules on amendments of the Company’s articles of association, or election and replacement of the Company’s board members. The Company conducts its business in accordance with the Law on Joint Stock Companies of the Republic of Lithuania, the Company’s articles of association and other legislation. The Company’s articles of association are amended in accordance with the law of the Republic of Lithuania. “Vilvi Group” annual report for 2022 111 9. Information on the power of attorney of the board members: Board members have not granted any powers of attorney to other persons with the purpose to conduct the functions, attributable to the competence of the board. The Company’s board members act in accordance with the Law on Joint Stock Companies, the Company’s articles of association and the board’s work regulations. 10. Information on the competence of the general meeting of shareholders, the shareholders’ rights and their implementation, if this information has not been established by the law: The competence of the general meeting of shareholders, the shareholders’ rights and duties are established in the legislation and the Company’s articles of association. 11. Information on the composition of the management, control bodies and their committees, also their fields of activity and that of the head of the company: General meeting of shareholders. The competence, rights and obligations of the general meeting of shareholders virtually does not differ from the competence, rights and duties of a general meeting of shareholders, established in the Law on Joint Stock Companies of the Republic of Lithuania and other legislation, as well as the Company’s articles of association. Board – a collegial management body, representing the Company’s shareholders for a period between their meetings, making decisions on the major issues of the Company’s economic activity, and implementing the company’s control. The board members act in accordance with the Law on Joint Stock Companies of the Republic of Lithuania and the Company’s articles of association. Currently, the board consists of 6 (six) members, the number of their terms of office is unlimited. Board members are elected by the General meeting of shareholders for no more than four years. There is no applicable rule on the election of the board members of the Company, the Company follows the provisions of the Law on Joint Stock Companies and the Company’s articles of association. There is no policy, related to age, gender, education, professional experience, applicable to the elections of the board members – they are elected based on their competence. The head of the Company is a director general, who follows the Company’s articles of association, decisions of the general meeting of shareholders and decisions of the board. The head of the Company is elected by the board of the Company. The head of the Company organises the Company’s daily operations and conducts actions, necessary to ensure its functions, the implementation of the decisions, adopted by the Company's bodies and to ensure the Company’s business. 12. Description of the diversity policy, applicable to the election of the head of the Company, management and control bodies in terms of such aspects as, for example, age, gender, education, professional experience, methods of implementation and results in the reporting period. If a diversity policy is not applicable, reasons for non-application: The Company does not have a diversity policy, applicable to the election of the head of the Company, management and control bodies. Candidates to members of the Company’s management bodies are not subject to discrimination for their age, gender, education or professional experience. The Company draws no limitations for candidates in terms of gender or age. The major criterion in the election of the members of the management bodies is the candidate's competence. 13. Information on the salary of each member of the management, control body (average salaries, paid during the reporting period, indicating premiums, allowances, bonuses and other payments individually): Information on average salaries, paid to the management bodies during the reporting period is provided in the Company’s remuneration report. “Vilvi Group” annual report for 2022 112 14. Information on all mutual agreements between shareholders (their essence and conditions): The Company has no data on mutual agreements between its shareholders. In 2022, the Company has not entered into any agreements with its body members or employees that would result in compensations should they resign or be dismissed without a reasonable cause, or if their employment would cease due to a change in control of the issuer. During the reporting period there were no harmful transactions that do not comply with the goals of the Company or the Group, common market conditions, violate the interests of the shareholders or other persons, or that had or could have a negative impact on the Company's business or results in the future. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 113 AB VILKYŠKIŲ PIENINĖ CORPORATE GOVERNANCE REPORT FORM FOR THE YEAR THAT ENDED ON 31 DECEMBER 2022 The public limited liability company AB”Vilkyškių pieninė” (hereinafter referred to as the “Company”), acting in compliance with Article 22 (3) of the Law of the Republic of Lithuania on Securities and paragraph 24.5 of the Listing Rules of AB Nasdaq Vilnius, hereby discloses how it complies with the Corporate Governance Code for the Companies listed on Nasdaq Vilnius as well as its specific provisions or recommendations. In case of non-compliance with this Code or some of its provisions or recommendations, the specific provisions or recommendations that are not complied with must be indicated and the reasons for such non-compliance must be specified. In addition, other explanatory information indicated in this form must be provided. 