Annual Report (ESEF) • Apr 28, 2023
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Lawyer: Ventsislav Stoev Servicing Banks: KBC Bank Bulgaria AD DSK Bank EAD Eurobank Bulgaria AD ING Bank N.V. - Sofia Branch UniCredit Bulbank AD Citibank Europe AD, Bulgaria Branch Municipal Bank AD Auditors: Baker Tilly Klitou and Partners EOOD SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 CONSOLIDATED ANNUAL STATEMENT OF COMPREHENSIVE INCOME 1 CONSOLIDATED ANNUAL STATEMENT OF FINANCIAL POSITION 2 CONSOLIDATED ANNUAL STATEMENT OF CASH FLOWS 3 CONSOLIDATED ANNUAL STATEMENT OF CHANGES IN EQUITY 4 NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 1. BACKGROUND INFORMATION ON THE GROUP 5! 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE GROUP 24! 3. REVENUE FROM CONTRACTS WITH CUSTOMERS 83! 4. OTHER OPERATING INCOME AND LOSSES 84! 5. MATERIALS AND CONSUMABLES USED 85! 6. HIRED SERVICES EXPENSE 86! 7. EMPLOYEE BENEFITS EXPENSE 87! 8. OTHER OPERATING EXPENSES 87! 9. IMPAIRMENT OF ASSETS 88! 10. IMPAIRMENT OF NON-CURRENT ASSETS OUTSIDE THE SCOPE OF IFRS 9 88! 11. FINANCE INCOME 89! 12. FINANCE COSTS 89! 13. GAINS/LOSSES FROM ASSOCIATES AND JOINT VENTURES 90! 14. INCOME TAX EXPENSE 90! 15. OTHER COMPREHENSIVE INCOME 92! 16. PROPERTY, PLANT AND EQUIPMENT 93! 17. INTANGIBLE ASSETS 96! 18. INVESTMENT PROPERTY 98! 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 100! 20. OTHER LONG-TERM EQUITY INVESTMENTS 106! 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES 108! 22. OTHER LONG-TERM RECEIVABLES 109! 23. INVENTORIES 111! 24. TRADE RECEIVABLES 112! 25. RECEIVABLES FROM RELATED PARTIES 115! 26. OTHER SHORT-TERM RECEIVABLES AND ASSETS 117! 27. CASH AND CASH EQUIVALENTS 119! 28. EQUITY 119! 29. LONG-TERM BANK LOANS 122! 30. DEFERRED TAX ASSETS AND LIABILITIES 125! 31. NON-CURRENT PAYABLES TO RELATED PARTIES 127! 32. LONG-TERM EMPLOYEE BENEFIT OBLIGATIONS 127! 33. LEASE LIABILITIES 131! 34. GOVERNMENT GRANTS 132! 35. OTHER NON-CURRENT LIABILITIES 133! 36. SHORT-TERM BANK LOANS 133! 37. TRADE PAYABLES 134! 38. PAYABLES TO RELATED PARTIES 135! 39. PAYABLES UNDER FACTORING AGREEMENT 136! 40. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 136! 41. TAX PAYABLES 136! 42. OTHER CURRENT LIABILITIES 139! 43. CONTINGENT LIABILITIES AND COMMITMENTS 139! 44. SEGMENT REPORTING 142! 45. FINANCIAL RISK MANAGEMENT 144! 46. ACQUISITIONS AND INCREASING INTERESTS IN SUBSIDIARIES 159! 47. DISPOSAL OF SUBSIDIARIES AND JOINT VENTURES 160! 48. RELATED PARTY TRANSACTIONS 163! 49. EVENTS AFTER END OF THE REPORTING PERIOD 166 for the year ended 31 December 2022 2022 2021 BGN'000 BGN'000 Revenue from contracts with customers 3 1 663 016 1 603 310 Other operating income/(losses), net 4 13 042 13 830 Changes in inventories of finished products and work in progress 9 713 (8 721) Raw materials and consumables used 5 (99 129) (83 122) Hired services expense 6 (70 126) (75 927) Employee benefits expense 7 (147 829) (150 061) Depreciation and amortization expense 16, 17 (52 099) (53 187) Carrying amount of goods sold (1 214 333) (1 166 508) Other operating expenses 8 (14 374) (16 095) Profit from operations 87 881 63 519 Impairment of non-current assets outside the scope of IFRS 9 10 (20 783) (10 476) Finance income 11 3 304 6 632 Finance costs 12 (9 417) (11 797) Finance income / (costs), net (6 113) (5 165) Gain from associates and joint ventures, net 13 22 635 12 092 Gain on acquisition and disposal of subsidiaries 1 456 37 604 Profit before income tax 85 076 97 574 Income tax expense 14 (8 743) (5 871) Net profit for the year 76 333 91 703 Other comprehensive income: Items that will not be reclassified to profit or loss: Remeasurement of property, plant and equipment 15 (991) 10 616 Remeasurement of defined benefit pension plans 15,32 1 498 (25) Net change in the fair value of other long-term equity investments 15 (1 047) (355) Income tax relating to items of other comprehensive income that will not be reclassified 15 99 (1 150) (441) 9 086 Items that may be reclassified to profit or loss: Exchange differences on translating foreign operations 15 (4 637) (799) Share of other comprehensive income of associates 15,19 (790) 3 708 (5 427) 2 909 Other comprehensive income for the year, net of tax 15 (5 868) 11 995 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 70 465 103 698 Net profit for the year attributable to: Equity holders of the parent 71 121 89 496 Non-controlling interests 5 212 2 207 Total comprehensive income for the year attributable to: Equity holders of the parent 65 110 101 970 Non-controlling interests 5 355 1 728 Basic net earnings per share 28 BGN 0.59 0.71 Diluted net earnings per share 28 BGN 0.57 0.71 Executive Director: Ognian Donev, PhD Finance Director: Boris Borisov Preparer: Lyudmila Bondzhova Audit company Baker Tilly Klitou and Partners EOOD № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD Notes The accompanying notes on pages 5 to 166 form an integral part of the consolidated financial statements. SOPHARMA GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1 OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:22:44 +03'00' BORIS ANCHEV BORISOV Digitally signed by BORIS ANCHEV BORISOV Date: 2023.04.26 19:29:00 +03'00' LYUDMILA KRUMOVA BONDZHOVA Digitally signed by LYUDMILA KRUMOVA BONDZHOVA Date: 2023.04.26 19:32:31 +03'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2023.04.28 11:10:35 +03'00' Galina Dimitrova Lokmadjiev a-Nedkova Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2023.04.28 11:16:06 +03'00' SOPHARMA GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2022 Notes 31 December 2022 BGN'000 31 December 2021 BGN'000 ASSETS Non-current assets Property, plant and equipment 16 376 407 362 393 Intangible assets 17 48 151 54 421 Goodwill 17 3 522 13 420 Investment property 18 10 568 9 446 Investments in associates and joint ventures 19 162 844 127 320 Other long-term equity investments 20 4 778 5 778 Long-term receivables from related parties 21 67 471 49 696 Other long-term receivables 22 5 694 10 222 Deferred tax assets 30 2 052 1 050 681 487 633 746 Current assets Inventories 23 278 583 255 949 Trade receivables 24 224 442 227 832 Receivables from related parties 25 12 909 14 479 Other short-term receivables and assets 26 36 702 35 250 Cash and cash equivalents 27 19 855 37 722 572 491 571 232 TOTAL ASSETS 1 253 978 1 204 978 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 134 798 134 798 Reserves 47 503 55 031 Other equity components (reserve on warrant issue) 12 488 12 512 Retained earnings 509 869 444 634 28 704 658 646 975 Non-controlling interests 11 976 11 893 TOTAL EQUITY 28 716 634 658 868 LIABILITIES Non-current liabilities Long-term bank loans 29 27 759 42 907 Deferred tax liabilities 30 6 397 8 472 Non-current liabilities to related parties 31 24 494 10 210 Retirement benefit obligations 32 6 541 7 622 Lease liabilities 33 52 058 38 589 Government grants 34 6 155 6 783 Other non-current liabilities 35 6 594 7 635 129 998 122 218 Current liabilities Short-term bank loans 36 158 355 217 392 Current portion of long-term bank loans 29 9 758 9 467 Trade payables 37 175 567 143 480 Payables to related parties 38 4 904 3 700 Factoring agreement liabilities 39 1 875 6 370 Current portion of lease liabilities 33 12 874 11 583 Payables to personnel and for social security 40 21 780 17 888 Tax payables 41 8 436 7 039 Other current liabilities 42 13 797 6 973 407 346 423 892 TOTAL LIABILITIES 537 344 546 110 TOTAL EQUITY AND LIABILITIES 1 253 978 1 204 978 The accompanying notes on pages 5 to 166 form an integral part of the consolidated financial statements. The consolidated financial statements on pages 1 to 166 were approved for issue by the Board of Directors and signed on 26 April 2023 by: Digitally signed by OGNIAN OGNIAN IVANOV DONEV IVANOV DONEV Executive Director: Date: 2023.04.26 19:23:27 +03'00' Ognian Donev, PhD Finance Director: Digitally signed by BORIS ANCHEV BORISOV Date: 2023.04.26 19:29:38 +03'00' Boris Borisov BORIS ANCHEV BORISOV Preparer: Lyudmila Bondzhova Digitally signed by LYUDMILA LYUDMILA KRUMOVA BONDZHOVA KRUMOVA BONDZHOVA Audit company Baker Tilly Klitou and Partners EOOD № 129: Date: 2023.04.26 19:33:03 +03'00' Digitally signed Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by IVAYLO YANCHEV YANCHEV by IVAYLO Galina Dimitrova Ivaylo Yanchev Galina Lokmadjieva-Nedkova Lokmadjieva-Nedkova Registered auditor Managing director YANCHEV Date: 2023.04.28 YANCHEV Baker Tilly Klitou and Partners EOOD 11:16:59 +03'00' Date: 2023.04.28 11:11:24 +03'00' 2 SOPHARMA GROUP CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2022 Notes 2022 2021 BGN'000 BGN'000 Cash flows from operating activities Cash receipts from customers 1 930 323 1 656 161 Cash paid to suppliers (1 603 177) (1 504 805) Cash paid to employees and for social security (141 810) (146 239) Taxes paid (except income taxes) (65 217) (74 454) Taxes refunded (except income taxes) 8 796 9 434 Income taxes paid (9 905) (7 937) Income taxes refunded 49 43 Interest and bank charges paid on working capital loans (5 921) (6 600) Foreign currency exchange gains/(losses), net (1 599) (548) Other proceeds/(payments), net (1 457) (1 018) Net cash flows used in operating activities 110 082 (75 963) Cash flows from investing activities Purchases of property, plant and equipment (19 347) (20 349) Proceeds from sales of property, plant and equipment 1 923 1 055 Proceeds from sales of investment property - 1 952 Purchases of intangible assets (4 309) (6 761) Purchases of equity investments 20 (675) (22 338) Proceeds from sales of equity investments 628 2 040 Proceeds from dividends on equity investments 33 451 Payments on acquisition of subsidiaries, net of cash received 46 (2 338) (2 338) Proceeds from disposal of subsidiaries, net of the cash provided 47 399 (1 152) Purchases of investments in associates and joint ventures 19 (16 480) (20 800) Proceeds from sale of investments in associates and joint ventures - 213 Proceeds from dividends on investments in associates and joint ventures 1 215 - Proceeds/(payments) on transactions with non-controlling interests, net (10 859) (8 421) Loans granted to related parties (13 500) (8 010) Loan repayments by related parties 684 10 795 Loans granted to third parties (1 962) (1 367) Loan repayments by third parties 4 4 129 Interest received on loans and deposits 965 2 806 Proceeds from guarantorship contracts 13 30 Net cash flows used in/from investing activities (63 606) (68 065) Cash flows from financing activities Proceeds from short-term bank loans (including increases in overdrafts) 12 19 554 Repayment of short-term bank loans (including decreases in overdrafts) (59 072) (27 145) Proceeds from long-term bank loans 2 163 16 834 Repayment of long-term bank loans (20 029) (19 405) Proceeds under factoring agreement 30 950 193 905 Interest and charges paid under factoring agreement (114) (56 8) Interest and charges paid under investment purpose loans (354) (1 994) Lease payments (16 081) (20 477) Treasury shares (1 919) (16 628) Dividends paid (11) (63) Government grants 34 81 Proceeds/(payments) related to other equity components (warrants), net 79 12 512 Net cash flows from financing activities (64 342) 156 606 Net (decrease)/increase in cash and cash equivalents (17 866) 12 578 Cash and cash equivalents at 1 January 37 717 25 139 Cash and cash equivalents at 31 December 27 19 851 37 717 Executive Director: Ognian Donev, PhD Finance Director: Boris Borisov Preparer: Lyudmila Bondzhova Audit company Baker Tilly Klitou and Partners EOOD № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD The accompanying notes on pages 5 to 166 form an integral part of the consolidated financial statements. 3 OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:24:03 +03'00' BORIS ANCHEV BORISOV Digitally signed by BORIS ANCHEV BORISOV Date: 2023.04.26 19:30:06 +03'00' LYUDMILA KRUMOVA BONDZHOVA Digitally signed by LYUDMILA KRUMOVA BONDZHOVA Date: 2023.04.26 19:33:38 +03'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2023.04.28 11:11:54 +03'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2023.04.28 11:17:25 +03'00' SOPHARMA GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2022 Non-controlling Total Attributable to owners of the equity of the parent interests equity Notes Share Treasury Statutory Revaluation reserve - property, plant and equipment Reserve from financial assets at fair value through other comprehensive income Translation of foreign operations reserve Other equity components Retained earnings Total capital shares reserves (reserve on warrants issue) BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Balance at 1 January 2021 28 134 798 (33 656) 63 335 28 425 2 282 (2 685) - 360 770 553 269 13 326 566 595 Changes in equity for 2021 Effect of treasury shares acquisition - (16 628) - - - - - - (16 628) - (16 628) Other equity components, incl.: 12 512 12 512 12 512 issue value 12 579 12 579 12 579 * transaction costs (67) (67) (67) Distribution of profit for: - - 2 866 - - - - (2 866) - - - * statutory reserves - - 2 866 - - - (2 866) - - - Effects assumed by non-controlling interests on: - - - - - - - (4 148) (4 148) (3 161) (7 309) * acquisition/(disposal) of subsidiaries: - - - - - - - - - 1 196 1 196 * increase in the interest in subsidiaries - - - - - - - (4 148) (4 148) (4 357) (8 505) Total comprehensive income for the year, including: - - - 9 485 (355) 3 367 - 89 473 101 970 1 728 103 698 * net profit for the year - - - - - - 89 496 89 496 2 207 91 703 * other comprehensive income, net of taxes - - - 9 485 (355) 3 367 - (23) 12 474 (479) 11 995 - Transfer to retained earnings - - - (1 122) (283) - - 1 405 - - - Balance at 31 December 2021 28 134 798 (50 284) 66 201 36 788 1 644 682 12 512 444 634 646 975 11 893 658 868 Balance at 1 January 2022 134 798 (50 284) 66 201 36 788 1 644 682 12 512 444 634 646 975 11 893 658 868 Changes in equity for 2022 Effect of treasury shares acquisition - (1 919) - - - - - - (1 919) - (1 919) Effects of rights sold under warrant issue - - - - - - - 103 103 - 103 Other equity components, incl.: - - - - - - (2 4) - (24) - (24) * transaction costs - - - - - - (2 4) - (24) - (24) Distribution of profit for: - - 2 427 - - - - (2 427) - - - * statutory reserves - - 2 427 - - - - (2 427) - - - Effects assumed by non-controlling interests on: - - - - - - - (5 587) (5 587) (5 272) (10 859) * increase in the interest in subsidiaries - - - - - - - (5 587) (5 587) (5 272) (10 859) Total comprehensive income for the year, including: - - - (892) (1 047) (5 427) - 72 476 65 110 5 355 70 465 * net profit for the year - - - - - - - 71 121 71 121 5 212 76 333 * other comprehensive income, net of taxes - - - (892) (1 047) (5 427) - 1 355 (6 011) 143 (5 868) - Transfer to retained earnings - - - (633) (37) - - 670 - - - - - Balance at 31 December 2022 28 134 798 (52 203) 68 628 35 263 560 (4 745) 12 488 509 869 704 658 11 976 716 634 The accompanying notes on pages 5 to 166 form an integral part of the consolidated financial statements. OGNIAN IVANOV DONEV Digitally signed by OGNIAN Executive Director: IVANOV DONEV Ognian Donev, PhD Date: 2023.04.26 19:24:39 +03'00' Finance Director: Digitally signed by BORIS ANCHEV BORISOV Date: 2023.04.26 19:31:39 +03'00' Boris Borisov BORIS ANCHEV BORISOV Preparer: Digitally signed by LYUDMILA KRUMOVA BONDZHOVA Date: 2023.04.26 19:34:13 +03'00' LYUDMILA KRUMOVA BONDZHOVA Lyudmila Bondzhova Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by IVAYLO YANCHEV YANCHEV IVAYLO YANCHEV Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina YANCHEV Ivaylo Yanchev Galina Lokmadjieva-Nedkova Date: 2023.04.28 Registered auditor Managing director Dimitrova Lokmadjieva-Nedkova 11:12:22 +03'00' Baker Tilly Klitou and Partners EOOD Date: 2023.04.28 11:17:52 +03'00' 4 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 5 1. BACKGROUND INFORMATION ON THE GROUP Sopharma Group (the Group) is comprised of the parent company and its seventy-seven (31 December 2021: seventy-eight) subsidiaries. In addition, the Group has investments in two associates and one joint venture (31 December 2021: in two associates and one joint venture). Parent company Sopharma AD (the parent company) is a business entity registered in Bulgaria with a seat and registered management address: Sofia, 16, Iliensko Shousse St. The Company was registered with court on 15 November 1991 by Decision No 1/1991 of Sofia City Court. Explanation regarding the change in the name of the reporting entity after the end of the previous reporting period: During the year there was no change in the name of the reporting parent company. Subsidiaries The Group subsidiaries as at 31 December 2022 are as follows: · Sopharma Trading AD – a business entity registered in Bulgaria by Decision No. 3594/16.10.1998 of Varna District Court, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Pharmalogistica AD – a business entity registered in Bulgaria by Decision of Sofia City Court dated 12 August 2002, with a seat and management address: Sofia, 16, Rozhen Blvd.; · Electroncommerce EOOD – a business entity registered in Bulgaria by Decision of Sofia City Court under Company File No. 24456 of 1991, with a seat and management address: Sofia, 1, Samokovsko Shousse St.; · Biopharm Engineering AD – a business entity registered in Bulgaria by Decision No. 524/1997 of Sliven District Court, with a seat and management address: Sliven, 75, Trakiya Blvd.; · Phyto Palauzovo AD – a business entity registered in Bulgaria by Decision No. 20120924105551/24.09.2012 of the Registry Agency, with a seat and management address: Kazanluk, 110, 23rd Pehoten Shipchenski Polk Blvd.; · Sopharmacy EOOD – a business entity registered in Bulgaria by Decision No. 201501191300026/19.01.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 2 EOOD – a business entity registered in Bulgaria by Decision No. 20150617110324/17.06.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 6 · Sopharmacy 3 EOOD – a business entity registered in Bulgaria by Decision No. 20151202165822/02.12.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 4 EOOD – a business entity registered in Bulgaria by Decision No. 20160229093338/29.02.2016 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 5 EOOD – a business entity registered in Bulgaria by Decision No. 20160301155620/01.03.2016 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 6 EOOD – a business entity registered in Bulgaria by Decision No. 20140127170842/27.01.2014 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 7 EOOD – a business entity registered in Bulgaria by Decision No 20170315161212/15.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 8 EOOD – a business entity registered in Bulgaria by Decision No 20170627142803/27.06.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12’; · Sopharmacy 9 EOOD – a business entity registered in Bulgaria by Decision No 20170911100706/11.09.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 10 EOOD – a business entity registered in Bulgaria by Decision No 20170911101412/11.09.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 11 EOOD – a business entity registered in Bulgaria by Decision No 20170302125338 /02.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 12 EOOD – a business entity registered in Bulgaria by Decision No 20170306085236/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 13 EOOD – a business entity registered in Bulgaria by Decision No 20170306080850/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 7 · Sopharmacy 14 EOOD – a business entity registered in Bulgaria by Decision No 20170306081205/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 15 EOOD – a business entity registered in Bulgaria by Decision No 20170302134305/02.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 16 EOOD – a business entity registered in Bulgaria by Decision No 20180515105543/15.05.2018 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 17 EOOD – a business entity registered in Bulgaria by Decision No 20180515105543/15.05.2018 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Sopharmacy 18 EOOD – a business entity registered in Bulgaria by Decision No 20190228133836/28.02.2019 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; · Veta Pharma AD - a business entity registered in Bulgaria under company file No. 581 dated 05.04.1999 of the Veliko Tarnovo District Court and with its seat and management address - the city of Veliko Tarnovo, 32 "Dulga Laka" Street; · Sopharmacy 19 EOOD (until 27 January 2021 it was called Valentina Vasileva – Lyulin EOOD) a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226110235 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 20 EOOD (until 16 February 2021 it was called Vasilka Lilovska EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518182226 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 21 EOOD (until 4 February 2021 it was called Venera Mutashka EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519084124 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 22 EOOD (until 17 February 2021 it was called Veselka Vassileva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090320091825 dated 20.03.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 23 EOOD (until 17 February 2021 it was called Victoria Angelova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604184353 dated SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 8 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 24 EOOD (until 4 February 2021 it was called Desislava Yordanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604170149 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 25 EOOD (until 4 February it was called Dimka Vladeva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519080611 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 26 EOOD (until 4 February 2021 it was called Donka Chivganova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226120647 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 27 EOOD (until 18 February 2021 it was called Ekaterina Mihaylova Shumen 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604181926 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 28 EOOD (until 27 January 2021 it was called Elka Neykova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227145039 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 29 EOOD (until 17 February 2021 it was called Emilia Angelova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090605085738 dated 05.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 30 EOOD (until 27 January 2021 it was called Zhuliana Kotova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227160338 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 31 EOOD (until 27 January 2021 it was called Ivan Ivanov 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080630143914 dated 30.06.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 32 EOOD (until 2 February 2021 it was called Iliana Kalushkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080630143914 dated SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 9 30.06.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 33 EOOD (until 4 February 2021 it was called Irina Toncheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226112827 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 34 EOOD (until 17 February 2021 it was called Kapka Nikolova – Voenna Bolnitsa EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226165512 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 35 EOOD (until 16 February it was called Kostadin Gorchev EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090513180047 dated 13.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 36 EOOD (until 4 February it was called Krasimira Shunina EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519083827 dated19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 37 EOOD (until 4 February 2021 it was called Lora Doncheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226102708 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 38 EOOD (until 4 February 2021 it was called Lyudmila Zlatkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519090345 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 39 EOOD (until 16 February 2021 it was called Lyudmila Kovacheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227150054 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 40 EOOD (until 2 February 2021 it was called Manik Burgazyan EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20081220153409 dated 20.12.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 41 EOOD (until 27 January 2021 it was called Mariyks Zhaygarova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519080839 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 10 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 42 EOOD (until 17 February 2021 it was called Maria Agova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518183127 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 43 EOOD (until 4 February 2021 it was called Maria Gancheva EOOD); a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226105948 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 44 EOOD (until 4 February 2021 it was called Maria Kenova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090605134931 dated 05.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 45 EOOD (until 4 February 2021 it was called Maria Hristova – Motopista EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519091916 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 46 EOOD (until 17 February 2021 it was called Mariyana Markova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519083054 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 47 EOOD (until 17 February it was called Mary Ivanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227154137 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 48 EOOD (until 2 February it was called Nelly Stavreva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227155742 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 49 EOOD (until 4 February 2021 it was called Preslava Becheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518162442 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 50 EOOD (until 27 January 2021 it was called Rayna Madzharova – St. Geori Sofiyski EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 11 20090227152516 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 51 EOOD (until 27 January 2021 it was called Rumyana Ignatova - Gancheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227153607 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 52 EOOD (until 17 February 2021 it was called Sashka Todorova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518174837 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 53 EOOD (until 7 February 2021 it was called Svetla Harizanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226101122 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 54 EOOD (until 17 February 2021 it was called Svetlana Pirpirova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519085825 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 55 EOOD (until 27 January 2021 it was called Ceiba Blagoevgrad 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090414165833 dated 14.04.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 56 EOOD (until 17 February 2021 it was called Silvia Veneva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519071228 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 57 EOOD (until 18 February 2021 it was called Siyana Milanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604164039 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 58 EOOD (until 27 January 2021 it was called Stoyanka Radenkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227160132 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 59 EOOD (until 8 February 2021 it was called Ana Advzhieva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090114162615 dated SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 12 14.01.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 60 EOOD (until 2 February 2021 it was called Radina Bekova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080422121447 dated 22.04.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 61 EOOD (until 2 February 2021 it was called Rumen Raynov EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090114170550 dated 14.01.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 62 EOOD (until 2 February 2021 it was called Hani Modhi EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080512090050 dated 12.05.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 63 EOOD (until 2 February 2021 it was called CSC Franchise EAD), a business entity registered in Bulgaria by Decision of the Registry Agency, No2008041018022 dated 10.04.