1. Summary of the Corporate Governance Report: According to the Articles of Association of the Company, the bodies of the Company are the General Meeting of Shareholders, the Management Board, and the Manager of the Company. The Company does not have a Supervisory Board, but the supervisory functions, provided for in the Law on Companies of the Republic of Lithuania (hereinafter referred to as the ,,Law”), are actually performed by the Management Board (although at the moment these supervisory functions is not legalized in the Articles of Association of AB Vilkyškių Pieninė, however, this issue will be resolved at this year's ordinary annual general meeting of shareholders), which is not an executive body of the Company and consists of four representatives of the Company and two independent members. The Management Board elects and removes the Manager of the Company, determines his/her remuneration and other terms of the employment agreement. The company is managed by the Manager of the Company. The Company has two committees - Audit Committee and Nomination and Remuneration Committee. The Nomination and Remuneration Committee shall perform the functions of the Remuneration and Nomination Committees. The Company does not currently comply with the requirement established by Paragraph 1.8 of the Corporate Governance Code, because does not provide the possibility for the shareholders to participate and vote in the general meeting of shareholders by means of electronic communication, the Company also does not comply with the requirement established by Paragraph 3.2.5., because the Chairman of the Management Board is the Manager of the Company. Also, the Articles of Association of the Company do not establish the supervisory functions performed by the Management Board laid down by Law (the term of the Board has not expired). These requirements will be taken into account during the election of the new management bodies of the Company and amending the Articles of Association of the Company at this year's ordinary annual general meeting of shareholders. More information on the Company’s Governance, shareholders’ rights, activities of the Management Board and Committees, Management Board members, as well as systems of internal control and risk management is provided in the Company’s Consolidated Annual Report for the year that ended on 31 December 2022. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 114 2. Structured table for disclosure: PRINCIPLES/ RECOMMENDATIONS YES/N O/ NOT APPLI CABLE 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 Shareholders are furnished with equal opportunity to access the and documents established in the legal acts, as well as to participate in the corporate decision-making process. The Company’s documents and information established in the legal acts are publicly available on the Company’s website and through the information disclosure system used by Nasdaq Vilnius in Lithuanian and English. 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 The capital of the Company consists of ordinary registered shares, which grant their owners equal personal property and non-property rights. Each share grants one vote at the general meeting of shareholders. 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 The Articles of Association of the Company, which set out the rights conferred to the holders of Company’s shares, are publicly available on the Company’s website. 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. Yes Transactions shall be approved in accordance with the procedure set forth in the Law on Companies of the Republic of Lithuania and the Articles of Association of the Company. Where necessary, important transactions are subject to approval of the general meeting of shareholders, despite the fact that such a procedure is not established in the Articles of Association of the Company. We plan to clearly establish this during the amendment of the articles of association of the Company. 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 Yes The Articles of Association of the Company provide that all persons, who on the day of the meeting are the shareholders of the Company, their authorized representatives, or persons with whom the voting rights transfer agreement has been concluded shall have the right to VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 115 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. participate and vote in the general meeting of shareholders. A shareholder who has the right to vote and is familiar with the agenda may also inform the general meeting of shareholders in writing about his or her “for” or “against” choice with respect to each resolution individually. These notifications shall be credited to the quorum of the general meeting of shareholders as well as the voting results. Meetings of the Company’s shareholders are held at the registered office of the respective company of the Company Group (during quarantine shareholders are encouraged to vote in writing). Ordinary meetings of shareholders are held in the second half of April. The notice convening the general meeting of shareholders shall state that the proposed new draft resolutions must be submitted in writing at any time before the general meeting of shareholders. 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 All documents and information related to the general meeting of shareholders, including notice of the meeting convened, draft resolutions, resolutions and minutes of the meeting, are announced publicly and at the same time in two languages - Lithuanian and English - through the Nasdaq regulated notice distribution system and on the Company’s website 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 Shareholders of the Company may exercise the right to participate in the shareholders’ meeting either in person or through a representative, if the person has a proper Power of Attorney or a voting rights transfer agreement has been concluded in accordance with the procedure established by legal acts. The Company shall also furnish the opportunity to shareholders to vote by filling out a general ballot as required by law. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 116 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 The Company does not comply with the provisions of this recommendation as the Company does not provide the possibility for the shareholders to participate and vote in the general meeting of shareholders by means of electronic communication. The company is considering this issue and the need for its implementation, possibilities, etc. 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 The Company informs about the educational background, work experience, and position of the candidates to the members of the collegial body during the general meeting of shareholders by submitting the curriculum vitae of the candidates in the material of the meeting. The name of the proposed audit firm shall be submitted to the general meeting in advance as a draft resolution. During the election a new member to the collegial body, the Company will publish the above information on each member in the draft resolutions of the general meeting. 1.10. Members of the company’s collegial management body, heads of the administration 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 Members of the company’s collegial management body, heads of the administration or other competent persons related to the company who can provide information related to the agenda of the general meeting of shareholders, as well as candidates proposed to members of the collegial body participate in the general meeting of shareholders. 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. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 117 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. Not applic able The Supervisory board is not formed in the Company. 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. Not applic able 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. Not applic able 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 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. Not applic able 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. Not applic able 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. Not applic able 2.2. Formation of the supervisory board VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 118 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. Not applica ble The Supervisory board is not formed in the Company. 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. Not applica ble 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. Not applica ble 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. Not applica ble 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 Not applica ble VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 119 independence, he/she cannot be considered independent due to special personal or company-related circumstances. 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. Not applica ble 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. Not applica ble 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 As the supervisory board is not formed in the Company, the Company’s strategy is approved by the management board. 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 The functions specified in the recommendation are performed by the management board (except for AB Pieno logistika of the Company Group, where the management board is not formed), taking into account the needs of the Company, shareholders, employees, and other interest groups. The Management Board of Vilkyškių Pieninė AB actually performs the supervisory functions provided for in the Law on Companies of the Republic of Lithuania. Although at present these supervisory functions is not established for the Management Board in the Articles of Association of Vilkyškių Pieninė AB, however, this issue will be resolved during the election of the new management bodies of the Company VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 120 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 The Company follows the recommendations of this paragraph. The members of the management board have the necessary variety of knowledge, opinions, and experience to perform their tasks properly (2 board members have economic education, 2 board members have technical education, 1 board member has management education and one board member has education related to agriculture.) There is one woman on the management board of AB Vilkyškių pieninė and one on the management board of AB Modest of the Company Group; and two women on the management board of AB Kelmės pieninė and on the management board UAB Kelmės pienas of the Company Group and there are no women on the management board of LTD ,,Baltic dairy board“ of the Company Group. and amending the Articles of Association of the Company at this year's ordinary annual general meeting of shareholders. The Management Board of LTD ,,Baltic dairy board“ of the Company Group, located in Latvia, performs the functions provided for by the laws of Latvia and the Articles of Association of this company. 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 The management board ensures that the Company complies with laws and internal policies of the Company (e.g. Remuneration Policy, Procurement Process and Procedures, Equal Opportunities Policy, Personal Data Processing Rules, etc.), and, it also ensures the accountability of the management in accordance with the established internal measures of governance and control. 3.1.4. Moreover, the management board should ensure that the measures included into the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance are applied at the company in order to ensure adherence to the applicable laws, rules and standards. Yes The management board ensures compliance with applicable laws, regulations, 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 When ppointing the manager of the company, the management board takes into account the candidate’s qualifications, experience, and competence. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 121 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 The curriculum vitae of the candidates to become members of the management board and information on the candidates‘ participation in the activities of other companies is submitted at the shareholder meeting together with draft resolutions without violating the requirements of the legal acts regulating the handling of personal data. In the annual report, the company indicates the necessary information about the members of the Management Board: education, qualifications, professional experience, current position, etc. 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 After the election, all members of the management board shall be familiarized with their rights and obligations under the legal acts of the Republic of Lithuania and the Articles of Association of the Company. Members of the management board are regularly informed at the Board meetings and individually, as required or per own request of the members, about the Company’s activities and its changes, material changes in the legal acts regulating the Company’s activities, and other circumstances affecting the Company’s activities. 3.2.4. Members of the management 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 and sufficiently frequent reconfirmation of their status. Yes According to the Articles of Association of the Company, the members of the management board are elected for a term of four years, without limiting the number of their terms. The Articles of Association of the Company provide for the possibility of re-election of the entire management board or its individual member. 