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; · Sopharmacy 64 EOOD (until 6 July 2021 it was called Sanita Franchising AD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080411103252 dated 11.04.2008; with a seat and management address: Sofia, 1220, Nadezhda Residential Area, 16, Rozhen Blvd; · Sopharma Poland Z.O.O., Poland, in liquidation – a business entity registered in Poland by Decision No. KRS 0000178554/04.11.2003 of XX Economic Division of Warsaw Regional Court Register, with a seat and management address: Poland, Warsaw, 58, Shashkova St.; · Sopharma Warsaw SP. Z.O.O., Poland – a business entity registered in Poland by Decision No. DSR 0000372245 of 17 December 2010 by XII Economic Division of the State Court Register of Warsaw, with a seat and management address: Poland, Warsaw, 8, Halubinskiego St.; · OOO Sopharma Ukraine, Ukraine – a business entity registered in Ukraine by Decision No. 10691020000029051/07.08.2012 in the Unified State Register of Legal Entities and Physical Entities-Entrepreneurs, with a seat and management address: Ukraine, Kiev, Oblonski Region, prospect Moskovskii No. 9, unit 4, floor 2, office 4-203; · PAO Vitamini, Ukraine – a business entity registered in Ukraine by Decision No. 133/15.04.1994 of Uman City Court, with a seat and management address: Ukraine, Cherkasy Province, Uman, 31, Leninski Iskri St.; · Sopharma Trading, Serbia – a business entity registered in Serbia by Decision No 07829531/ 05.02.1992 of the Business Registers Agency – Serbia, Belgrade, 48b Zorana Djindjica Boulevard; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 13 · TOO Sopharma Kazakhstan, Kazakhstan – a business entity registered in Kazakhstan by Decision No 5286-1910-04-ТОО/06.11.2014 of the Ministry of Justice, Auezov District, with seat and management address: Kazakhstan, Almaty, Auezov District, Mamir-4, home 190; · Pharmachim EOOD, Serbia – business entity registered in Serbia with BD 27219.2020 dated 14.04.2020 by the Business Registry Agency of Belgrade, with seat and management address: Republic of Serbia, Belgrade, 6, Vladimira Popovicha St. On 11 November 2022 the Group disposed of its interest in the company Rap Pharma International OOD. As from 10 March 2021 the company Momina Krepost AD obtained the status of a joint venture for the Group. As from 8 June 2021 the investment in Sopharma Buildings REIT was classified as other long-term equity investment for the Group, due to the sale of a significant portion thereof. On 1 October 2021 the Group disposed of its interest in UAB Recessus. On 2 November 2021 SIA BAH was incorporated – a subsidiary of SIA Briz, which the Group disposed of as at 30 November 2021. On 30 November 2021 the Group disposed of its interest in the companies SOOO Brititrade, OOO Tabina, OOO Pharmacevt Plus, OOO Galenapharm, DOO Medjel, DOO Alenpharm-plus, DOO Salusline, ZAO Interpharm, OOO Zdorovey, BOOO SpetzAfarmacia, OOO Bellerofon, OOO Zdorovey Plus and SIA BAH. On 30 December 2021 the Group disposed of its interest in the companies SIA Briz and SIA Briz Trading. Joint ventures As at 31 December 2022, the Group’s joint venture is: · Momina Krepost AD – a business entity registered in Bulgaria by Decision No. 3426/1991 of Veliko Tarnovo District Court, with a seat and management address: Veliko Tarnovo, 23, Magistralna St.. Associates The Group’s associates as at 31 December 2022 are as follows: · Doverie Obedinen Holding AD – a business entity registered in Bulgaria by Sofia City Court under Company File No. 13056 of 1996, with a seat and management address: 1594 Sofia, 82, Knyaz Dondukov Blvd; · Sopharma Properties REIT – a business entity registered in Bulgaria by Decision No. 1/24.03.2006 of Sofia City Court, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 14 1.1. Ownership and management of the parent company Sopharma AD is a public company under the Bulgarian Public Offering of Securities Act. Starting from November 2011, the shares of the company are traded in the Warsaw Stock Exchange. The shareholding structure of the parent company as at 31 December 2022 is as follows: % Donev Investments Holding AD 27.89 Telecomplect Invest AD 20.68 Sopharma AD (treasury shares) 10.00 MUPF Allianz Bulgaria 5.23 Telso AD 5.14 Other legal entities 20.86 Individuals 10.20 100.00 Sopharma AD has a one-tier management system with a five-member Board of Directors. Company's management in the form of Board of Directors is composed as at 31 December 2022 as follows: Ognian Donev, PhD Chairperson Vessela Stoeva Deputy Chairperson Bisera Lazarova Member Alexander Chaushev Member Ivan Badinski Member The parent company is represented and managed by its Executive Director Ognian Donev, PhD. Pursuant to a business management contract dated 9 June 2020, the Company’s Procurator is Simeon Donev. The Audit Committee supports the work of the Board of Directors and plays the role of those charged with governance that exercise monitoring and control over the internal control system, risk management and Company's system of financial reporting. The composition of the Audit Committee is as follows: Vasil Naidenov Chairman Tsvetanka Zlateva Member Kristina Atanasova – Elliot Member Name of the Group’s parent: No parent or other controlling entity have been identified other than the parent company exercising control over Sopharma AD. Name of the Group’s ultimate parent: No ultimate parent or other controlling entity have been identified other than the parent company exercising control over Sopharma AD. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 15 1.2. Structure of the Group and principal activities The structure of the Group includes Sopharma AD as a parent company and the subsidiaries stated below: Subsidiaries Companies in Bulgaria 31.12.2022 Interest % 31.12.2021 Interest % Date of acquisition of control Date of disposal of control/ Sopharma Trading AD 87.25 81.34 08.06.2006 Pharmalogistica AD 89.39 89.39 15.08.2002 Electroncommerce EOOD 100.00 100.00 09.08.2005 Biopharm Engineering AD 97.15 97.15 10.03.2006 Sopharma Buildings REIT - - 04.08.2008 07.06.2021 Momina Krepost AD - - 01.01.2008 10.03.2021 Phyto Palauzovo AD 95.00 95.00 21.09.2012 Veta Pharma AD 99.98 99.98 11.11.2016 Sopharmacy EOOD 87.25 81.34 19.01.2015 Sopharmacy 2 EOOD 87.25 81.34 17.06.2015 Sopharmacy 3 EOOD 87.25 81.34 02.12.2015 Sopharmacy 4 EOOD 87.25 81.34 29.02.2016 Sopharmacy 5 EOOD 87.25 81.34 01.03.2016 Sopharmacy 6 EOOD 87.25 81.34 03.12.2015 Sopharmacy 7 EOOD 87.25 81.34 15.03.2017 Sopharmacy 8 EOOD 87.25 81.34 27.06.2017 Sopharmacy 9 EOOD 87.25 81.34 11.09.2017 Sopharmacy 10 EOOD 87.25 81.34 11.09.2017 Sopharmacy 11 EOOD 87.25 81.34 07.12.2017 Sopharmacy 12 EOOD 87.25 81.34 07.12.2017 Sopharmacy 13 EOOD 87.25 81.34 07.12.2017 Sopharmacy 14 EOOD 87.25 81.34 07.12.2017 Sopharmacy 15 EOOD 87.25 81.34 07.12.2017 Sopharmacy 16 EOOD 87.25 81.34 15.05.2018 Sopharmacy 17 EOOD 87.25 81.34 15.05.2018 Sopharmacy 18 EOOD 87.25 81.34 28.02.2019 Sopharmacy 19 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 20 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 21 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 22 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 23 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 24 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 25 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 26 EOOD 87.25 81.34 01.10.2020 Sopharmacy 27 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 28 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 29 EOOD 87.25 81.34 01.10.2020 Sopharmacy 30 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 31 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 32 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 33 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 34 EOOD ** 87.25 81.34 01.10.2020 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 16 Subsidiaries Companies in Bulgaria 31.12.2022 Interest % 31.12.2021 Interest % Date of acquisition of control Date of disposal of control Sopharmacy 35 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 36 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 37 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 38 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 39 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 40 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 41 EOOD 87.25 81.34 01.10.2020 Sopharmacy 42 EOOD 87.25 81.34 01.10.2020 Sopharmacy 43 EOOD 87.25 81.34 01.10.2020 Sopharmacy 44 EOOD 87.25 81.34 01.10.2020 Sopharmacy 45 EOOD 87.25 81.34 01.10.2020 Sopharmacy 46 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 47 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 48 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 49 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 50 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 51 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 52 EOOD ** 87.25 81.34 01.10.2020 Sopharmacy 53 EOOD 87.25 81.34 01.10.2020 Sopharmacy 54 EOOD 87.25 81.34 01.10.2020 Sopharmacy 55 EOOD 87.25 81.34 01.10.2020 Sopharmacy 56 EOOD 87.25 81.34 01.10.2020 Sopharmacy 57 EOOD 87.25 81.34 01.10.2020 Sopharmacy 58 EOOD 87.25 81.34 01.10.2020 Sopharmacy 59 EOOD 87.25 81.34 01.10.2020 Sopharmacy 60 EOOD 87.25 81.34 01.10.2020 Sopharmacy 61 EOOD 87.25 81.34 01.10.2020 Sopharmacy 62 EOOD 87.25 81.34 01.10.2020 Sopharmacy 63 EAD 87.25 81.34 01.10.2020 Sopharmacy 64 AD 87.25 81.34 01.10.2020 * effective percentage of interest ** indirect interest Subsidiaries Companies abroad 31.12.2022 Interest % 31.12.2021 Interest % Date of acquisition of control Date of disposal of control SIA Briz - - 10.11.2009 30.12.2021 SOOO Brititrade ** - - 10.11.2009 30.11.2021 PAO Vitamini 100.00 100.00 18.01.2008 Sopharma Warsaw SP. Z.O.O. 100.00 100.00 23.11.2010 Sopharma Poland Z.O.O., Poland, in liquidation 60.00 60.00 16.10.2003 ООО Tabina - - 08.04.2011 30.11.2021 ООО Sopharma Ukraine 100.00 100.00 07.08.2012 OOO Pharmacevt Plus ** - - 31.05.2013 30.11.2021 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 17 Subsidiaries Companies abroad 31.12.2022 Interest % 31.12.2021 Interest% Date of acquisition of control Date of disposal of control ТОО Sopharma Kazakhstan 100.00 100.00 06.11.2014 OOO Galenapharm ** - - 28.02.2015 30.11.2021 DOO Medjel ** - - 28.02.2015 30.11.2021 DOO Alenpharm-plus ** - - 30.06.2015 30.11.2021 DOO Salusline ** - - 18.11.2016 30.11.2021 Rap Pharma International OOD - 80.00 14.04.2017 11.11.2022 ZAO Interpharm - - 26.04.2017 30.11.2021 Sopharma Trading d.o.o. 87.25 81.34 09.08.2017 OOO Zdorovey ** - - 16.08.2017 30.11.2021 BOOO SpetzAfarmacia ** - - 16.08.2018 30.11.2021 OOO Bellerofon ** - - 07.03.2019 30.11.2021 UAB Recessus - - 26.09.2019 01.10.2021 OOО Zdorovey Pharm - - 02.03.2020 30.11.2021 Pharmachim EOOD 100.00 100.00 14.04.2020 SIA Briz Trading ** - - 15.02.2021 30.12.2021 SIA BAH ** - - 02.11.2021 30.11.2021 * effective percentage of interest ** indirect interest · Sopharmacy EOOD is a subsidiary of Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy EOOD; · Sopharmacy 2 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 2 EOOD; · Sopharmacy 3 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 3 EOOD; · Sopharmacy 4 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 4 EOOD; · Sopharmacy 5 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 5 EOOD; · Sopharmacy 6 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 6 EOOD; · Sopharmacy 7 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 7 EOOD; · Sopharmacy 8 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 8 EOOD; · Sopharmacy 9 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 9 EOOD; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 18 · Sopharmacy 10 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 10 EOOD; · Sopharmacy 11 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 11 EOOD; · Sopharmacy 12 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 12 EOOD; · Sopharmacy 13 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 13 EOOD; · Sopharmacy 14 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 14 EOOD; · Sopharmacy 15 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 15 EOOD; · Sopharmacy 16 EOOD is a subsidiary through Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 16 EOOD; · Sopharmacy 17 EOOD is a subsidiary thro of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 17 EOOD; · Sopharmacy 18 EOOD is a subsidiary through Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 18 EOOD; · Sopharmacy 19 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 19 EOOD; · Sopharmacy 20 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 20 EOOD; · Sopharmacy 21 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 21 EOOD; · Sopharmacy 22 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 22 EOOD; · Sopharmacy 23 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 23 EOOD; · Sopharmacy 24 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 24 EOOD; · Sopharmacy 25 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 25 EOOD; · Sopharmacy 26 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 26 EOOD; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 19 · Sopharmacy 27 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 27 EOOD; · Sopharmacy 28 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 28 EOOD; · Sopharmacy 29 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 29 EOOD; · Sopharmacy 30 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 30 EOOD; · Sopharmacy 31 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 31 EOOD; · Sopharmacy 32 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 32 EOOD; · Sopharmacy 33 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 33 EOOD; · Sopharmacy 34 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 34 EOOD; · Sopharmacy 35 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 35 EOOD; · Sopharmacy 36 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 36 EOOD; · Sopharmacy 37 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 37 EOOD; · Sopharmacy 38 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 38 EOOD; · Sopharmacy 39 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 39 EOOD; · Sopharmacy 40 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 40 EOOD; · Sopharmacy 41 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 41 EOOD; · Sopharmacy 42 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 42 EOOD; · Sopharmacy 43 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 43 EOOD; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 20 · Sopharmacy 44 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 44 EOOD; · Sopharmacy 45 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 45 EOOD; · Sopharmacy 46 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 46 EOOD; · Sopharmacy 47 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 47 EOOD; · Sopharmacy 48 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 48 EOOD; · Sopharmacy 49 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 49 EOOD; · Sopharmacy 50 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 50 EOOD; · Sopharmacy 51 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 51 EOOD · Sopharmacy 52 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 52 EOOD; · Sopharmacy 53 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 53 EOOD; · Sopharmacy 54 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 54 EOOD; · Sopharmacy 55 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 55 EOOD; · Sopharmacy 56 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 56 EOOD; · Sopharmacy 57 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 57 EOOD; · Sopharmacy 58 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 58 EOOD; · Sopharmacy 59 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 59 EOOD; · Sopharmacy 60 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 60 EOOD; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 21 · Sopharmacy 61 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 61 EOOD; · Sopharmacy 62 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 62 EOOD; · Sopharmacy 63 EAD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 63 EAD; · Sopharmacy 64 AD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 64 AD; · Sopharma Trading d.o.o., Serbia is a subsidiary of Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharma Trading d.o.o.; The core business activities of the Group companies are focused on the pharmaceutical sector except for separate companies having business activities also in the field of investment in securities. The parent company holds a permit for production/import of pharmaceuticals No BG / MIA-0328 / 06.10.2022, issued by the Bulgarian Drug Agency (BDA). The core business activities of the companies within the Group are as follows: · Sopharma AD – production and trade in medicinal substances (active ingredients) and finished drug forms; research and development activities in the field of medicinal products; · Sopharma Trading AD – trade in pharmaceutical products; · Biopharm Engineering AD – production and trade in infusion solutions; · Pharmalogistica AD – secondary packaging of pharmaceutical products and real estate leases; · Electroncommerce EOOD – trade, transportation and packaging of radioactive materials and nuclear equipment for medicinal use, household electronics and electrical equipment; · Phyto Palauzovo AD – production, harvesting, purchase, growing and trade in herbs and medicinal plants; · Veta Pharma AD – production of medicinal, non-medicinal and other products; · Sopharmacy EOOD – franchising, know-how, renting of property, trade and other; · Sopharmacy 2 EOOD – Sopharmacy 62 EOOD (with the exception of Sopharmacy 6 EOOD) – retail trade in medicinal products; · Sopharmacy 6 EOOD – online and off-line retail trade in medicinal products; · Sopharmacy 63 EAD and Sopharmacy 64 EOOD – retail trade in medicinal products, franchising and other services; · PAO Vitamini, Ukraine – production and trade in pharmaceuticals; · OOO Sopharma Ukraine, Ukraine – trade in pharmaceuticals and market and public opinion SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 22 research; · Sopharma Trading d.o.o. – wholesale trade in medicinal products; · Sopharma Poland Z.O.O., Poland, in liquidation – market and public opinion research; · Sopharma Warsaw SP. Z.O.O., Poland – wholesale trade in pharmaceutical and medicinal products and market and public opinion research; · TOO Sopharma Kazakhstan, Kazakhstan – trade in pharmaceuticals; · Rap Pharma International OOD, Moldova (until 11 November 2022) – trade in pharmaceuticals; · Pharmachim EOOD, Serbia – consultancy. The parent company and the subsidiaries Sopharma Trading AD, Pharmalogistica AD, Electroncommerce EOOD, Biopharm Engineering AD, Phyto Palauzovo AD, Sopharmacy EOOD, Sopharmacy EOOD, Sopharmacy 62 EOOD, Sopharmacy 63 EAD and Sopharmacy 64 AD perform their activities in Bulgaria. Sopharma Poland Z.O.O. (in liquidation) and Sopharma Warsaw SP. Z.O.O. operate in Poland; PAO Vitamini, OOO Sopharma Ukraine – in Ukraine; Sopharma Trading d.o.o. and Pharmachim EOOD – in Serbia; TOO Sopharma Kazakhstan – in Kazakhstan; Rap Pharma International OOD (until 11 November 2022) – in Moldova. As at 31 December 2022, the interest of the Group in joint ventures is as follows: • Momina Krepost AD – 37.46% interest of Sopharma AD. The principal activities of the joint venture include development, implementation and production of human and veterinary medical products. It has been a Joint venture for the Group since 10 March 2021. As at 31 December 2022, the interest of the Group in associates is as follows: · Doverie Obedinen Holding AD – 24.998% interest of Sopharma AD. The principal activities of the company include acquisition, management, assessment and sale of shares in Bulgarian and foreign companies – legal entities. · Sopharma Properties REIT – 41.05% interest of Sopharma AD. The principal activities of the company include investing cash raised by issues of securities in real estate through purchase pf right of ownership and other rights in rem over real estate, construction and enhancements in order to provide the real estate for management, lease and/or sale. As of the date of these consolidated annual financial statements, the average number of Group's personnel was 4,764 workers and employees (2021: 5,507 workers and employees). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 23 1.3. Main indicators of the economic environment Currency exchange rates are among the main economic indicators of the business environment that have affected the activities of the Group companies throughout the period 2020 – 2022. The relevant exchange rates are presented in the table below: Indicator 2020 2021 2022 USD/BGN average for the year/period 1.71619 1.65419 1.86030 USD/BGN at end of the year/period 1.59386 1.72685 1.83371 PLN/BGN average for the year/period 0.44034 0.42841 0.41760 PLN/BGN at end of the year/period 0.42894 0. 42547 0. 41784 RSD/BGN average for the year/period 0.01663 0.01663 0.01665 RSD/BGN at end of the year/period 0.01663 0.01663 0.01667 UAH/BGN average for the year/period 0.06393 0.06065 0.05795 UAH/BGN at end of the year/period 0.05632 0.06329 0.05022 EUR/BGN average for the year/period 1.95583 1.95583 1.95583 EUR/BGN at end of the year/period 1.95583 1.95583 1.95583 1 BYN/BGN average for the year/period 0.70788 0.65183 - 1 BYN/BGN at end of the year/period 0.61820 0.67921 - KZT/BGN average for the year/period 0.0041 0.00388 0.00404 KZT/BGN at end of the year/period 0.00379 0.00401 0.00397 MDL/BGN average for the year/period 0.09912 0.09352 0.09835 MDL/BGN at the end of the year/period 0.09257 0.09736 0.09597 Source: BNB, National Banks of Ukraine, Poland, Serbia, Belarus, Kazakhstan and Moldova. 1.4. Macroeconomic situation The parent and many Group subsidiaries operate in the conditions of rising inflation. The management manages to retain the good financial position of the Group companies by indexing revenue and expenses, within reasonable limits. The direct effect of the changed macroeconomic environment is the increase in: - cost of basic manufacturing materials – due to the increase in the prices of materials and substances; - cost of heating and electricity – due to the significant price rises in the period; - the discount rate applied by the Group upon impairment tests of investments in other non-current assets. The Group maintains a stable capital base and debt ratio. In the reporting period there was no increase in interest costs on loans obtained. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 24 1.5. War in Ukraine – impact and effects On 24 February 2022, a military conflict began between Russia and Ukraine. As a result, many countries imposed sanctions on certain natural persons and legal entities in Russia, as well as on the state itself. The Russia-Ukraine conflict and the related economic sanctions and other measures taken by governments around the world have had a significant effect both on the local economies of the counties, and on the global economy. Usually, in such conflicts, pharmaceuticals are not subject to sanctions or other restrictions, in order to avoid a humanitarian crisis. Therefore, the sales of the Group on the territory of the two countries could be restricted mainly due to reasons such as difficulties with logistics and restrictions on the free movement of cash. In 2022 sales of the Group in Ukraine and Russia represent 7.4% from the consolidated revenues for 2022 (2021: 6.3%). At the date of approval of the consolidated financial statements the Group has no business counterparties included in the sanctioning lists published by the European Union. The Group has investments in two subsidiaries in Ukraine. These consolidated financial statements include the following assets owned by theses subsidiaries: property, plant and equipment amounting to BGN 6,144 thousand, inventory amounting to BGN 8,343 thousand, trade and other receivables amounting to BGN 8,212 thousand and cash and cash equivalents amounting to BGN 3,990 thousand. As of the date of the approval of these consolidated financial statements the assets of these subsidiaries are not physically affected by the military actions and there are no legal constraints for realization of the assets, which do not have tangible nature, however in the future it may be necessary to review the carrying amount of these assets, depending on the war’s development and its impact on the operations of these two subsidiaries. 1.6. Environmental matters The Group considers environmental protection and the slowing down of climate change to be part of its corporate social policy and develops its activities in accordance with environmental protection requirements. The Groups applies measures for: separate waste collection, minimizing, utilization and recycling of manufacturing and general waste; providing appropriate training to staff on matters related to environmental protection and pollution prevention. The Group actively invests in renewable energy sources for own use. 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE GROUP 2.1. Basis for preparation of the consolidated financial statements The consolidated financial statements of Sopharma Group for the year ended 31 December 2022 have been prepared in accordance with all International Financial Reporting Standards (IFRS), which comprise Financial Reporting Standards and the International Financial Reporting Interpretations Committee (IFRIC) interpretations, approved by the International Accounting Standards Board (IASB), as well as the International Accounting Standards (IAS) and the Standing Interpretations Committee (SIC) interpretations, approved by the International Accounting Standards Committee (IASC) and have been accepted by the Commission of the European Union. IFRSs as adopted by the EU is the commonly accepted name of the general-purpose framework – the basis of accounting equivalent to the framework definition SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 25 introduced by § 1, p. 8 of the Additional Provisions of the Accountancy Act "International Accounting Standards" (IASs). The Group’s consolidated financial statements have been prepared on a going-concern basis, which assumes that the Group will continue its existence for the foreseeable future. For the current financial year, the Group has adopted all new and/or revised standards and interpretations, issued by the International Accounting Standards Board (IASB) and respectively, by the International Financial Reporting Interpretations Committee (IFRIC), which have been relevant to its activities. The adoption of these standards and/or interpretations, applicable to entities in Bulgaria for annual reporting periods beginning on 1 January 2022 at the earliest, has not caused changes in Group’s accounting policies with the exception of some new and the expansion of already introduced disclosures, without leading to other changes in the classification or measurement of individual reporting items and transactions. The new and/or amended standards and interpretations include: · Amendments to IFRS 3 “Business Combinations” (in force for annual periods beginning on or after 1 January 2022, endorsed by EC). These amendments update IFRS 3 by replacing the reference to the old version of the Conceptual Framework for Financial Reporting with its latest updated 2018 version. They also add an exception from the principle for recognition of liabilities and contingent liabilities within the scope of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” and IFRIC 21 “Levies”, explicitly specifying that contingent liabilities are not recognized at the date of acquisition. The amendments are applied prospectively. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · Amendments to IAS 16 “Property, Plant and Equipment” (in force for annual periods beginning on or after 1 January 2022, endorsed by EC). These amendments prohibit deducting from the cost for “testing whether the asset is functioning properly”, which is part of the direct costs attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, the net proceeds received from selling items produced while the entity is preparing the asset for its intended location and condition. Instead, the entity shall recognize the revenue from sales of such items and the respective costs related thereto within profit or loss for the period, in accordance with the other applicable standards. The amendments specify that testing whether the asset is functioning properly is in fact an assessment of whether the technical and physical performance and capacity of the asset correspond to its intended use in production, supply of goods or services, lease, or for administrative purposes. Additionally, the amendment requires entities to separately disclose the amounts of proceeds and costs relating to items produced that are not an output of the entity’s ordinary activities. The amendments are applied retrospectively, but only for property, plant and SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 26 equipment brought to the location and condition necessary for their intended use on or after the start of the earliest period presented in the financial statements for which the entity first applies the amendments. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” (in force for annual periods beginning on or after 1 January 2022, endorsed by EC). The amendments specify that the ‘cost of fulfilling’ an onerous contract comprises the ‘costs that relate directly to the contract’, including: а) direct labour costs and direct cost of materials; and b) additional costs which related directly to fulfilling the contract – for instance, the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract. Administrative and other general costs are excluded, unless specifically billable to the counterpart. The amendments also make a small adjustment to the clarifications for recognition of impairment losses before a separate onerous contract provision is created, by highlighting that these are assets used in fulfilling the contract rather than assets intended thereto, which was the requirement prior to the amendments’ enforcement. An entity shall apply those amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · Annual Improvements to IFRSs 2018-2020 Cycle, to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, IFRS 9 “Financial Instruments”, Illustrative Example 13 to IFRS 16 “Leases” and IAS 41 “Agriculture” (in force for annual periods beginning on or after 1 January 2022, endorsed by EC). These improvements introduce partial amendments to the following standards: а) the amendment to IFRS 1 grants a relief for a subsidiary in first-time adoption of IFRS at a date later than the parent. It measures in its separate financial statements the assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements based on which the parent acquired the subsidiary. The subsidiary may, in its financial statements, measure the cumulative translation differences using the carrying amount stated in the parent’s consolidated financial statements based on the date of the parent’s date of transition to IFRS, unless adjustments have been made for the purpose of consolidation procedures or to account for the business combination’s effects. These amendments will also be applied for associates and joint ventures which have elected the same relief under IFRS 1. Entities shall apply these amendments for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted; b) the amendment to IFRS 9 clarifies which fees an entity includes when it applies the ‘10 per SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 27 cent’ test in assessing whether in case of a modification of a financial liability the conditions of the new or amended financial liability significantly differ from the conditions of the initially recognized one. According to the amendment, the entity includes only fees paid or received between the entity (the borrower) and the lender, including fees paid or received by either the entity or the lender on the other’s behalf. The entity applies the amendments to financial liabilities modified at or after the beginning of the annual reporting period in which it first applies these amendments; c) the amendment to Illustrative Example 13 to IFRS 16 removes from the example the illustration of the reimbursement of leasehold improvements by the lessor in order to resolve any potential confusion regarding the treatment of lease incentives. Since the amendment refers to an illustrative example accompanying the standard and is not a part thereof, no enforcement date is specified; d) the amendment to IAS 41 removes the requirement for entities to exclude taxation cash flows when measuring the fair value of a biological asset using a present value technique. At the date of these financial statements, the following amended standards and interpretations have also been issued, but are not adopted (and/or not endorsed by EU): · Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). These amendments provide guidelines and examples regarding the application of the materiality concept upon judgements and decisions makings related to disclosures of the accounting policy, such as a) they replace the requirement for disclosing material accounting policies information instead of significant accounting policies; b) they provide clarifications on how the entities can identify material accounting policy information and to give examples of when accounting policy information is likely to be material; c) clarify that accounting policy information may be material because of its nature, even if the related amounts are immaterial; d) clarify that accounting policy information is material if users of the entity’s financial statements would need it to understand certain material information in the financial statements; and d) clarify that the entity needn’t disclose immaterial accounting policy information, this shall not result in omitting or obscuring obscure material accounting information. Earlier application is permitted. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · Amendments to IAS 1 “Presentation of Financial Statements” (in force for annual periods beginning on or after 1 January 2024, not endorsed by EC). These amendments address the criteria for classification of liabilities as current or non-current. According to them, an entity classifies its liabilities as current or non-current depending on the rights thereof that are in existence at the end of the reporting period, and the classification is unaffected by SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 28 expectations about whether it will exercise its right to defer settlement of the liabilities. The classification shall not be impacted by the entity’s expectations for or events after the reporting period. The amendments made clear that “settlement” refers to the transfer to a counterparty of cash, equity instruments, other assets or services. The classification does not address derivatives of convertible liabilities, which constitute equity instruments. The amendments are applied retrospectively. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s liabilities. · Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). These amendments are related to clarifications aimed at a more accurate distinction between changes to the accounting policy, error adjustments and changes to accounting estimates, such as: a) “the definition of a change in accounting estimates” is replaced with a “definition of accounting estimates” – under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”; b) the entity develops and applies accounting estimates if the accounting policies require items in the financial statements to be measured in a way that involves measurement uncertainty; с) a clarification is made that a change in accounting estimate may result from a change in input or valuation technique, as well as from new information or new developments, unless it is the correction of a prior-year error; d) a change in an accounting estimate may affect only the current’s period profit or loss, or the profit or loss of both the current period and future periods. Earlier application is permitted. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · IAS 12 Income Taxes (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). Amendments to IAS 12 – Income Taxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction. The amendments restrict the scope of exemption from recognition of deferred tax liabilities, as a result of which it is not applied for transactions in which equal taxable and deductible temporary differences may arise upon initial recognition. Such transactions are the recognition of a right-of-use asset and lease liability by the lessee at the commencement date of a lease, as well as in the accrual of liabilities for dismantling, removing or restoring included as part of the cost of an asset. Upon the amendments coming into force, the entities should recognize each deferred tax asset (to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized) and a deferred tax liability (for all deductible temporary differences) in accordance with the IAS 12 criteria for transactions related to assets and liabilities arising from a single transaction on or after the beginning of the earliest comparative period presented in the financial statements. The entities SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 29 recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at that date. These amendments are effective for annual reporting periods beginning on or after January 1, 2023, and earlier application is permitted. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · IFRS 10 (amended) “Consolidated Financial Statements” and IAS 28 (amended) “Investments in Associates and Joint Ventures” – regarding the sale or contribution of assets between an investor and its associates or joint ventures (postponed effective date, to be determined by the IASB). These amendments address the accounting treatment of the sale or contribution of assets between an investor and its associates or joint ventures. They confirm that the accounting treatment depends on whether the assets sold or contributed constitute in substance a business as defined in IFRS 3. If these assets as an aggregate do not meet the definition of a business, then the investor shall recognise gain or loss only to the extent of other unrelated investor's interests in the associate or joint venture. In cases of sale or contribution of assets, which as an aggregate constitute a business, the investor shall recognise the full gain or loss on the transaction. The amendments will be applied on a prospective basis. IABS postponed the initial date of application of these amendments for an indefinite period. The management is in the process of research, analysis and assessment of the effects of the changes that might impact the accounting policy and the classification and presentation of the Group’s assets and liabilities, transactions and results. · Amendments to IFRS 16 “Leases” – Lease Liability in a Sale and Leaseback (in force for annual periods beginning on or after 1 January 2024, not endorsed by EC). The amendment aims to clarify requirements to the seller-lessee upon measuring a lease liability in sale and leaseback transactions. It requires a seller-lessee to subsequently (after the date of providing the underlying asset) determine lease payments and revised leased payments in a way that it does not recognize any amount of the gain or loss that relates to the right of use it retains. The amendments do not apply to the recognition of gains or losses in relation to partial or full termination of a lease. The amendments are applied retrospectively. Earlier application is permitted. The management has conducted research and has determined that these changes would not have a material impact on the Group’s assets and liabilities, transactions and results. · Amendments to IAS 1 “Presentation of Financial Statements, Non-Current Liabilities with Covenants” (in force for annual periods beginning on or after 1 January 2024, not endorsed by EC). These amendments specify that only covenants with which an entity is required to comply on or before the reporting date affect the entity’s right to defer the respective liabilities for at least twelve months after the reporting date and respectively, only these are to be considered upon assessing the classification of liabilities as current or SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 30 non-current. These amendments have an impact on whether the right exists at the reporting date, even if compliance with the conditions is determined thereafter (for instance, a covenant based on the entity’s financial position at the reporting date, but assessed thereafter). Covenants calculated based on the entity’s financial position after the reporting date (for instance, based on the entity’s financial position six months after the reporting date) shall not be considered upon determining the classification od liabilities and the right of deferral thereof. Nevertheless, entities shall disclose information about the covenants comprising an observable period within 12 months from the end of the reporting period, in order to assess the risk of whether the liabilities would become due. The amendments are applied retrospectively. Earlier application is permitted, but simultaneously with the application of amendments to IAS 1 Presentation of Financial Statements regarding the classification of liabilities as current and non-current. The management has conducted research and has determined that these changes would not have a material impact on the Group’s assets and liabilities, transactions and results. Additionally, with regard to the stated below new standards, amended/revised standards and new interpretations that have been issued but not yet in force for annual periods beginning on 1 January 2022, the management has judged that they are unlikely to have a potential impact resulting in changes in the accounting policies and the consolidated financial statements of the Group: · Improvements to IFRS 17 Insurance Contracts (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). The amendments are related to the Initial Application of IFRS 17 and IFRS 9 – Comparative Information. They provide a transitional provision regarding the comparative information on financial assets upon initial application of IFRS 17 in order to reduce accounting mismatches between financial assets and liabilities under insurance contracts in the comparative information upon initial application of IFRS 17 and IFRS 9. The application of the changes is optional and only applies to the presentation of comparative information upon initial application of IFRS 17. · IFRS 17 “Insurance Contracts” (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). This is an entirely new accounting standard on all types of insurance contracts, including some guarantees and financial instruments, and includes rules and principles on recognition and measurement, presentation and disclosure. The standard will supersede the effective standard up to date related to insurance contracts – IFRS 4. It establishes an entirely new overall model for insurance contracts’ accounting, covering all relevant accounting and reporting aspects. The consolidated annual financial statements of the Group have been prepared on a historical cost basis except for: а/ property, plant and equipment, measured at revalued amount; b/ investment property and other long-term equity investments, measured at fair value at the date of the consolidated statement of financial position. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 31 The Bulgarian subsidiaries of the Group and the associates Doverie Obedinen Holding AD and Sopharma Properties REIT, and the joint venture Momina Krepost AD maintain their accounting books in Bulgarian Lev (BGN), which is accepted as being their functional and presentation currency. The subsidiaries, associates and joint ventures abroad organise their accounting and reporting in accordance with the requirements of the respective local legislation: OOO Sopharma Ukraine and PAO Vitamini – the Ukrainian legislation; Sopharma Trading d.o.o. and Pharmachim EOOD – the Serbian legislation; Sopharma Poland Z.O.O. (in liquidation), Sopharma Warsaw SP. Z.O.O. – the Polish legislation; TOO Sopharma Kazakhstan – the legislation of Kazakhstan, and Rap Pharma International OOD (subsidiary until 11 November 2022) – the Moldovan legislation. The companies keep their accounting ledgers in the respective local currency – Belarusian Ruble (BYN), Ukraine Hryvnia (UAH), Serbian Dinar (RSD), Euro (EUR), Polish Zloty (PLN), Kazakhstan Tenge (KZT), and Moldovan Leu (MDL). The data in the consolidated annual financial statements and the notes thereto are presented in BGN ‘000 unless explicitly stated otherwise, and the Bulgarian Lev has been adopted as the Group’s presentation currency. The separate financial statements of foreign companies are restated from local currencies into BGN for the purposes of the consolidated financial statements as per the Group’s policy (Note 2.5). The presentation of the consolidated annual financial statements in accordance with International Financial Reporting Standards requires the management to make best estimates, accruals and reasonable assumptions that affect the reported values of assets and liabilities, the amounts of income and expenses and the disclosure of contingent receivables and payables as at the date of the consolidated financial statements. These estimates, accruals and assumptions are based on the information, which is available as of the date of the consolidated financial statements, and therefore, the future actual results might be different from them (whereas in the conditions of financial crisis the uncertainties are more significant). The items presuming a higher level of subjective assessment or complexity or where the assumptions and accounting estimates are material for the consolidated financial statements, are disclosed in Note 2.32 and Notes 16, 17, 18, 19, 20, 21, 22 and 42. 2.2. Definitions Parent company This is a company that has control over one or more other companies, in which it has invested. Having control means that the investor is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. The parent company is Sopharma AD, Bulgaria (Note 1). Subsidiary A subsidiary is a company, or another entity, that is controlled directly or indirectly by the parent company. The subsidiary companies are consolidated as from the date on which the effective control over them has been acquired by the Group and are de-consolidated as from the date when the control over them ceases and is transferred outside the Group. The full consolidation method is applied for their consolidation. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 32 The subsidiaries are presented in Note 1.2. Joint venture A joint venture is a company or another entity established by virtue of a contractual arrangement between the parent company as an investor and one or more other parties (companies) that start a common business undertaking, and on which the joint venturers (including the parent, which also has such a status) have a joint control. Joint control exists when it is contractually agreed that the strategic financial and operating decisions, relating to the joint venture, shall require mandatory unanimous consent of the joint venturers. The latter have rights to the net assets of the joint venture. The joint venture is included in the consolidated financial statements of the Group by applying the equity method – as from the date on which the joint control has been acquired by the venturer (the parent company) and its consolidation under this method is ceased when the joint venture is transformed into a subsidiary or when the joint control is transferred from the venturer to third parties. The joint venture is Momina Krepost AD (Note 1.2). Associate An associate is a company in which the investor (the parent company) exercises significant influence but is neither a subsidiary nor a joint venture with the investor. Significant influence is the right of participation in decision-taking with regard to financial and operating policies of the investee but is not control or joint control over these policies. Usually it exists in case of: (a) possession by the investor, directly or indirectly, of 20% to 50% of the shares in the capital of the investee company (including by virtue of an agreement between shareholders), and (b) in addition, the investor is represented in the managing body of the investee and/or participates in the decision-taking process with regard to the policy and strategy of the investee, and/or significant transactions exist between the investor and the investee. The associate is included in the consolidated financial statements of the Group by applying the equity method – from the date on which the investor (the parent company) acquires significant influence and its consolidation under this method is ceased when associate is transformed into a subsidiary or when it is accepted that the significant influence is transferred from the investor to third parties. The associates are Doverie Obedinen Holding AD and Sopharma Properties REIT (Note 1.2). 2.3. Consolidation principles The consolidated financial statements include the financial statements of the parent company and the subsidiaries, the joint ventures and the associates, prepared as at 31 December, which is the reporting date of the Group’s financial year. The 'economic entity' assumption has been applied in the consolidation whereas for the measurement of non-controlling interest in business combinations and other forms of acquisition of subsidiaries for which the 'proportionate share of net assets' method has been chosen. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 33 For the purposes of consolidation, the financial statements of the subsidiaries, the joint ventures and the associates have been prepared for the same reporting period as the parent company using uniform accounting policies. 2.3.1. Consolidation of subsidiaries In the consolidated financial statements, the financial statements of the included subsidiaries are consolidated under the 'full consolidation' method, line-by-line, by applying accounting policies that are uniform with regard to the significant reporting items. The investments of the parent company are eliminated against its share in the equity of the subsidiaries at the date of acquisition. Intra-group transactions and balances, including unrealised intra-group gains and losses, are eliminated in full. The effect of deferred taxes has been taken into account in these eliminating consolidation entries. The shares of shareholders – third parties in the subsidiaries other than these of the shareholders of the parent company are presented separately in the consolidated statement of financial position, the consolidated statement of comprehensive income and the statement of changes in equity as 'non-controlling interest'. The non-controlling interest includes: (a) the combined share of the shareholders – third parties at the date of initial consolidation in the fair value (deemed cost) of all identifiable assets acquired, liabilities and contingent (crystallised) liabilities of the respective subsidiaries assumed, determined (based on the share) through the proportionate method, and (b) the change in the share of these third parties in the equity of each respective subsidiary from their initial consolidation to the end of the reporting period. 2.3.2. Acquisition of subsidiaries The acquisition (purchase) method of accounting is used on the acquisition of a subsidiary (entity) by the Group in business combinations. The consideration transferred includes the fair value at the date of exchange of the assets transferred, the incurred or assumed liabilities and the equity instruments issued by the acquirer in exchange of the control over the acquiree. It includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related direct costs are recognised as current expenses when incurred except for the issue costs of debt or equity instruments, which are recognised as equity components. All identifiable assets acquired, liabilities and contingent (crystallised) liabilities assumed in the business combination are measured initially at their fair values at the date of exchange. Any excess of the aggregate consideration transferred (measured at fair value), the amount of non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquiree's previously held equity, over the acquired identifiable assets and assumed liabilities of the acquirer, is treated and recognised as goodwill. If acquirer's share in the fair value of acquired net identifiable assets exceeds the cost of acquisition of the business combination, this excess is recognised immediately in the consolidated statement of comprehensive income of the Group in the item 'gains/(losses) on acquisition/(disposal) of subsidiaries'. Any non-controlling interest in a business combination is measured based on the method of the 'proportionate share of the net assets' of the acquiree. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 34 When a business combination for the acquisition of a subsidiary is achieved in stages, all previous investments held by the acquirer at the acquisition date are revalued to fair value and the effects of this revaluation are recognised in the current profit or loss of the Group, respectively in 'finance income' and 'finance costs' or 'gains/(losses) from associates and joint ventures', and all previously recorded effects in other comprehensive income are recycled. The Group applies provisionary accounting for the items resulting from business combinations (acquisitions) when the initial reporting is not complete at the end of the reporting period when the business combinations was performed. This provisionary accounting is adjusted in the period of measurement, or additional assets and liabilities are recognised to reflect the new information on facts and circumstances which were already present at the date of acquisition. Adjustments made in the measurement period are stated retrospectively, and the comparatives are adjusted as at the acquisition date. 2.3.3. Disposal of subsidiaries On sale or other form of loss (transfer) of control over a subsidiary: · The carrying amounts of the assets and liabilities (including any attributable goodwill) of the subsidiary are derecognised at the date when control is lost; · The non-controlling interest in the subsidiary is derecognised at carrying amount in the consolidated statement of financial position at the loss of control date, including all components of other comprehensive income related thereto; · The fair value of the consideration received from the transaction, event or operation that resulted in the loss of control is recognised; · All components of equity, representing unrealised gains or losses in accordance with the respective IFRS under the provisions of which these components fall, are reclassified to 'profit or loss for the year' or are transferred directly to retained earnings; · Any resulting difference as a 'gain or loss from a disposal (sale) of a subsidiary' attributable to the parent is recognised in the consolidated statement of comprehensive income. · The remaining shares held that form investments in associates, joint ventures or other long-term equity investments are initially measured at fair value at the date of sale and subsequently – following the accounting policy adopted by the Group (Note 2.13 and Note 2.14). The acquisition (purchase-and-sale) method is applied also in transactions of uniting and/or restructuring of entities under a common control with companies of the Group, provided that they represent direct acquisitions from the perspective of the parent company. 2.3.4. Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with holders of the common equity of the Group. The effects from sales of parent company’s shares, without loss of control, to holders SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 35 of non-controlling interests are not treated as components of the current profit or loss of the Group but as movements directly in its equity components, usually to the ‘retained earnings’ reserve. And vice versa, when the parent company purchases additional shares from holders of non-controlling interest, without acquisition of control, the difference between the consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is also directly recognised in the consolidated statement of changes in equity, usually to the ‘retained earnings’ reserve. When the Group ceases to have control, joint control and significant influence, any retained minority investment as interest in the capital of the respective entity, is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. Respectively, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of all components related to the initial investment (in a subsidiary, joint venture or associate). 2.3.5. Consolidation of associates and joint ventures Associates and joint ventures are included in the consolidated financial statements by applying the equity method whereby the investment of the parent company is initially stated at cost and is subsequently recalculated to reflect the changes in investor’s (the parent company) share in the post-acquisition net assets of the associate or joint venture. Group's investment in an associate or joint venture includes also the goodwill identified on their acquisition net of any recognised impairment. The post-acquisition gains or losses for the Group (through the parent company) from associates and joint ventures for the respective reporting period represent its share in the net (post-tax) financial results of their business activities for the period, which share is recognised and presented on a separate line in the consolidated statement of comprehensive income. Analogously, the Group's share in post-acquisition changes in other components of comprehensive income of associates and joint ventures is also recognised and presented as movement in the other components of comprehensive income in the consolidated statement of comprehensive income, and respectively the consolidated reserves of the Group - in the statement of changes in equity. The Group recognises its share in the losses of associates and joint ventures up to the amount of its investment, including the granted internal loans, unless it has assumed certain obligations or payments on behalf of the associate or joint venture. The internal accounts and balances between the Group and associates and joint ventures are not eliminated. The unrealised gains or losses from transactions between them are eliminated to the percentage of Group's interest in the associates and joint ventures by also making tests for impairment in case of loss. The effect of deferred taxes on these consolidation procedures has also been taken into account. 2.4. Comparatives In these consolidated financial statements, the Group presents comparative information for one prior year. Where necessary, comparative data is reclassified (and restated) in order to achieve comparability in view of the current year presentation changes. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 36 2.5. Functional currency and recognition of exchange differences The functional currency of the Group companies in Bulgaria being also presentation currency for the Group is the Bulgarian Lev. The Bulgarian Lev is fixed to the Euro, under the BNB Act, at the ratio BGN 1.95583:EUR 1. Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate to BGN at the date of the transaction or operation is applied to the foreign currency amount. Cash, receivables and payables, as monetary reporting items, denominated in a foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank (BNB) for the last working day of the respective month. At 31 December, these amounts are presented in BGN at the closing exchange rate of BNB. The non-monetary items in the consolidated statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently re-valued at the closing exchange rate. Foreign exchange gains or losses arising on the settlement or recording of foreign currency commercial transactions at rates different from those at which they were converted on initial recognition, are recognised in the consolidated statement of comprehensive income in the period in which they arise and are presented net under 'other operating income/(losses)'. The functional currency of the companies in Poland (Sopharma Poland Z.O.O. (in liquidation) and Sopharma Warsaw SP. Z.O.O. is the Polish Zloty, of the subsidiary TOO Sopharma Kazakhstan – the Kazakhstan Tenge, of the subsidiaries in Ukraine (PAO Vitamini, OOO Sopharma Ukraine) – the Ukrainian Hryvnia, of the subsidiaries in Serbia (Sopharma Trading d.o.o., Pharmachim EOOD) – the Serbian Dinar, of the subsidiary (until 11 November 2022) in Moldova (Rap Pharma International OOD) – the Moldovan Leu. For the purposes of the consolidated financial statements, the financial statements of the subsidiaries abroad are restated from the functional currency of the respective subsidiary to the presentation currency (BGN) adopted for the consolidated financial statements, whereas: (a) all assets and liabilities are restated to the currency of the Group by applying the closing exchange rate of the local currency thereto at 31 December or at the date of disposal of the company; (b) all income and expenses are restated to the currency of the Group at average rate of the local currency thereto for the reporting period (Note 2.6 and Note 2.7); (c) all exchange differences resulting from the restatements are recognised and presented as a separate component of equity in the consolidated statement of financial position – 'translation of foreign operations reserve', and SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 37 (d) the exchange differences resulting from the restatement of the net investment in the companies abroad together with the loans and other currency instruments, accepted as hedge of these investments, are presented directly in equity. On disposal (sale) of a foreign operation (company), the cumulative amount of exchange differences that have been directly stated as a separate component of equity, are recognised as part of the profit or loss in the consolidated statement of comprehensive income on the line 'gains/(losses) on acquisition and disposal of subsidiaries, net', obtained on disposal (sale). Goodwill and adjustments to fair value arising on acquisition of a company abroad are treated analogously to the assets and liabilities of this company and are restated to the presentation currency at closing exchange rate. 2.6. Revenue 2.6.1. Recognition of revenue under contracts with customers The Group’s usual revenue is from the activities disclosed in Note 1.2. The Group’s revenue is recognised when control of the goods or services promised in the contract with the customer are transferred to the customer. Control is transferred to the customer upon satisfaction of the contractual performance obligations through transfer of the promised goods and/or provision of the promised services. Measurement of contracts with customers The Group accounts for a contract with a customer only if upon its enforcement: а/ it has commercial substance and rationale; b/ the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform it; c/ each party’s rights can be identified; d/ the payment terms can be identified; and e/ it is probable that the Group will collect the consideration to which it is entitled upon performing its performance obligations. In assessing whether collectability of an amount of consideration is probable, the Group considers all relevant facts and circumstances of the transaction, including past experience, customary business practices, published rules and declarations made by the Group, collaterals and possibilities for satisfaction. A contract for which any of the above criteria has not yet been met is subject to new assessment in each reporting period. The consideration received under such contracts shall be recognised as a liability (contract liability) in the statement of financial position, until: а/ all criteria for recognizing a contract with a customer are met; b/ the Group meets its performance obligations and has received all or substantially all of the consideration (which is non-refundable); and/or c/ when the contract is terminated and the consideration received is non-refundable. Upon the initial assessment of its contracts with customers, the Group makes additional analysis and judgement whether two or more contracts should be combined and accounted for as a single contract, respectively whether the goods and/or services promised in each separate and/or combined contract should be accounted for as a single and/or multiple performance obligation(s). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 38 Each promise to transfer goods and/or services which are distinct (in nature and in the context of the contract), is accounted for as a separate performance obligation. The Group recognises revenue for each separate performance obligation on an individual contracts basis with customers, by analysing the type, term and conditions of each specific contract. For contracts with similar features, revenue is recognised on a portfolio basis, only if their grouping into a portfolio would not have a materially different impact on the financial statements. When another party is involved in providing goods or services to a customer, the Group shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the Group is a principal) or to arrange for those goods or services to be provided by the other party (i.e. the Group is an agent). The Group is a principal and recognises as revenue the gross amount of consideration if it controls the specified goods and/or services prior to their transfer to the customers. If, however, the Group does not obtain control over the specified goods and/or services and its obligation is only to arrange for a third party to provide these specified goods and/or services, the Group is an agent and recognises as revenue the net amount it retains for the goods or services to be provided in its capacity as agent. 2.6.2. Measurement of revenue under contracts with customers Revenue is measured based on the transaction price determined for each contract. The transaction price is the amount of consideration to which the Group expects to be entitled, excluding amounts collected on behalf of third parties. Upon determining the transaction price, the Group takes into consideration the contractual conditions and its customary business practices, including the impact of variable consideration, the existence of a significant financing component in the contract, non-cash consideration, consideration payable to the customer (if any). In contracts with more than one performance obligations, the transaction price is allocated between each performance obligation based on the standalone selling prices of each good and/or service determined based on one of the methods permitted under IFRS 15, priority being given to the method of “observable selling prices”. The change in the scope or price (or both) of the contract is accounted for as a separate contract and/or as part of the existing contract, depending on whether the change is related to the addition of goods and/or services which are distinct, and on the price determined for them. Based on that: а) the Group accounts for a contract modification as a separate contract if the scope of the contract increases because of the addition of promised goods or services that are distinct, and the price of the contract increases by an amount of consideration that reflects the entity's stand-alone selling prices of the additional promised goods or services; b) the Group accounts for the contract modification as if it were a termination of the existing contract and the creation of a new contract (future application), if the remaining goods and/or services are distinct from the goods and/or services transferred before the contract modification, but the change in the contract price does not reflect the standalone selling price of the goods and/or services added; c) the Group accounts for the contract modification as if it were a part of the existing contract (cumulative catch-up adjustment) if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 39 2.6.3. Performance obligations under contracts with customers Sales of finished goods Wholesales of medicinal substances and medicinal forms are made in the country and abroad, both based on the Group’s specification (technology) and based on the customer’s specification (technology). Sales of finished goods based on the Group’s specifications Upon sales of finished goods based on the Group’s specifications, control is transferred to the customer at a point in time. Upon domestic sales, this is usually upon handover of the products and the physical possession of the customer thereof, when the customer has the ability to direct the use of, and by obtaining substantially all of the remaining benefits from, the finished goods. Upon export sales, the judgement at the point in which the customer obtains control over the finished goods sold is made based on the INCOTERMS applicable for the contract. Sales of products based on the customer’s specifications Regarding the finished goods based on the customer’s specifications, the Group has a legal and contractual restriction to direct for other use (sales to another party) and it has no alternative use. In these cases, the method of transfer is determined specifically for each contract with customers (at individual contract basis). For this purpose, it is determined if the Group is entitled to payment for the work performed to date, which should at least compensate for the cost incurred plus a reasonable margin should the contract be terminated for reasons other than the Group’s default (legally enforceable right to payment). If in the specific contract the Group has a legally enforceable right to payment, revenue is recognised over time, and the output method is used to measure the progress (stage of completion) of the contract. This method has been determined to the most appropriate to measure the progress, as the results achieved best depicts the Group’s activity towards complete satisfaction of the performance obligations. The progress is measured based on the units produced versus the total number of units ordered by the customer. The assessments of revenue, costs and/or stage of progress towards complete satisfaction of the performance obligations are reviewed at the end of each reporting period, incl. in case of change in the circumstance/occurrence of new circumstances. Each subsequent increase or decrease of expected revenue and/or costs is stated within profit or loss for the period in which the circumstances resulted in the review became known to the management. If in the specific contract the Group does not have a legally enforceable right to payment, revenue is recognised at a point in time, when control of the finished goods sold is transferred to the customer: when the finished goods are provided to the customer and it has physical possession thereon (for domestic sales) and in accordance with the contract’s applicable INCOTERMS (for export sales). Sales of pharmaceuticals and medical goods Sales of pharmaceuticals and medical goods by the Group’s distributor companies are to customers which are pharmacies, hospitals and wholesalers (wholesale) in the country and abroad. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 40 Wholesale Upon wholesale, the control of the goods sold is assessed to be transferred to the customer at a point in time. This is usually upon handover of the goods and the physical possession of the customer thereon, when the customer has the ability to direct the use of, and by obtaining substantially all of the remaining benefits from, the goods. Retail sales Upon retail sales, control of the goods sold is transferred to the customer upon their handover thereto. Customer loyalty programmes The Group maintains a loyalty programme whereby customers holding a club card may accumulate points for each purchase. The points accumulated may be exchanged for products participating in the programme without payment by the customer within a period set in the programme conditions. The Group management has determined that the loyalty points grant customers with a material right they cannot obtain without concluding a contract for the initial purchase. Therefore, the promise for future discounts through giving points is a separate performance obligation. The transaction price is allocated between the goods and/services already sold and the points which the Group expects to be claimed and compensated, based on the respective standalone selling prices. The standalone selling price of a point reflects the discount that the customer would get, adjusted for the probability of the points being claimed and compensated, determined based on information about the points used (past experience). The stand-alone selling price of the goods and/or services sold is determined based on the price list effective at the sale date. Payables under the loyalty programme are stated as a contract liability in the consolidated statement of financial position. The Group recognises revenue when the loyalty points are claimed or when their validity expires. The Group reviews its estimate of the points to be claimed and compensated at the end of each reporting period, and if necessary, adjusts the payable (contract liability) recognised, respectively the recognised revenue, through cumulative catch-up adjustment. Medical equipment (appliances) sales The sales of medical equipment usually include delivery, installation, commissioning, operation training and warranty service, and the selling price is total for the respective contract and/or equipment. Revenue from the sales of medical equipment is recognised on an individual contracts basis, and for each contract it is assessed whether the promised goods and/or services are separate performance obligations. This assessment is made based on the timing of transfer of control over the medical equipment and the interrelated components of the contract. Usually, control over the medical equipment (appliances) is transferred to the customer at a point in time, when the equipment is delivered at the agreed location and the physical possession is handed over to the customer. At this point, the Group transfers all risks and rewards related to the medical equipment, subject of the contract with the customer, and the customer has the ability to direct the use of the asset. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 41 The distinct installation, commissioning and training services which are sold together with the equipment are usually rendered following its delivery and are relatively independent. These services are accounted for as separate performance obligations, since a/ they may be performed by another supplier; b/ in most cases the services are short-term and not specific in nature; c/ they do not modify the equipment delivered and are not interrelated and integrated therewith. Therefore, it has been determined that in this case, control over the installation, commissioning and training services is transferred over the period of their rendering, since they are performed on an asset controlled by the customer, and the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs the services. The revenue from the services performed is recognised over time, and to measure contract progress (stage of completion), the output method is used. This method has been determined to be the most appropriate to measure progress, as it is most relevant in depicting the scheme of transfer of control and satisfying performance obligations, respectively most accurately reflects the level of all outstanding activities. Warranty service The warranty service usually includes a standard warranty clause that guarantees that the medical equipment sold meets the contractual specifications and quality standards for the usual warranty period (usually 12 months) and is covered by the producer. Transportation of the finished goods and goods sold Usually, upon export sales, the Group is responsible for transporting the goods to the location agreed, and the transportation is organised by the Group, and the cost of transport is included (calculated) as part of the selling price. Depending on the transportation conditions agreed with the customer, it may be carried out also after control over the products sold has been transferred to the customer. Until the transfer of control over the products, the sales of products and the transportation service are accounted for as a single performance obligation, since they constitute parts of an integrated service. The transportation service following transfer of control over the finished goods sold is accounted for as a separate performance obligation, since the transportation can be provided by another supplier (i.e. the customer may use the finished goods sold with readily available resources), and the transportation service does not modify or amend the finished goods sold in any way. In this case, the consideration the Group expects to be entitled to (the transaction price) is allocated between the separate performance obligations based on their stand-alone selling prices. The stand-alone selling price of the finished goods sold is determined based on the price list effective at the transaction’s date, and the stand-alone selling price of the transportation service is determined as an approximation by using the cost plus margin approach. To render the transportation service, the Group uses transportation companies – subcontractors. The Group has determined it controls the services prior to their provision to the customer and therefore it acts in its capacity as principal, since a/ it is primarily responsible for rendering the services and for the acceptability of the services to the customer (i.e. the Group is responsible for fulfilling the promise in the contract irrespective of whether it performs the services itself or hires a third-party service supplier to perform them); and b/ it has the discretion in establishing the price for the services independently, without interference by the customer. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 42 Revenue from the sales of transportation services are recognised over time, since it is not necessary for the work performed to date to be repeated if another party has to perform the remaining work, therefore, the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs the services. In order to measure the contract progress (stage of completion), the input method is used. This method has been determined as the most appropriate to measure the progress since it best depicts the Group’s activity regarding the transfer of control and satisfaction of obligations; respectively, it most accurately reflects the level of performance of obligations, in as far as the Group’s efforts (costs incurred) are directly related to the transfer of the service to the customer. The progress is measured based on the costs incurred to the total costs planned for contract performance. Bill-and-hold arrangements In certain cases, upon wholesale, the goods sold are physically possessed by the Group. The Group has analysed these arrangements and has determined that although the customer does not have physical possession over the goods, usually they have control thereon, since: a/ the hold is done at the customer’s request; b/ the goods can be identified separately as belonging to the customer; c/ the goods are available for immediate shipment at the customer’s request; d/ the Group does not have the ability to direct the use of the goods or direct them to another customer and e/ a separate consideration is agreed for the storage service. In these cases, the delivery of goods and the storage service rendering are accounted for as separate performance obligations. Respectively: a/ control over the goods sold is transferred to the customer at a point in time, when the goods can be identified separately as belonging to the customer, and the customer has legal title thereon; b/ the obligation to perform the storage services is satisfied over time, while this service is being provided. Sales of services The services provided by the Group include: storage services (pre-distribution) for customer goods, subscription extra-warranty servicing of medical equipment, medical representation etc. Service revenue is presented as other income in the statement of comprehensive income, in as far as it does not constitute a portion of the Group’s primary business activities. Extra-warranty (maintenance) service A Group’s company provides extra-warranty services under subscription. The extra-warranty service contracts are usually concluded for a period of 2 years. The consideration is fixed and is determined on an annual basis and/or for the entire term of the contract, allocated on a monthly basis. The services performed are usually invoiced on a monthly basis, and the payment period is 30 to 60 days from the date of issuing an invoice to the assignor. The extra-warranty service comprises various tasks/activities of continuous and/or repetitive nature, which are distinct and form part of an integrated service. They constitute a series of distinct services and are therefore a single performance obligation, since: a) the integrated maintenance service covers numerous distinct time periods (usually one month); b) the services are substantially the same, since the customer obtains continuous benefit therefrom for each separate time period (each month) even of the tasks SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 43 performed differ in their nature and quantity; c) control is transferred over time, since the customer simultaneously receives and consumes the benefits provided by the Group as the Group performs the service and there is no need for another company to substantially repeat the work done by the Group company at a given date if this other company has to perform the remaining portion of the performance obligation. Revenue is recognised over time, and the progress (stage of completion) is measured based on the time passed (on a linear basis – monthly). This method has been determined as the most appropriate one to measure the progress, since services are rendered on a monthly basis and form part of a series, therefore, it best depicts the Group’s activity regarding transfer of control and satisfaction of performance obligations. Other services For the other services performed by the Group, control is transferred to the customer over the period of their rendering, since the customer simultaneously receives and consumes the benefits provided by the Group. The revenue from other sales is recognised over time by measuring the degree of performance of the Group’s obligations (stage of completion). In order to measure the progress (stage of completion), the Group applies the output method based on the quantity of services provided. 2.6.4. Refund obligations under contracts with customers The refund obligation includes the Group’s obligation to reimburse a portion or all of the consideration received (or subject to receipt) from the customer under contracts with a right of return and/or for the expected retrospective discounts, rebates and discount volumes. The obligation is initially measured at the amount which the Group does not expect to be entitled to and which it expects to reimburse to the customer. At the end of each reporting period, the Group reassess the measurement of the refund obligations, respectively of the transaction price and of the recognised revenue. Refund obligations under contracts with customers are stated within “Other current liabilities” in the statement of financial position. 2.6.5. Transaction price and payment terms Finished goods, pharmaceutical and medical produces The selling prices of the products (finished goods and goods) sold by the Group are usually fixed, based on a common and/or customer-specific price list, and are individually determined for each product. Upon determining the transaction price, the Group also takes into account the various forms of variable consideration and other amounts (consideration) owed to the customer. Variable consideration The variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The forms of variable consideration applicable for the Group include: SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 44 · Volume discounts: Retrospective trade discounts provided to the customer upon reaching monthly, quarterly and/or annual turnover determined in advance, set as a uniform threshold and/or progressive bonus scheme. Upon measuring the variable consideration, the Group determines the customer’s estimated turnover by using the most probable outcome method. The discounts granted are offset against the amounts due by the customer. · Price discounts from the common price list: under the pricing policy adopted, upon wholesale, the selling price from the common price list is reduced by the discount usually applicable for the respective product. The discount applicable for each customer is determined based on the turnover agreed for a certain period as compared to the total potential turnover with the customer. These price discounts are granted to the customer upon each sale and/or at the end of each month. If the customer fails to meet the turnover targets and does not compensate the difference over the next period, the Group is entitled to claiming default compensation set as a percentage of the turnover default. · Price protection: With regards to domestic sales, the Group is obliged, upon price reduction imposed by a state regulatory body, to compensate the buyer and/or its customers for finished goods purchased at a higher price and not yet sold to end clients. The payment of this consideration depends on the state policy on medicinal products price regulation and is beyond the Group’s control. · Compensation for hidden flaws: the customer may claim returns due to hidden flaws (quality claims) throughout the validity period of the finished goods sold, which may vary from one to five years. Quality claims are settled by the provision of new replacement goods or by refund of the amount paid by the customer. Upon determining the compensations for hidden flaws due at the end of the reporting period, the Group takes into consideration the quality assurance system implemented thereby and the accumulated experience. · Compensations due to the customer: in case of inaccurate performance of contractual obligations by the Group, usually in relation of failure to meet the negotiated delivery deadline. These are included within a decrease of the transaction price only if the payment is very likely. The Group’s experience shows that historically, contract terms are complied with, and the Group has not recorded liabilities for payment of compensations. · Right of return: Some sales contracts allow the customer to return the goods within a given period. The Group accounts for the right of return as a form of variable consideration and recognises revenue from sales only at the amount of consideration it is reasonably assured it is entitled to (considering the goods expected to be returned). Upon determining what proportion of the goods sold is expected to be returned, the Group uses historical data about goods returned by customers over the past year. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 45 · Compensations owed by the customer: variable consideration in the form of compensations for delayed payment by the customer. Receiving such consideration depends on the customer’s actions and is beyond the Group’s control. They are included within the transaction price only when the uncertainty regarding their receipt has been resolved. Including compensations (owed by and due to the customer) as part of the transaction price is determined for each individual contract and is subject to reassessment at the end of each reporting period. The variable consideration expected in the form of various discounts, defaults and compensations is determined and measured based on the accumulated experience and is recognised as adjustment of the transaction price only and respectively the revenue (as an increase or a decrease) only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur, including due to assessment restrictions. Any subsequent changes to amount of the variable consideration are recognised as adjustment of revenue (as an increase or a decrease) at the date of change and/or resolving the uncertainty. At the end of each reporting period, the Group updates the transaction prices, including whether the estimated price contains restrictions, so as to accurately present circumstances existing and occurring during the reporting period. Upon assessing the variable consideration, the Group uses the most likely outcome approach. Discounts accrued but not settled at the end of the reporting period, to which the customer still does not have unconditional right, are presented as refund liabilities in the statement of financial position. Consideration due to the customer The consideration due to the customer includes amounts that the Group companies pay and/or have promised to pay to the customer. It is included as a component of the transaction price, unless the payment to the customer is in return to distinct goods and/or services which the customer transfers and/or grants to the Group companies and the fair value of these distinct goods and/or services does not exceed the amount of consideration paid by the Group. If the latter is higher than the fair value of the goods and/or service received by the customer, only the excess is included within the transaction price. The consideration paid to the customer is recognised as contract assets and are included within the transaction price, respectively in a decrease of revenue from contracts with customers, upon transfer of control over the goods sold or when the Group promises to pay, whichever occurs later. Significant financing component Upon wholesales the usual credit period is 30 to 270 days following the delivery of goods. In certain sales transactions, the payments can be partially in advance and the amounts paid in advance are refunded if the contract is terminated. The advance payments collected from customers are presented in the statement of financial position as contract liabilities. As a result of the financial condition and credit risk of some of the customers which are hospitals, the customer pays for the goods delivered with a significant delay compared to the payment period agreed, and in some cases, the period between the date of transfer of control over the goods and the date of payment by the customer may reach and exceed 2 years. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 46 The Group has determined that contracts with such customers do not contain a financing component, since: a) the payment term agreed with the customer does not differ from the usual payment term for such transactions, and upon concluding the sales contract, no explicit deferred payment scheme has been agreed; b) the selling prices do not include a financing component (interest). They are legislatively regulated and do not significantly deviate from the selling price of the same goods and/or services upon sales to other customers and/or upon sale to the same customer by another distributor of medicinal products and medical consumables. The differences (if any) result from variable consideration granted in the form of discounts, rather than from the agreed and/or expected payment period; c) the delay in payments results from the financial condition and credit risk of some of the customers which are hospitals; d) upon delay by the customers, the Group charges an interest (penalty) at the amount of the statutory interest, as from the date of delay; e) the financing element arises on the date of delay starting from which the Group charges a delay interest; f) the customer (hospital) pays the interest charged (penalties) and they reflect the time value of money. The interest income recognised due to not paying within the agreed payment period by customers, which are hospitals, are presented as finance income in the statement of comprehensive income (Notes 11 and 42). Upon retail sales, payment is due at the time of sale. Exceptions are retail sales in Bulgaria for which NHIF reimburses a portion of the price. This portion of the selling price is paid by NHIF within 60 days. Medical equipment (Appliances) The agreed selling price related to contracts for sale of medical equipment (appliances) is usually aggregated for the specific contract and/or equipment is aggregate. As a result, the consideration which the Group expects to be entitled is allocated to each separate performance obligation on the basis of stand- alone selling prices determined approximately by using the cost plus a margin approach. Significant financing component Upon the sale of medical equipment, the payment terms for the transaction price are determined individually for each contract. The customer usually makes an advance payment of up to 20% of the contracted consideration, and the remaining part is paid after performance of the contractual obligations, at a later date or in accordance to a payment schedule. Deferred payment is usually made after 30 days to 2 years. For contracts with deferred payment of over 1 year, the Group has determined that a financing component exists which is significant for revenue. In these cases the transaction price is adjusted so as to reflect the impact of the time value of money by using a discount rate reflecting the credit characteristics of the counterparty receiving the financing (the customer). The payments collected in advance from the customer are presented in the statement of financial position as contract liabilities, and the interest charged – as finance income in the statement of comprehensive income (Notes 11 and 42). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 47 For contracts where the period for transferring the control of the promised goods and services to the customer and the payment is up to 12 months, the Group does not adjust the transaction price to reflect the effect of the financing component. Sales of services The selling prices of services are usually fixed. The consideration upon extra-warranty (maintenance) service is fixed and determined on an annually and/or for the entire duration of the contract, and it is allocated equally on a monthly basis. The services performed are most often invoiced monthly, and the payment period is within 30 to 60 days from the date of the invoice issuance to the customer. 2.6.6. Contract costs The Group states as contract costs the following: · the incremental and directly related expenses it incurs upon concluding a contract with a customer, which it expects to recover over a period longer than twelve months (costs to obtain a contract with a customer) and · the expenses it incurs to fulfil a contract with a customer and which are directly related to the specific contract, enhance the generation of resources to be used in the contract fulfilment and the Group expects to recover them over a period longer than twelve months (costs of fulfilling contracts with customers). The Group in its primary business activity does not incur direct or specific costs to obtain contracts with customers and costs of fulfilling such contracts, which would have not been incurred if the contracts had not been obtained. 2.6.7. Contract balances Trade receivables and contract assets A contract asset is the Group's right to receive consideration in exchange for goods or services that it has transferred to a customer but is not unconditional (receivable accrual). If by transferring the goods and/or providing the services the Group performs its obligation before the customer to pay the respective consideration and/or before the payment is due, a contract asset is recognised for the consideration earned (which is conditional). Recognised contract assets are reclassified as trade receivables when the right to consideration becomes unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. Contract liabilities The Group presents as a contract liability the consideration received from the customer and/or the unconditional right to receive consideration before it has performed its contractual obligations. Contract liabilities are recognised as revenue when (or as) the performance obligations are satisfied. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 48 Contract assets and contract liabilities are presented in other receivables and payables in the statement of financial position. They are included in current assets when their maturity is within 12 months or within the Group’s usual operating cycle, and the others are stated as non-current. Assets and liabilities from a single contract are presented on a net basis in the statement of financial position, even if they result from difference performance obligations in the contract. Following their initial recognition, trade receivables and contract assets are subject to review for impairment in accordance with the requirements of IFRS 9 Financial Instruments. Right of return assets from contracts with customers The right of return is the Group’s right to receive sold goods which are expected to be returned by the customers (Note 23). This right is initially measured at the carrying amount of the goods which are expected to be returned, less any expected costs to recover the goods, including any potential decreases in the value of products returned, including due to passage of their expiry date. At the end of each reporting period the Group reassess the measurement of right of return assets recognised related to changes in expectations about the volume of goods returned and other decreases in their value. Right of return assets are presented in inventories in the statement of financial position and are separately disclosed in the notes to the annual financial statements. 2.7. Expenses Expenses are recognised in the Group when they are incurred based on the accrual and matching concepts (to the extent that this would not lead to recognition of an asset or liability not satisfying the definitions for assets and liabilities in the Framework and IFRS themselves). Deferred expenses are put off and recognised as current expenses in the period when the contracts, whereto they refer, are performed. Losses from revaluation of investment property to fair value are presented in the consolidated statement of comprehensive income (within profit or loss for the year) on the line 'other operating income/(losses)'. 2.8. Finance income and costs 2.8.1. Finance income Finance income is included in the statement of comprehensive income (within profit or loss for the year) when earned and comprises: interest income on granted loans and term deposits, interest income on receivables under special contracts, interest income on past due receivables, income/gains from deals with investments in available-for-sale securities at fair value through profit or loss, or through other comprehensive income, including dividends, net gains on exchange differences under loans in foreign currency, income from debt settlement transactions, gain on fair value measurement of available-for-sale investments in securities at fair value through profit or loss, or through other comprehensive income, gains from fair value measurement of investments in the acquisition of a subsidiary performed in stages. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 49 Interest income is calculated by applying the effective interest rate on the gross carrying amount of financial assets, with the exception of financial assets, which are credit-impaired (Stage 3), for which interest income is calculated by applying the effective interest rate on their amortised cost (i.e. the gross carrying amount after deducting the impairment allowance) 2.8.2. Finance costs Finance costs are included in the consolidated statement of comprehensive income (within profit or loss for the year) when incurred separately from finance costs and comprise: interest expenses under loans received, bank fees and charges under loans and guarantees, foreign exchange net loss from loans in foreign currencies, leases, and impairment losses on granted loans. 2.9. Property, plant and equipment Property, plant and equipment, including permanent plants (fixed tangible assets) are presented in the consolidated financial statements at revalued amount less the accumulated depreciation and impairment losses in value. Initial acquisition Upon their initial acquisition, property, plant and equipment are valued at acquisition cost (cost), which comprises the purchase price, including customs duties and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, and professional fees for people involved in the project, non-refundable taxes, expenses on capitalised interest for qualifying assets, etc. Property, plant and equipment of acquired subsidiaries are measured at fair value at the transaction (business combination) date which is accepted as acquisition price for consolidation purposes. Upon acquisition of property, plant and equipment under deferred settlement terms, the purchase price is equivalent to the present value of the liability discounted on the basis of the interest level of the attracted by the Group credit resources with analogous maturity and purpose. The Group has set a value threshold of BGN 500, below which the acquired assets, regardless of having the features of fixed assets, are treated as current expense at the time of their acquisition. Subsequent measurement The chosen by the Group approach for subsequent measurement of property, plant and equipment, is the revaluation model under IAS 16, i.e. measurement at revalued amount less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The revaluation of property, plant and equipment is accepted to be performed by certified appraisers normally in a period of five years. Where the fair value changes materially in shorter periods, revaluation may be performed more frequently. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 50 Subsequent costs Repair and maintenance costs are recognised as current expenses as incurred. Subsequent costs incurred in relation to property, plant and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised in the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructure. Depreciation methods The Group applies the straight-line depreciation method for property, plant and equipment. Depreciation of an asset begins when it is available for use. Land is not depreciated. The useful life of the groups of assets is dependent on their physical wear and tear, the characteristic features of the equipment, the future intentions for use and the expected obsolescence. The useful life per group of assets is as follows: · buildings – 20-70 years; · installations – 5-30 years; · machinery and equipment – 6-35 years; · computers and mobile devices – 2-5 years; · motor vehicles – 5-17 years; · servers and systems – 4-18 years; · furniture and fixtures – 3-13 years; · other tangible assets – 3-12 years. The useful life set for any tangible fixed asset is reviewed by the management of each company within the Group and respectively, by the parent company, at the end of each reporting period and in case of any material deviation from the future expectations of their period of use, the latter is adjusted prospectively. Impairment of assets The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount might permanently differ from their recoverable amount. If any indications exist that the estimated recoverable amount of an asset is lower than its carrying amount, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of property, plant and equipment is the higher of fair value less costs to sell or the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money and the risks, specific to the particular asset. Impairment losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) unless a revaluation reserve has been set aside for the respective asset. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 51 Then the impairment is treated as a decrease in this reserve (through other comprehensive income) unless it exceeds its amount and the excess is included as expense in the consolidated statement of comprehensive income (within profit or loss for the year). Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the consolidated statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale. The gains or losses arising from the sale of an item of 'property, plant and equipment' group are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. They are stated net under 'other operating income/(losses), net' on the face of the consolidated statement of comprehensive income (within profit or loss for the year). The part of 'revaluation reserve' component attributable to the asset sold is directly transferred to 'retained earnings' component in the consolidated statement of changes in equity. 2.10. Biological assets Biological assets are measured at fair value less the estimated costs to sell. The fair value of biological assets is determined on the basis of their present location and condition based on a price quoted in an active market or other alternative sources of current prices. Gain or loss on initial recognition of a biological asset at fair value less estimated costs to sell and changes in fair value less estimated costs to sell is recognised in the consolidated statement of comprehensive income (within profit or loss for the year) in the period in which it arises and is presented in 'other operating income/(losses), net'. When the fair value of a biological asset cannot be reliably measured, it is measured at cost less accumulated depreciation or impairment losses. Subsequently, when the fair value of this biological asset becomes reliably measurable, the Group changes its approach and switches to measuring the asset at fair value less the estimated costs to sell. 2.11. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition (the consideration given) over the fair value of Group's share in the net identifiable assets of the acquired company at the date of acquisition (the business combination). Goodwill is initially measured in the consolidated financial statements at acquisition cost (cost) and subsequently – at cost less accumulated impairment losses. Goodwill is not amortised. Goodwill arising on the acquisition of a subsidiary is presented in the consolidated statement of financial position in the group of 'intangible assets' while goodwill arising on the acquisition of a joint venture or an associate (entities) is incorporated in the total amount of the investment and is stated in the group of 'investments in joint ventures' or respectively 'investments in associates'. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 52 The goodwill on the acquisition of joint ventures and associates (entities) is tested as part of the total balance (amount) of the investment. The individually recognised goodwill on the acquisition of subsidiaries (entities) is mandatory tested for impairment at least once in a year. Impairment losses on goodwill are not subsequently reversed. Gains or losses on the sale (disposal) of a particular subsidiary (entity) of the Group include the carrying amount of the goodwill relating to the entity sold (disposed of). On the realisation of a particular business combination, each recognised goodwill is allocated to a particular cash generating unit and this unit is used for impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. Impairment losses on goodwill are presented in the consolidated statement of comprehensive income (within profit or loss for the year) in the item 'impairment of non-current assets'. Other intangible assets Intangible assets are stated in the consolidated financial statements at acquisition cost less accumulated amortisation and any impairment losses in value. The intangible assets include mainly intellectual property rights, software and complex intangible assets (licences and pharmacy chain locations). The Group applies the straight-line amortisation method for the intangible assets with determined useful life from 3 to 18 years. The carrying amount of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying amount might exceed their recoverable amount. Then impairment is recognised as an amortisation expense in the consolidated statement of comprehensive income (within profit or loss for the year). Intangible assets are derecognised from the consolidated statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale at the date of transfer of control to the asset recipient. The gains or losses arising from the sale of an item of intangible assets are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. They are stated net within “other operating income/(losses) on the face of the statement of comprehensive income (within profit or loss for the year). 2.12. Investment property Investment property is property lastingly held by the Group to earn rentals and/or for capital appreciation. They are presented in the consolidated statement of financial position at fair value (Note 18). Gains or losses arising from a change in the fair value of investment property are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as 'other operating income/(losses), net' for the period in which they arise. The income gained on investment property is presented in the same item of the consolidated statement of comprehensive income. Investment properties are derecognised from the consolidated statement of financial position when they are permanently withdrawn from use and no future economic benefits are expected therefrom or on disposal. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 53 Gains or losses arising from the disposal of investment property are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. They are presented under 'other operating income/(losses), net' in the consolidated statement of comprehensive income (within profit or loss for the year). Transfers to, or from, the group of 'investment property' is made only when there is a change in the functional designation and the use of a particular property. In case of a transfer from 'investment property' to 'owner-occupied property', the asset is recognised in the new group at deemed cost, which is its fair value at the date of transfer. To the opposite, in case of a transfer from 'owner-occupied property' to 'investment property' the asset is measured at fair value at the date of transfer while the difference to its carrying amount is presented as a component of the consolidated statement of comprehensive income (within other comprehensive income) and within 'revaluation reserve – property, plant and equipment' in the statement of changes in equity. 2.13. Investments in associates and joint ventures Long-term investments, representing shares in associates and joint ventures, are presented in the consolidated financial statements under the equity method – value that includes the acquisition cost being the fair value of the consideration paid, including the direct costs on investment acquisition adjusted by investor's share of profits or losses and respectively the other reserves of the joint ventures and associates after the dates of their acquisition. The share of profits and losses after the date of acquisition of an associate and a joint venture is presented on a separate line in the consolidated statement of comprehensive income (within profit or loss for the year) while the share of other components of comprehensive income – on the respective line of the consolidated statement of comprehensive income (within other comprehensive income) and as a separate movement of the individual components of reserves in the consolidated statement of changes in equity. The investments in associates and joint ventures held by the Group together with the included goodwill are subject to review for impairment at the date of the financial statements. Where conditions for impairment are identified and its amount is determined, the impairment is included in the consolidated statement of comprehensive income (within profit or loss for the year) in the item 'gain/(loss) from associates and joint ventures'. In purchases and sales of investments in associates and joint ventures the date of trading (conclusion of the deal) is applied. Investments in associates and joint ventures are derecognised when the rights related thereto are transferred to third parties as a result of occurrence of legal rights for that and thus the significant influence over or joint control of the economic benefits from the investments is being lost. The income from their sale is presented in 'gain/(loss) from associates and joint ventures' of the consolidated statement of comprehensive income (within profit or loss for the year). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 54 2.14. Other long-term equity investments The other long-term equity investments are non-derivative financial assets in the form of shares in the capital of other companies (minority interest), held for a long term. Initial measurement Equity investments are initially recognised at cost, being the fair value of the consideration given including the direct expenses associated with the investment (financial asset) acquisition (Note 2.25). All purchases and sales of equity instruments are recognised at the transaction’s “trade date”, i.e. the date on which the Group undertakes to purchase or sell the asset. Subsequent measurement The equity investments held by the Group are subsequently measured at fair value (Note 2.31) determined with support by an independent licensed valuator. The effects from subsequent remeasurement to fair value are carried within a separate component of the statement of comprehensive income (in other comprehensive income), respectively in the reserve for financial assets at fair value through other comprehensive income. These effects are transferred to retained earnings upon disposal of the respective investment. Dividend income Dividend income related to long-term investments constituting shares in other entities (non-controlling interest) is recognised as current income and stated in the statement of financial position (within profit or loss for the year) in the “finance income” item. Upon derecognising shares at disposal or sale, the weighted-average price method is used, applying the price determined at the end of the month when the derecognition is performed. 2.15. Inventories Inventories are valued in the consolidated financial statements as follows: · raw materials, consumables and goods – at the lower of acquisition cost and net realisable value; · finished products, semi-finished products and work in progress – at the lower of production cost and net realisable value. Expenses incurred in bringing a certain product within inventories to its present condition and location, are included in the acquisition cost (cost) as follows: · raw materials, materials and goods – all delivery costs, including the purchase price, import customs duties and charges, transportation expenses, non-refundable taxes and other expenses, incurred for rendering the materials and goods ready for usage (sale); SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 55 · finished products, semi-finished products and work in progress – all necessary expenses on production that constitute the production cost, which includes the cost of direct materials and labour and the attributable proportion of production overheads (both variable and fixed), but excluding administrative expenses, exchange rate gains and losses and borrowing costs. The inclusion of fixed production overheads in the production cost of finished products, semi-finished products and work in progress is based on normal production capacity. They are allocated to finished products on the following bases chosen by the Group: · for production of medicinal products – the standard rate of man-hours of directly engaged staff in the production of the particular unit; · for production of infusion solutions – quantity of manufactured finished products; · for production of plastic medical disposable products – planned cost of manufactured finished products. The parent company applies 'standard production cost' for current valuation of finished products, semi- finished products and work in progress, and respectively, 'standard purchase cost' for basic raw materials and other production materials. At the end of each reporting period the management performs analysis of factors leading to variances on: (a) the supply of raw materials and other production materials – by comparing the actual and standard acquisition costs, and (b) the production of finished products, semi- finished products and work in progress – by comparing the actual and standard production costs. Where necessary, the value of inventories, included in the financial statements, is adjusted. On the basis of research on the good reporting practices in the pharmaceutical industry, the Company has adopted materiality thresholds regarding: (a) variance on supply of raw materials and other production materials – up to 2%, and (b) variance on production – up to 1%, within which the current value of the existing closing stocks of raw and other materials, finished products and work in progress are not adjusted for the purposes of the consolidated financial statements. Upon use (putting into production or sale) of inventories, they are currently expensed by applying the weighted average cost (cost) method. The net realisable value represents the estimated selling price of an asset in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. 2.16. Trade receivables Trade receivables constitute the Group’s unconditional entitlement to consideration under contracts with customers and other counterparties (i.e. it is only dependent on the passage of time before payment of the consideration). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 56 Initial measurement Trade receivables are initially recognised and carried at fair value based on the transaction price, which is usually equal to the invoice amount, unless they contain a significant financial component, which is not additionally charged. In this case they are recognised at their present value determined by applying a discount rate which is equal to the interest rate specific to the customer-debtor. Subsequent measurement The Group holds trade receivables only for the purpose of collecting contractual cash flows and subsequently measures them at amortised cost less the amount of impairment accumulated for expected credit losses. (Note 2.25 Financial instruments). Impairment The Group applies the expected credit losses model for the entire term of all trade receivables, using the simplified approach under IFRS 9, and based on the matrix model for loss percentage (Note 24). 2.17. Interest-bearing loans and other financial resources granted All loans and other financial resources granted are initially recognised at acquisition cost (nominal amount), which is accepted to be the fair value of the consideration received on the transaction, net of the direct costs related to these loans and granted resources. After the initial recognition, the interest-bearing loans and other granted resources are subsequently measured and presented in the consolidated financial statements at amortised cost by applying the effective interest rate method. They are classified in that category as the business model of the Group is solely to collect contractual cash flows of principal and interest. Amortised cost is calculated by taking into account all types of charges, commissions, and other costs, associated with these loans. Gains and losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as 'finance income' (interest) or 'finance costs' throughout the amortisation period, or when the receivables are settled, derecognised or reduced. Interest income is recognised in accordance with the stage in which the respective loan or other receivables has been classified based on the effective interest method. Interest-bearing loans and other financial resources granted are classified as current ones unless (and for the relevant portion thereof) the Group has unconditionally the right to settle its obligation within a term of more than 12 months after the end of the reporting period (Note 2.25). 2.18. Cash and cash equivalents Cash includes cash on hand and cash at current accounts, and cash equivalents – bank deposits with original maturity up to three months, and funds in deposits with longer maturity which are readily available to the Group under its agreements with the banks over the deposits’ terms (Note 2.25). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 57 Subsequent measurement Cash and cash equivalents at banks are subsequently measured at amortised cost, less the impairment accumulated for expected credit losses. For the purposes of the statement of cash flows: · cash proceeds from customers and cash paid to suppliers are presented at gross amount, including value added tax (20%); · interest on investment purpose loans received is reported as payments for financial activities while the interest on loans for current activities (for working capital) is included in the operating activities; · interest received on overdue trade receivables is reported as receipts from customer in cash flows from operating activities; · interest received from bank deposits is included within cash flows from investing activities; · VAT paid on fixed assets purchased from foreign suppliers is presented on the line 'taxes paid' while that paid on assets purchased from local suppliers is presented as 'cash paid to suppliers' in the cash flows from operating activities as far as it represents a part of the operating flows of the Group companies and is recovered therewith in the respective period (month). · overdraft proceeds and payments are stated net by the Company. · permanently blocked funds for a period of more than 3 months are not treated as cash and cash equivalents. · proceeds under factoring agreements are stated within cash flows from financing activities. 2.19. Trade and other payables Trade and other current amounts payable are carried to the consolidated financial statements at original invoice amount (acquisition cost), which is the fair value of the consideration to be paid in the future for goods and services received. In case of payments deferred over a period exceeding the common credit terms, where no additional interest payment has been envisaged or the interest considerably differs from the common market interest rates, the payables are initially valued at their fair value based on their present value at a discount rate applicable for the Group, and subsequently – at amortised cost (Note 2.25). 