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. No AB Vilkyškių pieninė does not comply with the recommendation of Paragraph 3.2.5. as the chairman of its management board is the manager of the company. The impartiality of supervision is ensured by other five members of the management board. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 122 3.2.6. Each member should devote sufficient time and attention to perform his duties as a member of the management board. Should a member of the management board attend less than a half of the meetings of the management board throughout the financial year of the company, the supervisory board of the company or, if the supervisory board is not formed at the company, the general meeting of shareholders should be notified thereof. Yes In 2022, the management board members attended the management board meetings (a quorum was present during all meetings), with each member devoting sufficient time to perform the duties of the management board member. Most board meetings were held remotely (due to quarantine restrictions). There were no management board members who attended less than half of the management board meetings during fiscal year of 2022. 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, 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. Yes Currently the management board of the Company (the term of which will expire in 2022) has 2 independent members. The election of a new management board will take into account the independence criteria set out in the Law. 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 Members of the management board of AB Vilkyškių pieninė, AB Modest, AB Kelmės pieninė, UAB Kelmės pienas and LTD ,,Baltic dairy board“ may be compensated for their work in the management board with tantiemes approved by the general meeting of shareholders. No tantiemes were paid to management board members in 2022. 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 According to the information available to the Company, the members of the management board act in good faith with respect to the Company, following the interests of the Company and not their own or those of third parties, adhering to the principles of honesty, reasonableness, confidentiality, and responsibility, trying to remain independent during the decision-making. 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 Yes Every year the management board is carry out an assessment of its activities, review the management board’s annual performance goals and evaluate their achievement. The management structure of the Company is published annually in the annual report of the Company. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 123 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. 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. Not applica ble The Supervisory board is not formed in the Company. 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 Management board meetings are held at least once a month at the end of the month, and more frequently if the need arises. 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 Yes The members of the management board shall be provided in advance with the information of the meeting convened, the agenda of the meeting, and any material related to the issues to be discussed at the meeting. Each member of the governing body shall have access to the materials of the meeting before the date of the meeting. As a general rule, the published VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2022 124 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. agenda of a meeting shall not be changed, unless otherwise decided at a meeting where all the members of the management board of the Company are present, and the material submitted for the meeting shall be sufficient for the additional issue to reach a decision on the issue that is not announced in the agenda. 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 Not applic able The recommendations of paragraph 4.4. cannot be applicable in the Company as no supervisory board is formed. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 125 remuneration are discussed. 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. Yes AB Vilkyškių pieninė has 2 committees: Nomination and Remuneration Committee and Audit Committee. Nomination and Remuneration Committee is formed by the management board. The members of the Audit Committee and the Regulations of the Committee is approved by the general meeting of shareholders on the recommendation of the management board. AB Modest, AB Kelmės pieninė, AB Pieno logistika, UAB Kelmės pienas and LTD ,,Baltic dairy board“ have no committees. The functions of the Nomination and Remuneration Committee shall be carried out by a formed single Nomination and Remuneration Committee. 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. Not applic able 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 Each committee of AB Vilkyškių pieninė is composed of 3 members. All members of the Audit Committee have financial education, and 2 of them are independent members. All members of the Nomination and Remuneration Committee shall have managerial experience and one of them shall be an independent member. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 126 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 The activities of the Nomination and Remuneration Committee of AB Vilkyškių pieninė are regulated by the Regulations approved by the management board. Regulations of the Audit Committee of AB Vilkyškių pieninė are approved by the general meeting of shareholders. Both committees regularly inform the collegial body about their activities and results. Information on Committee activities and attendance of Committee meetings is presented in the consolidated annual report of 2022. 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 The members of the collegial body, who are not members of the Committee, shall participate in the meetings of the committees, if necessary, at the invitation of the respective Committee. If necessary, the Committee may invite relevant Company personnel, responsible for the matters discussed in the Committee, to attend the meeting. The chairman of the committee is also provided with the possibility to communicate with the shareholders as necessary. 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 Yes The functions of the Nomination Committee specified in this recommendation are essentially performed by the Nomination and Remuneration Committee of AB Vilkyškių pieninė. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 127 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; 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. Yes 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. Yes The functions of the Remuneration Committee specified in this recommendation are essentially performed by the Nomination and Remuneration Committee of AB Vilkyškių pieninė. The Nomination and Remuneration Committee submits proposals to the collegial body on the remuneration policy, reviews it regularly, and monitors its implementation. 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. Yes The functions of the Audit Committee are defined in the Regulations of the Audit Committee approved by the General Meeting of Shareholders. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 128 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 The members of the Committee shall be provided with all the detailed information necessary for the performance of its functions. 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 After the members of the Audit Committee decide who must attend the meeting of the Committee, these persons shall be invited, ensuring possibility that the members of the managerial bodies would not be present at the same meeting. 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 Internal and external auditors shall regularly present their activity plans and reports to the Audit Committee. 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 The Audit Committee shall have the opportunity to periodically verify whether employees have the possibility to lodge a complaint or report anonymously any suspected violations by the Company. Complaints are submitted to an authorized employee of the Company's HR Department, which must ensure the anonymity of the complaint. 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. Yes Reports of the Audit Committee are presented at management board meetings twice a year. 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. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 129 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 the creation of the well-being, jobs, and financial stability of the Company. Within the context of this principle, the term “stakeholders” includes investors, employees, creditors, suppliers, customers, the local community, and other persons 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 Management board members avoid situations where their personal interests may be in conflict with the company’s interests. 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 The remuneration policy approved by the management board is published on the Company’s website and is regularly reviewed. 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 The approved Remuneration Policy does not provide for the possibility to receive remuneration depending on the Company's performance. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 130 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 The Company adheres to the requirements of applicable laws (provisions of the Labor Code of the Republic of Lithuania) regarding termination payments. 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. Not applic able The Company has no system of employee incentivisation or remuneration with Company shares. 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 The implementation of the Remuneration Policy is disclosed in the Remuneration Report, which is published on the Company's website. 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 In the event of a material change in the remuneration policy, such change shall be included in the agenda of the general meeting of shareholders. The Company does not employ schemes under which the remuneration is provided in shares or share options, or other rights to purchase shares or receive remuneration based on the changes in the share price. 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 VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 131 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 All stakeholders are provided with the possibility to participate in corporate governance and access to the necessary information. 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 All stakeholders are provided with the possibility to participate in corporate governance in the manner prescribed by law 8.3. Where stakeholders participate in the corporate governance process, they should have access to relevant information. Yes The stakeholders involved in the corporate governance process shall be granted access to the necessary information, without prejudice to the interests of the Company and other related parties. 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 The Company provides the possibility to confidentially report any illegal or unethical practices to the collegial body performing the supervisory function. 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 On a quarterly basis, the Company reports its operating and financial results on the Company’s website and through the information disclosure system used by Nasdaq Vilnius. 9.1.2. objectives and non-financial information of the company; Yes Information on the Company’s activities, objectives and corporate governance is disclosed through press releases and VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 132 notifications on material events, as well as on the Company’s website, and the information disclosure system used by Nasdaq Vilnius. 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 Information is provided on the Company’s website and in its interim and annual reports. 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 Information is provided on the Company’s website and in its interim and annual reports. 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; Yes Information on the composition of committees and the number of meetings is provided in the annual reports. 9.1.6. potential key risk factors, the company’s risk management and supervision policy; Yes The information is provided in interim and annual reports 9.1.7. the company’s transactions with related parties; Yes Information is provided on the Company’s website and in its interim and annual reports. 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 The information is provided in interim and annual reports. 9.1.9. structure and strategy of corporate governance; Yes Information is provided on the Company’s website and in its interim and annual reports. 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 Information is provided in interim and annual reports, notifications on material events, on the Company’s website, and in the Company’s social report. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 133 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. Yes When disclosing the information specified in paragraph 9.1.1 of recommendation 9.1, the company which is a parent company in respect of other companies discloses information about the consolidated results of the whole group of companies in the interim and annual reports. 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. Yes The Company discloses in its consolidated annual report information on the amount of annual remuneration and other income paid to the Company’s key management and members of the managerial bodies, as well as education, qualifications and participation in the activities and capital of other companies. 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 AB Vilkyškių pieninė submits information via the information disclosure system used by Nasdaq Vilnius in Lithuanian and English at the same time, thus ensuring simultaneous disclosure of information to everyone. The Company seeks to publish the information before or after the Nasdaq Vilnius trading session and simultaneously submit it to all markets where the Company’s securities are traded, and also makes it publicly available on the website. 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 The Company adheres to this recommendation because the Company’s annual consolidated financial information is audited by an independent audit firm. 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 The management board of the Company (manager in AB Pieno logistika of the Company Group) submits the candidacy of the audit company to the meeting of shareholders. The Audit Company shall be approved by the general meeting of shareholders of the Company. VILKYŠKIŲ PIENINĖ AB Corporate governance report for the year that ended on 31 December 2021 134 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 In 2022, the audit company did not provide non- audit services to the Company. Should the audit company provide non-audit services, then the Company would inform about it publicly. _______ PricewaterhouseCoopers UAB, J. Jasinskio str. 16B, 03163 Vilnius, Lithuania +370 (5) 239 2300, [email protected], www.pwc.lt Company code 111473315, registered with the Legal Entities’ Register of the Republic of Lithuania Independent auditor’s report To the shareholders of VILKYŠKIŲ PIENINĖ AB Report on the audit of the consolidated and separate financial statements Our opinion In our opinion, the consolidated and separate financial statements give a true and fair view of the consolidated and separate financial position of VILKYŠKIŲ PIENINĖ AB (the “Company”) and its subsidiaries (together - the “Group”) as at 31 December 2022, and of the Group’s and of the Company’s consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Our opinion is consistent with our additional report to the Audit Committee dated 7 April 2023. What we have audited The Group’s and the Company’s consolidated and separate financial statements comprise: ● the consolidated and separate statements of financial position as at 31 December 2022; ● the consolidated and separate statements of profit or loss and statements of other comprehensive income for the year then ended; ● the consolidated and separate statements of changes in equity for the year then ended; ● the consolidated and separate statements of cash flows for the year then ended; and ● the notes to the consolidated and separate financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group and the Company in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the Law of the Republic of Lithuania on the Audit of Financial Statements that are relevant to our audit of the separate and consolidated financial statements in the Republic of Lithuania. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the Law of the Republic of Lithuania on the Audit of Financial Statements. To the best of our knowledge and belief, we declare that non-audit services that we have provided to the Group and the Company are in accordance with the applicable law and regulations in the Republic of Lithuania and that we have not provided non-audit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014 considering the exemptions of Regulation (EU) No 537/2014 endorsed in the Law of the Republic of Lithuania on the Audit of Financial Statements. The non-audit services that we have provided to the Group and the Company, in the period from 1 January 2022 to 31 December 2022, are disclosed in note 8 to the financial statements. Our audit approach Overview ● Overall Group and Company materiality: Euro 1,750 thousand and Euro 1,750 thousand respectively x We conducted audit at 3 Group entities, all operating in Lithuania; x Our audit addressed 94% of the Group’s revenues and 99 % of the Group’s total assets. x Impairment testing of goodwill (Group) x Inventory write-down to net realisable value (Group and Company) As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated and separate financial statements (together “the financial statements”). In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including, among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group and Company materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the financial statements as a whole. Overall Group materiality EUR 1,750 thousand (in 2021 – EUR 1,068 thousand). Overall Company materiality EUR 1,750 thousand (in 2021 – EUR 800 thousand). How we determined it 0.75% of the Group’s and 0.60% of the Company’s total revenue. Materiality Group scoping Key audit matters Rationale for the materiality benchmark applied Significant fluctuations in the Group’s and the Company’s profit depend on the prevailing trends in global dairy markets. We have, therefore, chosen revenue as a benchmark for determining the materiality because, in our view, it provides the stakeholders consistent information year-on-year basis, reflecting the Group’s and the Company’s growth. Revenue and market share are also considered to be important business performance indicators. We chose the thresholds of 0.75% and 0.60%, which is within the range of acceptable quantitative materiality thresholds for this benchmark. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above EUR 87 thousand for the Group and the Company, respectively, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Impairment testing of goodwill (Group) Refer to accounting policy on impairment testing on page 21 , accounting estimates and assessments on page 27 and note 15 ‘Intangible assets’ in the financial statements. We focused on this area because of the significance of the goodwill balance (The Group has goodwill balance of EUR 4,166 thousand as at 31 December 2022) and because the impairment assessment involved significant management’s judgements about the future results and the discount rates applied to future cash flows forecasts. Under the requirements of IAS 36 Impairment of assets goodwill has to be t ested for impairment at least on an annual basis. The determination of recoverable amount, being the higher of value in - use and fair value less costs of disposal, requires judgment from management and management expert’s when identifying and valuing the re levant cash- generating units. Recoverable amounts are based on management’s view of internal and market conditions such as future prices and We focused on goodwill attributable to the cash generating unit from fresh milk products of Kelmės pienas UAB, which represents 93% (in 2021 – 96% ) of the entire goodwill balance of the Group. We evaluated the Group’s accounting policies with respect to impairment of goodwill that these are based on IFRS. Our audit procedures included challenging management on the appropriateness of the impairment models and the reasonableness of the assumptions used by performing the following: - Assessing the reliability of the cash flow forecast by checking the actual past performance and comparing to previous forecasts and by inspecting internal documents, such as budget forecasts for 2023 –2027; - Benchmarking market related assumptions like discount rate and long - term growth rate against external data. Where it was considered necessary, we involved our valuation experts; - Testi ng the mathematical accuracy of the model and assessing the sensitivity of the impairment test to key inputs. volume growth rate, the timing of future operating expenditure and the most appropriate discount and long -term growth rates. As at 31 December 2022, based on the impairment test performed for that day, no further impairment was identified for cash generating unit of Kelmės pienas UAB related to fresh milk products as recoverable amount exceeded its carrying amount. An impairment loss of EUR 2,749 thousand was identified as at 31 December 2021. We found the assumptions used by management in the calculation of discounted cash flows to be within acceptable range of our expectations. We also reviewed the disclosures in the financial statements regarding impairment tests. Inventory write -down to net realisable value (Group and Company) Refer to accounting policy on inventory on page 17, accounting estimates and assessments on page 27 and note 18 ‘Inventories’ in the financial statements. We focused on this area due to the size of the inventory balance (EUR 25,493 thousand and EUR 9,188 thousand as at 31 December 2022 at the Group and the Company, respectively), and because the management’s assessment of the net realisable value of inventory involved estimates about the future discounts and sales of goods below their cost. As at 31 Dece mber 2022 the Group’s and the Company’s inventory (finished goods) write - down to net realisable value allowance amounted to EUR 2,593 thousand and EUR 521 thousand, respectively. We assessed the Group’s and the Company’s policies and methodology in respect of inventory write -downs to net realisable value compliance with the requirements of IFRSs. W e analysed, on sample bases, sales prices of the finished goods items sold after the balance sheet date and compared results with the figures used in the management’s calculation of inventory write -down allowance. We analysed the aging of inventories other than finished goods, by periods, to identify slow - moving or obsolete items. We also verified the reliability of the inventory ageing report and compared our e stimated inventory write- down allowance to the management’s calculations. We found the assumptions used by management in the calculation of inventory write - down to net realisable value to be within acceptable range of our expectations. How we tailored our Group audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group comprises of parent and 5 subsidiaries four of which operate in Lithuania and one in Latvia. Based on our risk and materiality assessments, we determined which entities were required to be audited, by taking into account the relative significance of each entity to the Group as a whole and in relation to each material line item in the consolidated financial statements. We performed full scope audits of the parent entity VILKYŠKIŲ PIENINĖ AB and its subsidiaries Kelmės Pieninė AB and Modest AB. For Kelmės pienas UAB and Baltic Dairy Board SIA we have carried audit work on selected balances and transactions which were assessed by us as material from the Group audit perspective. The remaining component of the Group was immaterial. Our audit addressed 94% of the Group’s revenues and 99% of the Group’s total assets. Reporting on other information including the consolidated annual report Management is responsible for the other information. The other information comprises the consolidated annual report, including the corporate governance report, remuneration report and social responsibility report (but does not include the financial statements and our auditor’s report thereon). Our opinion on the financial statements does not cover the other information, including the consolidated annual report. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the consolidated annual report, including the corporate governance report and remuneration report, we considered whether the consolidated annual report, including the corporate governance report and remuneration report, includes the disclosures required by the Law of the Republic of Lithuania on Consolidated Reporting by Groups of Undertakings, the Law of the Republic of Lithuania on Reporting by Undertakings. Based on the work undertaken in the course of our audit, in our opinion: ● the information given in the consolidated annual report, including the corporate governance report and remuneration report, for the financial year for which the financial statements are prepared, is consistent with the financial statements; and ● the consolidated annual report, including the corporate governance report and remuneration report, has been prepared in accordance with the Law of the Republic of Lithuania on Consolidated Reporting by Groups of Undertakings and the Law of the Republic of Lithuania on Reporting by Undertakings. The Group has prepared the social responsibility report that was presented as a separate report. In addition, in light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the consolidated annual report which we obtained prior to the date of this auditor’s report. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation of the financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group and the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s and the Company’s financial reporting process. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Company’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group and the Company to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. ● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and have communicated with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory requirements Report on the compliance of the format of the consolidated financial statements with the requirements of the European Single Electronic Reporting Format We have been engaged based on the amendment to our audit agreement by the management of the Company to conduct a reasonable assurance engagement for the verification of compliance with the applicable requirements of the European single electronic reporting format of the Group’s consolidated financial statements, including the consolidated annual report, for the year ended 31 December 2022 (the “Single Electronic Reporting Format of the consolidated financial statements”). Description of a subject matter and applicable criteria The Single Electronic Reporting Format of the consolidated financial statements has been applied by the management of the Company to comply with the requirements of art. 3 and 4 of the Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (the “ESEF Regulation”). The applicable requirements regarding the Single Electronic Reporting Format of the consolidated financial statements are contained in the ESEF Regulation. The requirements described in the preceding sentence determine the basis for application of the Single Electronic Reporting Format of the consolidated financial statements and, in our view, constitute appropriate criteria to form a reasonable assurance conclusion. Responsibility of the management and those charged with governance The management of the Company is responsible for the application of the Single Electronic Reporting Format of the consolidated financial statements that complies with the requirements of the ESEF Regulation. This responsibility includes the selection and application of appropriate markups in iXBRL using ESEF taxonomy and designing, implementing and maintaining internal controls relevant for the preparation of the Single Electronic Reporting Format of the consolidated financial statements which is free from material non-compliance with the requirements of the ESEF Regulation. Those charged with governance are responsible for overseeing the financial reporting process, which should also be understood as the preparation of financial statements in accordance with the format resulting from the ESEF Regulation. Our responsibility Our responsibility was to express a reasonable assurance conclusion whether the Single Electronic Reporting Format of the consolidated financial statements complies, in all material aspects, with the ESEF Regulation. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ (“ISAE 3000 (R)”). This standard requires that we comply with ethical requirements, plan and perform procedures to obtain reasonable assurance whether the Single Electronic Reporting Format of the consolidated financial statements complies, in all material aspects, with the applicable requirements. Reasonable assurance is a high level of assurance, but it does not guarantee that the service performed in accordance ISAE 3000 (R) will always detect the existing material misstatement (significant non- compliance with the requirements). Summary of the work performed Our planned and performed procedures were aimed at obtaining reasonable assurance that the Single Electronic Reporting Format of the consolidated financial statements was applied, in all material aspects, in accordance with the applicable requirements and such application is free from material errors or omissions. Our procedures included in particular: x obtaining an understanding of the internal control system and processes relevant to the application of the Single Electronic Reporting Format of the consolidated financial statements, including the preparation of the XHTML format and marking up the consolidated financial statements; x verification whether the XHTML format was applied properly; x evaluating the completeness of marking up the consolidated financial statements using the iXBRL markup language according to the requirements of the implementation of single electronic format as described in the ESEF Regulation; x evaluating the appropriateness of the Group’s' use of XBRL markups selected from the ESEF taxonomy and the creation of extension markups where no suitable element in the ESEF taxonomy has been identified; and x evaluating the appropriateness of anchoring of the extension elements to the ESEF taxonomy. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion In our opinion, the Single Electronic Reporting Format of the consolidated financial statements for the year ended 31 December 2022 complies, in all material aspects, with the ESEF Regulation. Report on the compliance of the format of the separate financial statements with the requirements of the European Single Electronic Reporting Format The European single electronic reporting format has been applied by the management of the Company to the Company’s financial statements to comply with the requirements of Article 3 of Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (the “ESEF Regulation”). These requirements specify the Company’s obligation to prepare its financial statements in a XHTML format. We confirm that the European single electronic reporting format of the financial statements for the year ended 31 December 2022 complies with the ESEF Regulation in this respect Appointment We were first appointed as auditors of the Group and the Company on 28 April 2017. Our appointment has been renewed by shareholder resolution representing a total period of uninterrupted engagement appointment of 6 years. The key audit partner on the audit resulting in this independent auditor’s report is Rasa Selevičienė. On behalf of PricewaterhouseCoopers UAB /signed with electronic signature/ Rasa Selevi čienė Assurance director Auditor's Certificate No.000 504 Vilnius, Republic of Lithuania 7 April 2023 The auditor's electronic signature is used herein to sign only the Independent Auditor's Report
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