2.20. Interest-bearing loans and other borrowings All loans and other borrowings are initially recognised in the consolidated financial statements at cost (nominal amount), which is accepted to be the fair value of the consideration received on the transaction, netted of the direct costs related to these loans and borrowings. After the initial recognition, the interest- bearing loans and other borrowings are subsequently measured and presented in the consolidated financial statements at amortised cost by applying the effective interest rate method. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 58 Amortised cost is calculated by taking into account all types of charges, commissions and other costs, including any discount or premium on settlement, associated with these loans. Gains and losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as finance income or costs (interest) throughout the amortisation period, or when the liabilities are derecognised or reduced (Note 2.25). Interest costs are recognised for the term of the financial instrument based on the effective interest method. Interest-bearing loans and other borrowings are classified as current ones unless (and for the relevant portion thereof) the Group has unconditionally the right to settle its obligation within a term of more than 12 months after the end of the reporting period. 2.21. Capitalisation of borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset of the Group are capitalised as part of the cost of that asset. A qualifying asset is an asset that necessarily takes a period of at least 12 months to get ready for its intended use or sale. The amount of borrowing costs eligible for capitalisation to the value of a qualifying asset is determined by applying a capitalisation rate. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when the following conditions are met: expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Borrowing costs are also reduced by any investment income earned on the temporary investment of those borrowed funds. 2.22. Leases At the lease inception, which is the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease, the Group performs analysis and assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lessee The Group applies a uniform model for recognition and measurement of all leases, except for short-term leases (leases with a lease term of 12 months or less and which do not contain a purchase option) and leases of low value assets (such as tablets, personal computers, telephones, office equipment, etc.). The Group has not elected to apply the practical expedient of IFRS 16, which allows a lessee, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 59 For contracts that contain a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components. а) right-of-use assets The Group recognises right-of-use assets in the statement of financial position at the commencement date of the lease, i.e. the date on which a lessor makes an underlying asset available for use by the lessee. Right-of-use assets are presented in the statement of financial position at acquisition cost, less the accumulated depreciation, impairment losses and adjustments resulting from remeasurement and adjustments to the lease liability. The acquisition cost includes: · the amount of the initial measurement of the lease liability; · any lease payments made at or before the commencement date, less any lease incentives received; · any initial direct costs incurred by the Group in its capacity as lessee; · costs for dismantling and removing the underlying asset, restoring the site on which the asset is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. The Group depreciates the right-of-use asset to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. If ownership of the asset is transferred under the lease by the end of the lease term, the Group shall depreciate it to the end of the useful life. Depreciation shall be charged from the commencement date. The depreciation terms by types of underlying assets are as follows: · land – 3 to 15 years · buildings – 1 to 10 years · motor vehicles – 1 to 5 years · furniture and fixtures – 2 to 4 years The Group has elected to apply the acquisition cost model for all of its right-of-use assets. Right-of-use assets are tested for impairment in accordance with IAS 36 Impairment of Assets, by applying an impairment determination and reporting policy analogous to the one for property, plant, and equipment. The recoverable amount of right-of-use assets is the higher of the fair value less disposal costs, or value in use. To determine assets’ value in use, future cash flows are discounted to their present amount, by applying a pre-tax discount rate reflecting the market conditions and time value of money and the risks inherent to the respective asset. Impairment losses are determined as the difference between the recoverable and carrying amount (when the recoverable amount is lower than the carrying amount) and are carried to the statement of comprehensive income as impairment of non-current assets. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 60 Right-of-use assets are presented within property, plant and equipment in the consolidated statement of financial position, and depreciation thereof – within depreciation and amortization expenses in the consolidated statement of comprehensive income. b) lease liabilities The Group companies recognise lease liabilities at the commencement date, measured at the present value of the lease payments that are not paid at this date. They include: · fixed lease payments (including in-substance fixed payments), less any lease inceptives receivable; · variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; · the exercise price of the purchase options, if the lessee is reasonably certain to exercise this option; · payments of penalties for terminating the lease, of the lease term reflects the exercise of an option to terminate the lease; · the amount expected to be payable by the Group to lessor under residual value guarantees. Variable lease payments that do not depend on an index or a rate, but are dependent on performance or use of the underlying asset, are not included in the measurement of the lease liability and the right-of-use asset. They are recognised as current expenses in the period when the event or circumstance resulting in these payments arises. Lease payments are discounted using the interest rate implicit in the lease, of that rate can be readily determined, or the Company’s incremental borrowing rate, which it would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Lease payments (instalments) contain a certain ratio of the finance cost (interest) and the respective portion of the lease liability (principal). Interest costs for the lease are presented in the statement of comprehensive income (within profit or loss for the year) for the lease period on a periodic basis, so as to achieve constant periodic rate of interest on the remaining balance of the lease liability, and are presented as “finance costs”. Lease liabilities are stated on separate lines in the consolidated statement of financial position: Lease liabilities – non-current portion of liabilities, current portion of lease liabilities – for the current portion of liabilities, non-current payables to related parties – non-current portion, and payables to related parties – current portion. The Group subsequently measures the lease liability by: · increasing the carrying amount to reflect the interest on the lease liability; · reducing the carrying amount to reflect the lease payments made; · remeasuring the carrying amount to reflect any reassessment or lease modifications of the lease; · residual value guarantees are reviewed and if necessary, adjusted, at the end of each reporting period. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 61 The Group remeasures the lease liabilities (and makes corresponding adjustments to the related right-of- use assets) whenever: · the lease term has changes or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; · the lease payments change due to changes in an index or rate or a change in expected payment under a residual value guarantee, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged (original) discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); · a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of modification. c) Short-term leases and leases of low-value assets The Group has elected the exemption from recognition of right-of-use assets and lease liabilities under IFRS 16 for short-term leases of buildings and motor vehicles and for low-value assets constituting printers and other equipment which the Group considers to be at a low value when new and are independently used at the Group without dependence or close relation to other assets. Payments related to short-term leases and leases of low-value assets are recognised directly as current expenses in the statement of comprehensive income (within profit or loss for the year) on a straight-line basis over the lease term. Lessor Leases for which the Group is a lessor are classified as finance or operating leases. Whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, the contract is classified as a finance lease; all other leases are classified as operating leases. Operating lease Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. The underlying asset which is subject to the lease shall remain and be stated within the Group’s consolidated statement of financial position. Finance lease The Group recognises and presents the assets held under finance leases in its statement of financial position as lease receivables whose amount is equal to the net investment in the lease. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 62 The Group recognises finance income (lease interest) over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the lease. Interest income is included in the statement of comprehensive income (within profit and loss for the year) as finance income based on the Effective Interest Method. When the contract contains both lease and non-lease components, the Company applies IFRS 15 to allocate the total consideration between the separate components. 2.23. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with workers and employees of the Group are based on the Labour Code and the provisions of the effective social security legislation for the companies operating in Bulgaria, the Polish Code – for the companies in Poland, the employment legislation and the Collective Labour Agreement – for the companies in Ukraine, the employment legislation, the General Collective Labour Agreement and the effective Employment Rules and Regulations – for the companies in Serbia, and the Social Security Law of the Republic of Kazakhstan – for the company in Kazakhstan. Short-term benefits Short-term benefits to hired personnel in the form of remuneration, bonuses and social payments and benefits (due for payment within 12 months after the end of the period when the employees have rendered the service or have satisfied the required terms) are recognised as an expense in the statement of comprehensive income (within profit or loss for the year) for the period when the service thereon has been rendered and/or the requirements for their receipt have been met, unless a particular IFRS requires capitalisation thereof to the cost of an asset, and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. At each date of consolidated balance sheet, the companies of the Group measure the estimated costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated amounts of employee's remuneration and the statutory social security and health insurance contributions due by the employer thereon. Tantieme In accordance with the Group companies’ Articles of Association and upon a decision of the General Meeting of Shareholders, the Executive Director and/or other management are entitled to one-off remuneration (tantieme), usually determined as a percentage of the Company’s net profit. These remuneration expenses are recognised in the statement of comprehensive income (within profit or loss) within “employment benefit expenses”. When a certain portion is required to be deferred for a period of more than 12 months, this portion is measured at present value at the reporting date and is stated within non-current liabilities in the statement of financial position in the item 'payables to personnel'. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 63 Bonus schemes The amounts payable to staff, including key management members, under different bonus schemes applied in the Group, are usually accrued for the reporting year to which the achieved results refer. These remuneration expenses are recognised in the statement of comprehensive income (within profit or loss) within “employment benefit expenses” and in the statement of financial position as “payables to personnel” and are usually short-term. Long-term retirement benefits Defined contribution plans For Bulgaria The major duty of the companies - employers in Bulgaria is to make the mandatory social security contributions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security (SMPS) Fund, to the General Diseases and Maternity (GDM) Fund, the Unemployment Fund, the Labour Accident and Professional Diseases (LAPD) Fund, and for health insurance. The rates of the social security and health insurance contributions are regulated in the Social Security Code (SSC), as well as in the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are split between the employer and employee in line with rules of the SSC. These pension plans, applied by the Group in its capacity as an employer, are defined contribution plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, GDM Fund, Unemployment Fund, LAPD Fund as well as to universal and professional pension funds – on the basis of rates fixed by law, and has no legal or constructive obligation to pay further contributions if the funds do not hold sufficient means to pay the respective individuals the benefits they have worked-out over the period of their service. The obligations referring to health insurance are analogous. For companies abroad The rates of the social security contributions in Poland are approved by the Law on the National Social Security System, in Ukraine – Law on Pension Provision, in Serbia – the Law on Labour in the Republic of Serbia, and in Kazakhstan – Law of the Republic of Kazakhstan on Social Security Obligations. The social security contributions are being apportioned between an employer and employees at ratios regulated by the relevant local laws. There is no established and functioning private voluntary social security scheme at the Group. The contributions, payable by the companies of the Group under defined contribution plans for social security and health insurance, are recognised as a current expense in the statement of comprehensive income (within profit or loss for the year) unless a particular IFRS requires this amount to be capitalised to the cost of an asset, and as a current liability at their undiscounted amount along with the accrual of the respective employee benefits to which the contributions refer and in the period of rendering the underlying service. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 64 Defined benefit plans In accordance with the Labour Code, the Group in its capacity as an employer in Bulgaria is obliged to pay an indemnity at the amount of the respective employee’s gross remuneration for two months upon termination of employment relations due to retirement. If the employee has acquired within the company of the same Group ten years’ service over the last twenty years, the indemnity amounts to the gross remuneration for six months. In their nature these are unfunded defined benefit schemes. In accordance with the Labour Law in Serbia, the employer of the Serbian company is obliged to pay to its personnel on coming of age for retirement an indemnity at the amount of at least three average salaries calculated at the time of payment. In accordance with the employment legislation in Ukraine and the Collective labour Agreement of the Ukrainian company, the employer is obliged to pay to its personnel on coming of age for retirement an indemnity, which depending on the length of service with the entity may vary between UAH 250 and UAH 500 (between BGN 14 and BGN 29). Also, the company in Ukraine accrues social indemnities, which are paid prior to retirement of employees due to specific labour conditions. According to the employment legislation in Poland, the employer is obliged to pay upon retirement one gross monthly salary. In their nature these are unfunded defined benefit schemes. The calculation of the amount of these liabilities necessitates the participation of qualified actuaries in order to determine their present value at the date of the financial statements, at which they are presented in the consolidated statement of financial position, and respectively, the change in their value – in the consolidated statement of comprehensive income as follows: (a) current and past service costs, interest costs and the gains/losses on a curtailment and settlements are recognised immediately when incurred and are presented in current profit or loss under 'employee benefits expense'; and (b) effects from remeasurement of obligations that in substance represent actuarial gains and losses are recognised immediately when occurred and are presented to other comprehensive income in the item 'remeasurement of defined benefit pension plans'. Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. At the date of issue of the consolidated financial statements, the companies of the Group assign certified actuaries who provide their report with calculations regarding the long-term retirement benefit obligations upon termination of employment relations due to retirement. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the maturity of this obligation, and using the interest rates of long-term government bonds of similar term, quoted in the respective country where the company itself operates. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 65 Share based payments Share based payments to employees and others providing similar services are measured at fair value of the equity instruments as of the grant date. Form remunerations related to share based payments with conditions which have not vested rights the fair value as of the grant date is measured in a way to reflect these conditions and not to account for differences between expected and actual results. Termination benefits In accordance with the local provisions of the employment and social security regulations of the Group companies, the employer is obliged, upon termination of the employment contracts of employees prior to retirement, to pay certain types of indemnities. The Group recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, including based on an announced plan (for instance, for restructuring), to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents in the case of voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the consolidated statement of financial position at their present value. 2.24. Share capital and reserves Sopharma AD (the parent company) is a joint-stock company and is obliged to register with the Commercial Register a specified share capital, which should serve as a security for the creditors for execution of their receivables. Shareholders are liable for the obligations of the Group up to the amount of the capital share held by each of them and may claim returning of this share only in liquidation or bankruptcy proceedings. The parent company reports its share capital at the nominal value of the shares registered in the court. According to the requirements of the Commercial Act and the Articles of Association, the parent company is obliged to set aside a Reserve Fund (statutory reserve) by using the following sources: · at least one tenth of the profit, which should be allocated to the Fund until its amount reaches one tenth of the share capital or any larger amount as may be decided by the General Meeting of Shareholders; · any premium received in excess of the nominal value of shares upon their issue (share premium reserve); · other sources as provided for by a decision of the General Meeting. The amounts in the Fund can only be used to cover annual loss or losses from previous years. When the amount of the Fund reaches the minimum value specified in the Articles of Association, the excess may be used for share capital increase. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 66 The treasury shares are presented in the consolidated statement of financial position at acquisition cost (cost) and Group's equity is decreased by their gross purchase price. Gains or losses on sales of treasury shares are at the expense of retained earnings and are carried directly to Group's equity in the 'retained earnings' component. Revaluation reserve – property, plant and equipment is set aside from: · the revaluation surplus between the carrying amount of property, plant and equipment and their fair values at the date of each revaluation; · the revaluation surplus between the carrying amount of property stated as owner-occupied property and their fair values at the date when they are transferred to investment property. Deferred tax effect on the revaluation reserve is directly carried at the account of this reserve. Revaluation reserve is transferred to accumulated profits when the assets are derecognised from the consolidated statement of financial position of the Group or are fully depreciated. The revaluation reserve covers the impairment of the assets to which it relates. It may be used in the implementation of Group's dividend and capital policies only after it is transferred to the 'retained earnings' component. The reserve for financial assets at fair value through other comprehensive income is formed by the effects of fair-value measurement of other long-term equity investments. Upon derecognition of these investments, the reserve form is not recycled through the statement of comprehensive income (through profit or loss for the year). The translation of foreign operations reserve includes the effects of restating the financial statements of the companies abroad from local currency to the presentation currency of the Group. This reserve is recognised as a separate component of equity in the consolidated statement of financial position and as part of the profit or loss in the consolidated statement of comprehensive income on the line 'gains/(losses) on acquisition and disposal of subsidiaries, net' on disposal (sale) of a foreign operation (company). The other equity components constitute a reserve on warrants issued, which is formed by the difference between the issue value of the registered warrants and the transaction costs related to the issue. The warrants are issued and registered at a fixed price, denominated in BGN, and grant future rights to conversion into a fixed number of ordinary, dematerialised, registered, freely transferrable parent company shares, and are therefore classified as an equity instrument. 2.25. Financial instruments A financial instrument is any contract that simultaneously gives rise to a financial asset at one entity and a financial liability or equity instrument at another entity. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 67 Financial assets Initial recognition, classification and measurement At initial recognition, financial assets are classified in three groups, as subsequently measured: at amortised cost; at fair value through other comprehensive income, and at fair value through profit or loss. The Group initially measures financial assets at fair value, and in the case of financial assets which are not stated at fair value through profit and loss, the direct transaction costs are added. An exception to this rule are trade receivables that do not contain a significant financing component – they are measured based on the transaction price determined under IFRS 15 Revenue from contracts with customers (Note 2.6.2). Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. The classification of financial assets at their initial recognition depends on the characteristics of the contractual cash flows of the respective financial asset and on the Group’s business model for management thereof. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result solely from collecting contractual cash flows, selling the financial assets, or both. Subsequent measurement For the purpose of subsequent measurement, financial assets are classified in the following categories: - Financial assets at amortised cost (debt instruments) - Financial assets at fair value through other comprehensive income without “recycling” of cumulative gains or losses (equity instruments) Classification groups Financial assets at amortised cost (debt instruments) The Group measures a financial asset at amortised cost if both of the following conditions are met: - the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 68 Financial assets at amortised cost are subsequently measured using the effective interest method. They are subject to impairment. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) upon asset disposal, modification or impairment. The Group’s financial assets at amortised cost include: cash and cash equivalents at banks, trade receivables, including from related parties, loans to related and third parties (Note 21, Note 22, Note 24, Note 25, Note 26 and Note 27). Financial instruments at fair value through other comprehensive income (equity instruments) At initial recognition, the Group companies may make an irrevocable election to classify certain equity instruments as financial instruments at fair value through other comprehensive income, but only if they meet the equity definition under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined at an individual level, on an instrument by instrument basis. At derecognition of these assets, gains and losses from measurement to fair value, recognised in other comprehensive income, are not transferred to (recycled through) profit or loss. Dividends are recognised as “financial income” in the statement of comprehensive income (within profit or loss for the year) when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity instruments designated as financial instruments at fair value through other comprehensive income are not subject to impairment test. The Group has made an irrevocable election to classify into this category minority equity investments which it holds in the long term and in relation to its business interests in these entities. Significant part of these instruments are listed. They are presented in the consolidated statement of financial position within the „Other long-term equity investments” item. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when: - the rights to receive cash flows from the asset have expired, or - the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 69 When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Impairment of financial assets The Group recognises an allowance (impairment provision) for expected credit losses for all debt instruments which are not held at fair value through profit or loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms To calculate the expected credit losses for loans to related and third parties, incl. cash and cash equivalents at banks, the Group applies the general impairment approach defined by IFRS 9. Under this approach, the Group applies a 3-stage impairment model based on changes at the initial recognition of the credit quality of the financial instrument (asset). Expected credit losses are recognised at two stages: а. A financial asset which is not credit impaired at its initial recognition/acquisition is classified in Stage 1. These are loans granted to debtors with low risk of default, classified as performing and not overdue. Since its initial recognition, its credit risk and characteristics are subject to continuous monitoring and analyses. The expected credit losses for the financial assets classified in Stage 1 are determined based on credit losses resulting from probable events or default that are possible in the next 12 months of the respective asset’s lifetime (12-month expected credit losses for the instrument). b. When there has been a significant increase in credit risk since the initial recognition of a financial asset, and as a result its characteristics deteriorate, it is classified in Stage 2. Expected credit losses for financial assets classified in Stage 2 are determined for the remaining lifetime of the respective asset, irrespective of the point of default (lifetime expected credit loss (ECL)). The Group’s management has developed a policy and a set of criteria to analyse, ascertain and assess the occurrence of a condition of “significant increase in credit risk”. The main points of the policy and set of criteria are disclosed in Note 45. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 70 In the cases when the credit risk of a financial instrument increases to a level that indicates default, the financial asset is considered to be impaired, and is classified in Stage 3. At this stage, the losses incurred for the lifetime of the respective asset are identified and calculated. The Group’s management has performed the respective analyses, based on which it has determined a set of criteria for default events. One of them is delay in contract payments by over 90 days, unless circumstances exist for a certain instrument that make such claim refutable. Along with that, there are other events, based on internal and external information, which indicate that the debtor is not able to repay all contracted amounts due, including in consideration of all loan collaterals and credit enhancements held by the Group. The main points of the policy and set of criteria are disclosed in Note 45. The Group adjusts expected credit losses determined based on historical data, with forecasted macroeconomic indicators for which it has been established that correlation exists and which are expected to impact the amount of expected credit losses. In order to calculate expected credit losses for trade receivables and contract assets the Group has elected and applies a simplified approach based on an expected credit losses calculation matrix and does not monitor subsequent changes in their credit risk. In this approach, it recognises an allowance (impairment provision) based on lifetime expected credit losses at each reporting date. The Group has developed and applies a provisioning matrix based on its historical experience with credit losses, adjusted with forecast factors specific for debtors and the economic environment, for which a correlation has been established with the percentage of credit losses (Note 45). Derecognition Impaired financial assets are derecognised when there is no reasonable expectation of recovering the contractual cash flows. Financial liabilities Initial recognition, classification and measurement The Group’s financial liabilities include trade and other payables, loans and other borrowings, including bank overdrafts. All financial assets are initially recognised at fair value, and in the case of loans and borrowings and trade and other payables, net of direct transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings, including bank overdrafts, derivative financial instruments. Subsequent measurement The subsequent measurement of financial liabilities depends on their classification as described below: SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 71 Classification groups Loans and borrowing After initial recognition, the Group measures interest-bearing loans and borrowings at amortised cost, applying the effective interest method. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) when the respective financial liability is derecognised, as well as through amortisation based on the effective interest rate. The amortised cost is calculated by taking into consideration any discounts or premiums at acquisition, as well as fees or costs that constitute an integral part of the effective interest rate. Amortisation is included as a “finance expense” in the statement of comprehensive income (within profit or loss for the year). Derecognition Financial liabilities are derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. Offsetting (netting) of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. This requirement results from the concept of the economic substance of the Group’s relations with a given counterparty stating that in the simultaneous presence of these two requirements the expected actual future cash flow and rewards for the Group is the net flow, i.e. the net amount reflects the Group’s actual right and obligation resulting from these financial instruments – in all cases to only receive or pay the net amount. If the two conditions are not simultaneously met, it is assumed that the Group’s rights and obligations with respect to these offsetting financial instruments are not exhausted in all situations by only the payment or receipt of the net amount. The offsetting policy is also related to the measurement, presentation and management of actual credit risk and the liquidity risk pursuant from these offsetting instruments. The criteria applied to establish the “current and legally enforceable entitlement to offsetting” are: · lack of dependence on a future event, i.e. it should not only be applicable upon the occurrence of a future event; · the offsetting should be enforceable and legally defendable during (cumulatively): - the usual business operations; - in case of default/delay, and - in case of insolvency SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 72 The applicability of criteria is measured against the requirements of the Bulgarian legislation and the contractual relations between the parties. The condition of “presence of current and legally enforceable right to offsetting” is always and mandatorily assessed together with the second condition – for “mandatory settling of these instruments on a net basis”. 2.26. Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument Financial guarantee contracts are initially recognised as a financial liability at fair value determined based on the present value of the difference in cash flows between contract payments required under the debt instrument, and payments that would be required without a guarantee payable to a third party upon commitment. The subsequent measurement of financial guarantee liabilities is the higher of the following: · the amount determined in accordance with the expected credit losses model, and · the initially recognised amount, less, when applicable, the cumulative amount of the revenue recognised under the principles of IFRS 15 Revenue from Contracts with Customers. The provision for expected credit losses on financial guarantee contracts is included in the consolidated statement of financial position as ‘other current liabilities”. 2.27. Income taxes Current income taxes of the Bulgarian companies of the Group are determined in accordance with the requirements of the Bulgarian tax legislation – the Corporate Income Taxation Act (CITA). The nominal income tax rate in Bulgaria for 2022 is 10% (2021: 10%). The subsidiaries and joint ventures abroad are charged in accordance with the requirements of the respective local tax regulations by applying the following tax rates: Country Tax rate 2022 2021 Ukraine 18% 18% Serbia 15% 15% Latvia n/a 0-25% Belarus n/a 18% Lithuania n/a 15% Poland 19% 19% Kazakhstan 20% 20% Moldova 12% 12% SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 73 Deferred income taxes are determined using the liability method on all temporary differences of each consolidated company existing at the consolidated financial statements date, between the carrying amounts of the assets and liabilities and their tax bases, including for those arising from consolidation adjustments. Deferred tax liabilities are recognised for all taxable temporary differences, with the exception of those originating from recognition of an asset or liability, which has not affected the accounting and the taxable profit/(loss) at the transaction date. Deferred tax assets are recognised for all deductible temporary differences and the carry-forward of unused tax losses, to the extent that it is probable they will reverse and a taxable profit will be available or taxable temporary differences might occur, against which these deductible temporary differences can be utilised, with the exception of the differences arising from the recognition of an asset or liability, which has affected neither the accounting nor taxable profit /(loss) at the transaction date. The carrying amount of all deferred tax assets is reviewed at each reporting date and reduced to the extent that it is probable that they will reverse and sufficient taxable profit will be generated or taxable temporary differences will occur in the same period, whereby they could be deducted or compensated. Deferred taxes, related to items directly credited or charged as other components of comprehensive income or as an equity item in the consolidated statement of financial position, are also reported directly in the respective component of the comprehensive income or the equity item in the statement of financial position. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period and type of operations when the asset is realised or the liability – settled (repaid) on the basis of the tax laws that have been enacted or substantively enacted, and at tax rates of the country under the jurisdiction of which the respective deferred asset or liability is expected to be recovered or settled. Deferred tax assets of a Group company are presented net against the deferred tax liabilities of this company when it is the tax payer in the respective jurisdiction, and this is only in cases where the company is legally entitled to perform or receive net payments of current tax liabilities or income tax receivables. 2.28. Government grants Government grants represent various forms of providing gratuitous resources by a government (local and central authorities and institutions) and/or intergovernmental agreements and organisations. Government grants (from municipal, government and international institutions, including under the procedure of using the European funds and programmes) are initially recognised as deferred income (financing) when there is reasonable assurance that they will be received by the Group and that the latter has complied and complies with the associated thereto requirements. A government grant that compensates the Group for expenses incurred is recognised in current profit or loss on a systematic basis in the same period in which the expenses are recognised. A government grant that compensates investment expenses incurred to acquire an asset is recognised in current profit or loss on a systematic basis over the useful life of the asset usually proportionately to the amount of the recognised depreciation charge. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 74 2.29. Net earnings or losses per share Basic net earnings or losses per share are calculated by dividing net profit or loss attributable to ordinary equity holders of the parent company by the weighted average number of ordinary shares outstanding during the period. The weighted average number of ordinary shares outstanding during the period is the number of ordinary shares outstanding during at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. This factor represents the number of days that the shares are outstanding as a proportion of the total number of days in the period. In case of a capitalisation, bonus issue or splitting, the number of the outstanding ordinary shares as at the date of such event, is adjusted as to reflect the proportional change in the number of outstanding ordinary shares as if the event has occurred in the beginning of the earliest presented period. Diluted net earnings or losses per share are calculated dilutive potential ordinary shares (warrants) have been issued by the parent. Upon the calculation of diluted net earnings or loss per share for the period attributable to the parent, adjustment is made to the net profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares of the parent, and the average weighted number of shares in circulation, with the effect of all dilutive potential ordinary shares, comprising warrants. The potential ordinary shares are aimed to offset the decrease in the net earnings per share when the conversion thereof would increase the net earnings per share or would decrease loss per share from continuing operations. The profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares in the parent is increased by adding the amount of dividends and post-tax interest recognized in the period in relation to the dilutive potential ordinary shares, and is adjusted for any other changes to profit or loss that might arise as a result of the conversion of dilutive potential ordinary shares. The options and warrants have a decreasing value only when the average market price of ordinary shares for the period exceeds the price upon exercising the options or warrants (i.e. they generate profit). Earnings per share reported in prior periods are not adjusted retrospectively to account for changes in the prices of ordinary shares. Diluted net earnings or losses per share is calculated based on the calculated base net earnings or loss per share, adjusted as follows: (a) the profit or loss for the period attributable to holders of ordinary shares of the parent, is increased by the amount of post-tax dividend and interest recognised in the period in relation to the dilutive potential ordinary shares, and is adjusted for all other changes in profit and loss that might arise as a result of the conversion of dilutive potential ordinary shares; and (b) The average weighted number of ordinary shares in circulation in the period is increased by adding the average weighted number of the additional ordinary shares that would be in circulation upon conversion of all dilutive potential ordinary shares. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 75 2.30. Segment reporting The Group identifies its reporting segments and discloses segment information in accordance with the organisational and reporting structure used by the management of the parent company for current general monitoring and management of the Group and its components. Operating segments are business components, which are regularly measured by members of the management who take operating decisions by using financial and operating information prepared specifically on the segment for the purposes of current monitoring and assessment of results and allocating Group's resources. Group's operating segments are currently monitored and directed separately as each of them represents a separate business area that offers various products and bears various business risks and rewards. The operating segments that the Group’s management monitors, measures and controls risks and return therefrom are defined based on the main business operations performed on pharmaceutical products, namely: production and trade. Information by operating segments The Group uses one basic measuring unit – gross margin (profit) for measuring the results in the operating segments and allocation of resources between them. It is defined as the difference between segment revenue and segment expenses directly attributable to the respective segment. Segment assets, liabilities, respective revenue, expenses and results include those that are and can be directly attributable to the respective segment as well as such that can be allocated on a reasonable basis. Usually they include: (a) for revenue - sales of finished products; (b) for expenses - raw materials and consumables used, depreciation and amortisation and production staff remuneration, cost of goods sold; (c) for assets - property, plant and equipment and inventories, receivables from related parties, trade receivables and cash and cash equivalents; (d) for liabilities - payables to personnel and for social security, payables to related parties, trade payables and bank loans for direct financing (long-term and short-term). Capital expenditures (investments) by business segments are differentiated expenses incurred in the period of acquisition or construction of segment non-current assets, which are expected to be used for more than one period. The Group manages its investments in securities, trade accounts and financial resources granted/received as well as taxes at Group and entity level and they are not allocated at segment level. The results of the operations regarded as accidental ones compared to the main types of operations (activities) of the Group as well as revenue, expenses, liabilities and assets that are not subject to allocation are stated separately in the item 'total at Group level'. In general, these amounts include: other operating income unless originating from the operation of a particular segment, administrative expenses, interest income and expenses, realised and unrealised gains and losses from foreign currency transactions and investments, investments in other companies, trade and other receivables, trade payables and loans received, tax accounts, general-purpose production and administrative equipment. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 76 Inter-segment transfers: segment revenue, expenses and results, include internal transfers between business segments. These transfers are accounted for at competitive market prices charged to third party customers of similar goods, and are eliminated at consolidated financial statements level. Investments in joint ventures and associates, accounted for by using the equity method, are excluded from segment assets and segment revenue. They are stated within non-allocated assets, and revenue therefrom is presented within the item “gains/(losses) from joint ventures and associates, net”. The applied accounting policy for segment reporting is based on that used by the Group for the preparation of its statutory financial statements for public purposes. Additionally, the Group discloses information about important customers when the amount of revenue realised from the respective client exceeds 10% of the total amount of Group’s consolidated operating revenue. 2.31. Fair value measurement Some of Group's assets and liabilities are measured and presented and/or just disclosed at fair value for financial reporting purposes. These include: (a) on a recurring (annual) basis – other long-term equity investments, investment property, bank loans granted and received and loans to/from third parties, certain trade and other receivables and payables, receivables and payables under finance leases, etc. (b) on a non- recurring (periodical) basis – non-financial assets such as property, plant and equipment. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent market participants at the measurement date. Fair value is an exit price and is based on the assumption that the sale transaction will take place either in the principal market for this asset or liability or in the absence of a principal market – in the most advantageous market for the asset or liability. Both the designated as a principal market and the most advantageous market are markets to which the Group companies must have an access. Fair value is measured from the perspective of using the assumptions and judgments that potential market participants would use when pricing the respective asset or liability assuming that market participants act in their economic best interest. In measuring the fair value of non-financial assets the starting point is always the assumption what would be the highest and best use of the particular asset for the market participants. The Group applies various valuation techniques that would be relevant to the specific features of the respective conditions and for which it has sufficient available inputs while trying to use at a maximum the publicly observable information, and respectively, to minimize the use of unobservable information. It uses the three acceptable approaches – the market approach, the income approach and the cost approach – whereas the most frequently applied valuation techniques include direct and/or adjusted quoted market prices, market comparables (analogues) and discounted cash flows, including based on capitalised rental income. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 77 All assets and liabilities that are measured and/or disclosed in the consolidated financial statements at fair value, are categorised within the following fair value hierarchy, namely: · Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities; · Level 2 — Valuation techniques that use inputs other than directly quoted prices but are observable, either directly or indirectly, including where the quoted prices are subject to certain adjustments; and · Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised at fair value in the consolidated financial statements on a recurring basis, the Group determines at the date of the consolidated financial statement whether transfers between levels in the fair value hierarchy are deemed to be made for a particular asset or liability depending on the inputs available and used at that date. Internal rules and procedures for measuring the fair value of various types of assets and liabilities have been developed centrally in the parent company. For the purpose, a specifically designated individual, subordinated to the Finance Director of the Group, organised the performance of the overall valuation process and also coordinates and observes the work of the external appraisers. The Group uses the expertise of external certified appraisers to determine the fair value of the following assets and liabilities: other long-term equity investments Level 2 and Level 3, investment properties – Level 1, property, plant and equipment – Level 2. The choice of such appraisers is made on an annual basis using the following criteria: applied professional standards, professional experience and knowledge, reputation and market status. The need for rotation of external appraisers is periodically assessed – every three to five years. The applied valuation approaches and techniques as well as the used inputs for each case of fair value measurement are subject to mandatory discussion and coordination between the external experts – appraisers and the specifically designated individual, engaged with measurements, and so is the acceptance of the issued appraiser's reports – especially with regard to the significant assumptions and the final conclusions and proposals for the fair value amount. The final fair value measurements are subject to approval by the Finance Director and/or Chief Accountant, Executive Director and the Board of Directors of the respective company and the Finance Director of the Group. In accordance with Group accounting policy, at the end of each reporting period the specifically designated individual, engaged with measurements, performs a general analysis of collected in advance information about the movement in the values of assets and liabilities of the Group companies that are subject to valuation or to a disclosure at fair value, the type of available data and the possible factors for the observed changes, and proposes for approval to the Finance Director, the approach for measuring the fair value of the respective assets and liabilities at that date. Where necessary, this is explicitly consulted with the involved external appraisers. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 78 The results of the assessment of the fair value measurement procedure are presented to the audit committee and to the independent auditors of the respective companies as well as to the Finance Director and the independent auditors of the Group. For the purposes of fair value disclosures, the Group has classified the respective assets and liabilities on the basis of their nature, basic characteristics and risks as well as of the fair value hierarchical level. 2.32. Critical accounting judgments on applying the Group's accounting policies. Key estimates and assumptions of high uncertainty. Revenue from contracts with customers Upon revenue recognition and preparation of the consolidated annual financial statements, the management performs various judgements, estimates and assumptions that impact the revenue, costs, assets and liabilities accounted for and the respective disclosures thereto. As a result of the uncertainty regarding these assumptions and estimates, significant adjustments may occur in the carrying amount of the assets and liabilities concerned in the future, respectively the costs and revenue recorded. The key judgements and assumptions that materially impact the amount and term for recognition of revenue from contracts with customers, including the timing, transfer of the control of the promised finished goods, goods and/or services, the estimation of variable consideration for returned assets and volume rebates, are disclosed in Note 2.6.1. Fair value measurement of equity investments When the fair value of equity investments carried in the statement of financial positions cannot be obtained based on quoted prices on active markets, their fair value is determined by using other valuation models and techniques, including the discounted cash flows model. The input used in these models is obtained from observable markets, where possible, but when this cannot be done, significant judgement is applied to determine fair values. Such judgement involves the review, analysis and assessment of input, for instance regarding liquidity risk, credit risk, and volatility. The changes in assumptions for these factors may impact the amount of the fair value of financial instruments stated. Calculation of expected credit losses for loans and guarantees granted, trade receivables, including from related parties, and cash and cash equivalents The measurement of expected credit losses for financial assets stated at amortised cost (loans granted, trade receivables and contract assets, cash and cash equivalents), as well as for financial guarantees granted is an area that requires the use of complex models and material assumptions for future economic conditions and the credit behaviour of customers and debtors (for instance, the probability of counterparties not meeting their obligations and the pursuant losses). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 79 In order to apply these requirements, the Group’s management makes a number of material judgements, such as: (a) determining criteria to identify and measure significant credit risk increases; (b) selection of suitable models and assumptions to measure expected credit losses; (c) establishing groups of similar financial assets (portfolios) for the purpose of measuring expected credit losses, (d) establishing and assessing the correlation between historical default rates and the behaviour of certain macro indicators to reflect the effects of forecasts for these macro indicators in the calculation of expected credit losses. (Note 45). Regarding trade receivables, including from related parties The Group uses provisioning matrixes calculate expected credit losses from trade receivables and contract assets. The provision rates are based on days past due for groups from different customer segments (portfolios) sharing similar loss models (type of client sector). Each provisioning matrix is initially based on detailed historical observation of default rates in the Group companies’ receivables and the movement of receivables by delay groups. Usually, historical data is used for at least three years as per the financial statement’s date. Moreover, the Company calibrates the matrix so as to adjust historically ascertained dependence for credit losses with forecast information by also using probability scenarios. If certain forecast economic conditions, measured by means of certain macro indicators, are expected to aggravate or improve in the next year, which might result in established correlational increase in payment delays for a certain sector (type of client), the historic default rates are adjusted. At each reporting date, the observable historical default rates are updated and the effects of changes in the estimates are accounted for. The assessment of the relation between observable historical default rates, the forecast economic conditions and expected credit losses is a significant accounting judgement. The amount of expected credit losses is sensitive to changes in circumstances and forecast conditions. The Group’s historical credit closes and the forecast economic conditions may deviate from actual collection rates in the future. Regarding loans and guarantees granted: The Group has adopted the general approach for calculating impairment based expected credit losses of the loans granted, pursuant to IFRS 9. For this purpose, the Group applies a model of its choice. Its application goes through several stages. First, the debtor’s credit rating is determined by means of several rating agencies’ methodologies for the respective economic sectors and ratios, quantitative and qualitative parameters and indicators of the entity. Second, by using statistical models including historical default probability data (PD), transfer between ratings, macro-economic data and forecast, the relevant marginal PD are calculated by year for each rating. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 80 Third, based on this analysis and the determined rating, and based on a set of indicators for the instrument’s characteristics at the date of each financial statements, the following parameters are determined: instrument stage (Stage 1, Stage 2 or Stage 3), PD needed for the instrument’s lifetime, as well as loss given default (LGD). The main formula used to calculate expected credit losses is: ЕCL=EADxPDxLGD, where: ECL is the expected credit losses indicator; ЕAD is the exposure at default indicator; PD is the probability of default indicator; LGD is the loss given default indicator. Upon determining losses, all guarantees and/or collaterals and/or insurances are taken into consideration. Thus, in the final step, by using all these parameters and following discount, the expected credit loss for the respective period of the respective financial assets is calculated. Stage 1 includes loans granted which are classified as “regular” according to the internal risk classification scheme developed. These are loans granted to debtors with low default rates, regular servicing, without considerable aggravation of key indicators (financial and non-financial), and without amounts past due. The expected impairment loss for such loans is calculated based on default probability for the next 12 months and the Group’s expectation for loss amount upon exposure default over the next 12 months. Stage 2 includes granted loans classified as “renegotiated”. These are loans with respect to which (based on a set of indicators) a significant aggravation of the credit risk related to the debtor has been established as compared to the exposure’s initial recognition. The expected impairment loss for these loans is calculated based on the default probability for the lifetime of the loan which is considered to be credit-unimpaired, and the Group’s expectations for loss amount upon exposure default over the lifetime. Stage 3 includes granted loans which are classified as “underperforming”. These are loans for which evidence exists that the asset is credit-impaired, i.e. a credit event has occurred (according to the policy on default event eligibility). Therefore, an analysis is performed of a system of indicators used to identify the occurrence of credit losses. Impairment losses for such loans are calculated based on probability-weighted scenarios for the Group’s expectations for the loss amount of the non-performing credit-impaired exposure throughout its lifetime. A granted loan is credit-impaired when one or more events have occurred which have an adverse effect on expected future cash flows from this loan, accordingly financial assets. The Group applies the same model with respect to expected credit losses from guarantees granted and certain individual receivables. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 81 Cash To calculate expected credit losses for cash and cash equivalents at banks, the Group applies the general “three-stage” impairment model under IFRS 9. For this purpose, it applies a model based on the bank’s public ratings as determined by internationally recognised rating firms like Moody’s, Fitch, S&P, BCRA and Bloomberg. Based on this, on the one hand, PD (probability of default) indicators are set by using public data about PD referring to the rating of the respective bank, and on the other hand, through the change in the rating of the respective bank from one period to the next, the Company assesses the presence of increased credit risk. Loss given default is measured by using the above formula. Upon determining LGD, the presence of secured and/or insured amounts in the respective bank accounts is taken into consideration. Recognition of tax assets Upon recognition of deferred tax assets, the Group’s management assesses the probability of future reversal of individual temporary differences and the abilities of each Group’s company to generate sufficient profit to compensate such reversal. With respect to subsidiaries which have continued to state losses over the last few years, the Group’s management has identified as at the date of issuance of the consolidated financial statement significant uncertainty about whether and to what extent these companies would be able to generate sufficient taxable profit within the period designated under the respective local tax legislation on tax losses carry forward. . Inventories Normal capacity Group's normal production capacity is determined on the basis of management assessments (made after relevant analyses) for optimum load of the production facilities and return on the investments made therein, with structure of the manufactured finished products accepted as being common for the Group. Impairment At the end of each financial year, the Group companies review the state, useful life and usability of the existing inventories. In case of identified inventories bearing a potential of not being realised at their current carrying amount in the following reporting periods, the Group companies impair these inventories to net realisable value. Revaluation of property, plant and equipment As at 31 December 2021, a thorough review was performed of the changes which have occurred in the fair value of the Group companies’ non-current tangible assets, as well as of the physical and technical condition thereof, operation means and residual useful lives. Respectively, remeasurement was carried out, since at this date the five-year period for remeasurement adopted in accordance with the policy expires. The review and remeasurement were performed with the professional support of independent licensed appraisers. SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 82 The management has performed detailed analysis of the licensed appraisers’ reports, incl. the sensitivity tests. As a result, it has stated revaluation, and has recognized new revaluation reserve at the amount of BGN 9,466 thousand, net of impairment and deferred tax (Note 15) and deferred tax and has stated current impairment expense at the amount of BGN 9,779 thousand. In addition, a current expense for impairment was stated at the amount of BGN 697 thousand of PPE in process. The Group has decided to not revalue the following groups of assets: a/fully depreciated assets acquired before 31 December 2006, as far as the potential additional depreciation costs thereon are already offset by the increased maintenance costs; b/ assets acquired in 2021 – as far as these asset’s acquisition cost was close to their fair value; c/ right-of-use assets for which under agreements for consideration the right of control over the use of assets for a certain period of time is obtained, which as at 31 December 2021 is between 2 and 4 years; and d/ assets from all groups (with the exception of properties) for which the market analyses show that the changes in the value of these assets are not affected by price or market changes over the period, but result from differences in assumptions regarding useful life. The outcomes of the fair value measurement process are presented to the Group auditors. Actuarial calculations Calculations of certified actuaries have been used every year when determining present value of long-term payables to personnel upon retirement on the basis of assumptions for mortality rate, staff turnover rate, future salaries level and discount factor. Cash pool In 2021 a cash pool scheme was introduced at Sopharma Trading Group for the purpose of more effective short-term management of the group’s cash flows by gathering the bank balances of domestic subsidiaries within a single bank account. Participants’ balances are transferred on a daily basis to a main bank account managed by the cash pool leader – the subsidiary Sopharma Trading AD. Litigation provisions With regard to the pending litigations against companies of the Group, the management of respective companies have judged, jointly with their lawyers, that at this stage the probability and risks of a negative outcome therefrom is still below 50% and therefore, no provisions for payables under litigations have been included in the consolidated annual statement of financial position as at 31 December 2022 (31 December 2021: none). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 83 3. REVENUE FROM CONTRACTS WITH CUSTOMERS Group revenue from contracts with customers includes: 2022 2021 BGN'000 BGN'000 Revenue from sales of goods 1,379,123 1,328,372 Revenue from sales of finished products 283,893 274,938 Total 1,663,016 1,603,310 Contract balances are as follows: 2022 2021 BGN ‘000 BGN ‘000 Receivables under contracts with customers – third parties, net of impairment (Note 24) 195,208 199,988 Receivables under contracts with customers – related parties, net of impairment (Note 25) 250 660 Contract liabilities under contracts with customers – third parties (Note 42) 2,664 978 Contract liabilities at 31 December 2022 include advance payments received for the delivery of medical equipment, at the amount of BGN 2,652 thousand (31 December 2021: BGN 969 thousand) and for delivery of medicinal and medical products – BGN 12 thousand (31 December 2021: BGN 9 thousand). The change in contract liabilities for the period from 1 January to 31 December 2022 is as follows: 2022 2021 BGN'000 BGN'000 Balance at 1 January (Note 42) 978 154 Revenue stated, which was recognised as contract liabilities, incl.: (978) (154) - Advance payments received (978) (154) Payments from clients (excluding those recognised as revenue in the period) 2,664 978 Balance at 31 December 2,664 978 The reimbursement obligations as at 31 December 2022 amount to BGN 7,877 thousand (31 December 2021: BGN 2,631 thousand) and include liabilities under retrospective trade volume discounts payable under contracts with customers which have been or will be reimbursed over the next reporting period. (Note 42). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 84 4. OTHER OPERATING INCOME AND LOSSES Other operating income and losses, net include: 2022 2021 BGN'000 BGN'000 Services rendered 7,535 6,474 Rentals 1,312 1,260 Gain on change in the fair value of investment property (Note 18) 1,125 134 Government grants 841 1,482 Gain on sale of property, plant and equipment 498 406 Written-off liabilities and reversed provisions 426 751 Social activities and events 239 214 Gains/(losses) on exchange differences under trade receivables and payables and current accounts (180) 538 Interest on current accounts 149 213 Gain on sale of materials 128 84 Gain on leases 73 230 Other 896 2,044 Total 13,042 13,830 The services rendered include: 2022 2021 BGN'000 BGN'000 Fees to National Health Insurance Institute 1,933 1,052 Development services 1,701 1,442 Advertising and marketing 1,333 2,235 Pre-distribution income 980 870 Lab analyses 377 360 Gamma irradiation 301 228 Secondary packaging 233 142 Transport services 146 53 Other 531 92 Total 7,535 6,474 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 85 5. MATERIALS AND CONSUMABLES USED 2022 2021 BGN'000 BGN'000 Basic materials 63,331 53,096 Electric energy 10,682 9,281 Heating 7,078 4,052 Spare parts, laboratory and technical materials 6,863 5,455 Fuels and lubricating materials 4,418 3,040 Advertising materials 2,050 1,863 Work clothing and PPE 1,234 1,426 Stationery 999 948 Auxiliary materials 871 616 Water 479 700 Impairment of materials 385 996 Low-value and short-term objects 331 686 Other 408 963 Total 99,129 83,122 Expenses on basic materials include: 2022 2021 BGN'000 BGN'000 Substances 28,339 23,263 Packaging materials 12,143 10,328 Liquid and solid chemicals 10,099 8,583 Sanitary-hygienic and dressing materials 3,054 2,398 Foil 2,835 1,817 Ampoules 2,347 2,194 Vials 2,144 942 Herbs 1,065 2,073 Tubes 862 613 Polypropylene, polyethylene, polystyrene 266 435 Other 177 450 Total 63,331 53,096 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 86 6. HIRED SERVICES EXPENSE Hired services expense includes: 2022 2021 BGN'000 BGN'000 Advertising 20,007 27,410 Consulting services 11,331 10,607 Forwarding and transportation services 4,721 4,324 Subscription fees 4,517 4,256 Manufacturing 4,509 5,044 Buildings and equipment maintenance 3,781 3,164 Rentals and utilities 3,040 2,680 Bank and regulatory charges 2,280 2,592 Communications 2,144 2,078 Local taxes and charges 2,066 2,014 Security 2,010 2,022 Insurance 1,269 1,433 Commissions 1,228 1,388 Vehicle repair 842 838 Other 6,381 6,077 Total 70,126 75,927 The expenses accrued for the year for statutory audit of the separate and consolidated financial statements amount to BGN 677 thousand (2021: BGN 627 thousand). During the year, the statutory auditors of the financial statements of the parent company did not render other services (2021: services related to agreed-upon procedures engagement for checking the historical financial information included in a public offering of warrants prospectus. The consideration under this contract is BGN 7 thousand). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 87 7. EMPLOYEE BENEFITS EXPENSE 2022 2021 BGN'000 BGN'000 Current wages and salaries 117,776 119,856 Social security contributions 20,537 21,686 Social benefits and payments 4,918 4,192 Accruals for unused paid leaves 2,129 1,764 Accruals for long-term retirement benefits to personnel (Note 32) 1,344 946 Tantieme 737 1,308 Social security/health insurance contributions on leaves 388 309 Total 147,829 150,061 8. OTHER OPERATING EXPENSES 2022 2021 BGN'000 BGN'000 Net change in the allowance for impairment of credit losses on receivables, incl. from related parties (Note 9) 3,399 1,891 Entertainment allowances 1,991 2,266 Scrappage and shortage of goods 1,542 2,466 Fines and penalties to suppliers Impairment of goods, finished products and work in progress 1,465 2,037 Business trips 1,155 450 Scrappage of non-current assets 1,095 711 Unrecognised tax credit 928 420 Donations 620 800 Trainings 438 365 Scrappage of non-current assets 225 247 Scrappage of finished products and work in process 220 599 Receivables written-off 93 3,007 Other 1,203 836 Total 14,374 16,095 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 88 9. IMPAIRMENT OF ASSETS 2022 2021 BGN'000 BGN'000 Impairment of credit losses from receivables, including from related parties 6,811 5,238 Reversed impairment of credit losses from receivables, including from related parties (3,412) (3,347) Net change in allowance for impairment of credit losses on receivables, incl. from related parties (Note 8) 3,399 1,891 Impairment of goods, finished products and works in process (Note 8) 1,465 2,037 Impairment of inventories (Note 5) 385 996 Total 5,249 4,924 10. IMPAIRMENT OF NON-CURRENT ASSETS OUTSIDE THE SCOPE OF IFRS 9 2022 2021 BGN'000 BGN'000 Impairment of goodwill (Note 17) 9,601 - Impairment of property, plant and equipment (Note 16) 9,589 10,476 Impairment of investments in joint ventures (Note 19) 1,593 - Total 20,783 10,476 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 89 11. FINANCE INCOME Finance income includes: 2022 2021 BGN'000 BGN'000 Interest income on loans granted 2,223 2,248 Interest income on past due trade receivables 558 1,916 Net gain from exchange differences from receivable on transactions in securities 214 266 Interest income on special agreements 149 190 Interest income on cession agreements 71 - Income from guarantorships and guarantees 52 19 Shareholding income (dividends) 33 271 Interest income on bank deposits 4 35 Net gains from exchange differences from loans denominated in foreign currencies and leases - 1,489 Net gain on transactions with investments in securities - 152 Net change in the allowance for impairment of credit losses on receivables under business loans granted - 46 Total 3,304 6,632 12. FINANCE COSTS Finance costs include: 2022 2021 BGN'000 BGN'000 Interest expense on loans received 4,403 7,944 Net change in the allowance for impairment of credit losses on receivables under business loans granted 1,856 - Bank fees and charges on loans and guarantees 1,365 960 Interest expense on leases 1,141 1,751 Expense for other interest 391 382 Net loss on exchange differences from loans denominated in foreign currencies and leases 161 - Interest expense on factoring agreements 84 714 Provision for financial guarantees 16 45 Impairment of credit losses on guarantorship fees - 1 Total 9,417 11,797 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 90 13. GAINS/LOSSES FROM ASSOCIATES AND JOINT VENTURES 2022 2021 BGN'000 BGN'000 Gains from associates, net 22,866 12,088 (Losses)/gains from joint ventures, net (231) 4 22,635 12,092 The gains from associates include: 2022 2021 BGN'000 BGN'000 Group’s share in the current profit of associates 22,866 12,088 Total 22,866 12,088 The (losses)/gains from joint ventures, net include: 2022 2021 BGN'000 BGN'000 Group’s share in the current profit/(loss) of joint venture (224) 4 Effect of transactions with Group companies (7) - Total (231) 4 14. INCOME TAX EXPENSE Consolidated statement of comprehensive income 2022 2021 (profit or loss for the year) BGN'000 BGN'000 Taxable profit of the Group companies for the year 99,808 (13,958) Revaluation reserve included as an increase in the annual tax return (1,299) (439) Taxable profit for the year 98,509 (14,397) Current income tax expense for the year (Note 2.27) 11,399 5,732 Tax adjustment for past periods 143 106 Deferred income taxes Origination and reversal of temporary differences (2,799) 33 8,743 5,871 Total income tax expense carried to the consolidated statement of comprehensive income (within profit or loss for the year) SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 91 Reconciliation of income tax expense applicable to the consolidated accounting profit or loss 2022 2021 BGN'000 BGN'000 Accounting profit for the year 85,076 97,574 Income tax for the year (Note 2.27) 8,259 5,187 Unrecognised amounts under the tax return Related to increases 4,266 14,247 Related to decreases (5,837) (16,758) Tax loss for the current year on which no deferred tax assets are recognised 2,157 3,391 Decreases related to tax losses for which no tax asset was recognised in prior periods - (236) Recognised deferred taxes on temporary differences from prior periods (102) 40 Total income tax expense carried to the consolidated statement of comprehensive income (within profit or loss for the year) 8,743 5,871 The tax effects regarding items of other comprehensive income are as follows: 2022 2021 BGN'000 BGN'000 Pre -tax amount Tax benefit/ (expense) Amount net of tax Pre -tax amount Tax benefit/ (expense) Amount net of tax Items that will not be reclassified to profit or loss (Loss)/gain on revaluation of property, plant and equipment Net change in the fair value of other long-term equity investments (991) 99 (892) 10,616 (1,151) 9,465 ( 1,047) - ( 1,047) ( 355) - ( 355) Remeasurement of defined benefit pension plans 1,498 - 1,498 (25) 1 (24) (540) 99 (441) 10,236 (1,150) 9,086 Items that may be reclassified to profit or loss Exchange differences on translating foreign operations (4,637) - (4,637) (799) - (799) Share of other comprehensive income of associates (790) - (790) 3,708 - 3,708 (5,427) - (5,427) 2,909 - 2,909 Other comprehensive income for the year (5,967) 99 (5,868) 13,145 (1,150) 11,995 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 92 15. OTHER COMPREHENSIVE INCOME Other components of comprehensive income include: Items of other comprehensive income attributable to the Group Items of other comprehensive income attributable to non- controlling interests Total items of other comprehensive income 2022 2021 2022 2021 2022 2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Items that will not be reclassified to profit or loss Revaluation of property, plant and equipment (991) 10,636 - (20) (991) 10,616 Net change in the fair value of equity investments measured at fair value through other comprehensive income (1,047) (355) - - (1,047) (355) Remeasurement of defined benefit pension plans 1,355 (23) 143 (2) 1,498 (25) Income tax related to other comprehensive income 99 (1,151) - 1 99 (1,150) Items that may be reclassified to profit or loss - Foreign exchange differences from restatement of foreign operations (4,637) (341) - (458) (4,637) (799) Portion of other comprehensive income of associates (790) 3,708 - - (790) 3,708 Other comprehensive income for the year (6,011) 12,474 143 (479) (5,868) 11,995 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 93 16. PROPERTY, PLANT AND EQUIPMENT Land and buildings Plant and equipment Other Assets in progress Total 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Book value Balance at 1 January 305,758 334,672 269,771 265,882 51,271 54,541 4,798 10,209 631,598 665,304 Additions 54,257 14,601 3,602 2,587 5,892 6,491 17,256 12,896 81,007 36,575 Effect from revaluation - 5,568 - 3,325 - 763 - - - 9,656 Effects from translation of foreign currency (1,155) 1,626 (1,593) 809 (384) 332 (20) 26 (3,152) 2,793 Disposals (18,824) (18,267) (2,121) (6,026) (3,965) (7,602) (2,230) (107) (27,140) (32,002) Written-off book value of assets upon disposal of subsidiaries (503) (24,913) (47) (9,157) (254) (2,612) - (1,076) (804) (37,758) Impairment (9,589) (8,330) - (732) - - - (697) (9,589) (9,759) Transfer to property, plant and equipment 3,869 2,662 9,474 13,083 948 708 (14,291) (16,453) - - Transfer to/(from) assets held for sale - (1,861) - - - (1,350) - - - (3,211) Balance at 31 December 333,813 305,758 279,086 269,771 53,508 51,271 5,513 4,798 671,920 631,598 Balance at 1 January 305,758 334,672 269,771 265,882 51,271 54,541 4,798 10,209 631,598 665,304 Accumulated depreciation and impairment Balance at 1 January 78,719 83,149 160,348 153,283 30,138 33,000 - - 269,205 269,432 Depreciation charge for the year 20,602 22,907 15,041 14,571 6,723 6,566 - - 42,366 44,044 Effect from revaluation - (126) - (783) - (38) - - - (947) Impairment 991 (1,283) - 2,000 - - - - 991 717 Effects from translation of foreign currency (349) 646 (859) 457 (253) 170 - - (1,461) 1,273 Written-off depreciation (9,552) (15,036) (1,918) (5,730) (3,437) (6,763) - - (14,907) (27,529) Depreciation written-off upon disposal of subsidiaries (454) (11,017) (34) (3,450) (193) (1,517) - - (681) (15,984) Transfer to/(from) assets held for sale - (521) - - - (1,280) - - - (1,801) Balance at 31 December 89,957 78,719 172,578 160,348 32,978 30,138 - - 295,513 269,205 Carrying amount at 31 December 243,856 227,039 106,508 109,423 20,530 21,133 5,513 4,798 376,407 362,393 Carrying amount at 1 January 227,039 251,523 109,423 112,599 21,133 21,541 4,798 10,209 362,393 395,872 SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 94 As at 31 December 2022, the tangible fixed assets of the Group within “land and buildings” include: land amounting to BGN 60,252 thousand (31 December 2021: BGN 60,904 thousand) and buildings of carrying amount BGN 183,604 thousand (31 December 2021: BGN 166,135 thousand). Tangible fixed assets in progress as at 31 December include: · expenses on new buildings construction – BGN 1,495 thousand (31 December 2021: BGN 909 thousand); · buildings reconstruction – BGN 813 thousand (31 December 2021: BGN 1,278 thousand); · supply of equipment – BGN – 488 thousand (31 December 2021: BGN 41 thousand); · expenses for acquisition of biological assets – none (31 December 2021: BGN 138 thousand); · advances granted – BGN 2,567 thousand (31 December 2021: BGN 2,258 thousand); · other – BGN 150 thousand (31 December 2021: BGN 174 thousand). The total cash outflow from leases in 2022 amounts to BGN 16,081 thousand (2021: BGN 20,477 thousand). As at 31 December 2022, the Group has leased fixed tangible assets with carrying amount of BGN 1,260 thousand (31 December 2021: BGN 1,294 thousand). As at 31 December 2022 Property, plant and equipment include right-of-use assets with carrying amounts respectively: in the group of “land and buildings” – BGN 78,470 thousand (31 December 2021: BGN 48,126 thousand), within “others” – BGN 6,546 thousand (31 December 2021: BGN 6,297 thousand). Right-of-use assets are disclosed in detail in Note 33. Other data The following encumbrances have been constituted on tangible fixed assets of the Group as at 31 December 2022 in relation to received loans (Notes 29 and 36) as follows: · Land and building with a carrying amount respectively of BGN 27,459 thousand and BGN и 58,194 thousand (31 December 2021: respectively, BGN 26,644 thousand and BGN 72,468 thousand); · Pledges on facilities with carrying amount of BGN 131 thousand (31 December 2021: BGN 141 thousand); · Pledges on equipment, transportation vehicles and furniture and fixtures – BGN 30,045 thousand (31 December 2020: BGN 35,383 thousand). Periodical revaluation to fair value Revaluation of property, plant and equipment was performed as at 31 December 2021 with the assistance of an independent certified appraiser for the purpose of determining the fair value of the assets in accordance with the requirements of IFRS 13 and IAS 16. During this revaluation, the following main approaches and valuation methods were applied to measure the fair value of the different types of tangible assets: · ‘market approach’ and ‘market comparables’ approach – for regulated land plots and agricultural land for which an actual market exists, there are market comparables and transactions therewith and there is basis for comparison – the fair value adopted is the market value determined using the comparative method; SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 95 · ‘cost approach’ through ‘amortised recoverable amount’ method and ‘method based on the cost to create or replace the asset’ – for specialized buildings, machinery, equipment, facilities and other assets for which there is no actual market and comparable sales of comparable assets – the fair value adopted is the amortised recoverable amount based on the indexed historical value of the asset and based on current costs to create or replace the asset. · ‘income approach’ through ‘capitalized income on use/production of biological assets’ – for permanent yellow acacia crops in fruit-bearing stage. The effects of remeasurement as at 31 December 2021 are as follows: · Measurement to fair value as at 31 December 2021, carried to the statement of comprehensive income (within profit or loss for the year) at the amount of BGN 10,476 thousand, incl. 697 thousand for property, plant and equipment in process (Note 10); · Measurement to fair value carried to the statement of comprehensive income (within other comprehensive income) at the amount of BGN 10,616 thousand, incl. effect of measurement to fair value in a joint venture (Note 15). SOPHARMA GROUP NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 96 17. INTANGIBLE ASSETS Goodwill Software Intellectual property rights Assets in progress Total 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Book value Balance at 1 January 31,308 31,157 33,265 27,696 61,638 88,183 2,847 2,458 129,058 149,494 Additions - - 2,624 4,928 81 35 1,442 1,998 4,147 6,961 Effects from translation of foreign currency (257) 151 (25) 249 19 40 - 3 (263) 443 Transfer - - 1,134 857 51 374 (1,185) (1,231) - - Written-off book value of assets upon disposal of subsidiaries (40) - - (345) (643) (22,858) - (41) (683) (23,244) Disposals - - (15) (120) (353) (4,136) (347) (340) (715) (4,596) Balance at 31 December 31,011 31,308 36,983 33,265 60,793 61,638 2,757 2,847 131,544 129,058 Accumulated amortisation and impairment Balance at 1 January 17,888 17,888 15,707 13,225 27,622 46,840 - - 61,217 77,953 Amortisation charge for the year - - 3,366 2,673 6,496 6,575 - - 9,862 9,248 Impairment 9,601 - - - - - - - 9,601 - Effects from translation of foreign currency - - (17) 241 20 19 - - 3 260 Asset amortisation written-off upon disposal of subsidiaries - - - (318) (473) (22,609) - - (473) (22,927) Amortisation written-off - - (4) (114) (335) (3,203) - - (339) (3,317) Balance at 31 December 27,489 17,888 19,052 15,707 33,330 27,622 - - 79,871 61,217 Carrying amount at 31 December 3,522 13,420 17,931 17,558 27,463 34,016 2,757 2,847 51,673 67,841 Carrying amount at 1 January 13,420 13,269 17,558 14,471 34,016 41,343 2,847 2,458 67,841 71,541 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 97 Intangible assets in progress as at 31 December include: · expenses on acquiring licenses and permits for use of medicinal products – BGN 1,117 thousand (31 December 2021: BGN 1,438 thousand); · expenses on acquisition of software – BGN 1,356 thousand (31 December 2021: BGN 734 thousand); · advances granted – BGN 99 thousand (31 December 2021: BGN 409 thousand); · other – BGN 185 thousand (31 December 2021: BGN 266 thousand). As at 31 December 2022 there are pledges in relations to loans obtained by the Group on software with carrying amount BGN 2,856 thousand (31 December 2021: BGN 2,578 thousand) (Notes 29 and 36). The rights on intellectual property include products of development activities related to medicinal substances (active ingredients) and dosage forms, acquired patents and trademarks and complex intangible assets (licences and pharmacy chain locations). Within the total intellectual property owned by the Group the largest share belongs to internally created trademarks, which have not been capitalised in the consolidated statement of financial position. These trademarks grant exceptional rights on the names of pharmaceuticals while those with biggest relative share in the sales of the Group are: Carsil, Tempalgin, Broncholitin, Tabex, Analgin, Tribestan, Vicetin, Sydnopharm, Antistenocardin, Spasmalgon, Softensif, Chlofadon, Chlofasolin, Sofafailin, Sopral, Vasopren, Buscolisin, Nivalin, Maraslavin, Dimex, Allergosan, Aminalon. The Group holds a patent for production of dosage forms containing Ranitidin. The intangible assets acquired through business combinations mainly in Serbia, include the exclusive contracts with counterparts, licences and a distribution network. Goodwill impairment The management of the Group performed the necessary procedures for the mandatory test for impairment of the goodwill, recognised in the consolidated statement of financial position, on the acquisition of a subsidiary. For the purpose, each individual company was accepted as a 'cash-generating unit'. The (pre-tax) projected cash flows were based on the financial budgets, developed by the management of the respective companies and of the Group as a whole, that covered 3 to 5-year period as well as other medium- term and long-term plans and intents for the development and restructuring of the activities within the Group. The recoverable amount of each cash generating unit was determined on the basis of the 'value in use'. The key assumptions used in the calculations had been determined specifically for each goodwill bearing company, treated as a separate cash-generating unit, and in line with the characteristic features of its operations, the business environment and risks. The tests and judgments of Group's management for impairment of recognised goodwill were made through the prism of its projections and intents as to the future economic benefits, expected by the Group from its subsidiaries including through the use of their internally created trademarks, commercial and industrial experience and the generated thereby and expected for the future volumes of revenue, ensuring position in the Bulgarian and international markets (development and retaining), the expectations for future sales and restructuring of the activities, etc. SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 98 As a result of the analyses performed the Group management, the impairment of goodwill recognised as at 31 December 2022 amounts to BGN 9,601 thousand (31 December 2021: none). 18. INVESTMENT PROPERTY 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 9,446 11,691 Net gain from adjustment to fair value through profit or loss (Note 4) 1,125 134 Disposals (3) (2,379) Balance at 31 December 10,568 9,446 Investment property represents buildings and the land they stand on, differentiated parts of buildings for independent use, intended for long-term lease. By group they are as follows: Group of assets 31.12.2022 31.12.2021 BGN '000 BGN '000 Warehouse premises 5,139 4,534 Production buildings 2,720 2,639 Offices 2,199 1,825 Social objects 510 448 Total 10,568 9,446 Fair value measurement Fair value hierarchy The fair values of the groups of investment properties are categorised as Level 2 fair values based on the inputs to the valuation technique used. The investment property remeasurement to fair value is recurring and is due to the application of the fair value model under IAS 40. It is performed regularly at the end of each reporting period. Fair value is determined with the assistance of independent certified appraisers. The table below shows reconciliation between the opening and closing balances of the fair values of investment properties measured at Level 2: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 99 Warehouse premises Offices Production buildings Social objects Total Balance at 1 January 2021 4,631 4,048 2,578 434 11,691 Additions (143) (2,236) - - (2,379) Remeasurement to fair value through profit or loss – unrealised 46 13 61 14 134 Balance at 31 December 2021 4,534 1,825 2,639 448 9,446 Remeasurement to fair value through profit or loss – unrealised 608 374 81 62 1,125 Disposals (3) - (3) Balance at 31 December 2022 5,139 2,199 2,720 510 10,568 Valuation techniques and significant unobservable inputs The table below shows a description of the valuation techniques, used in measuring the fair value of all groups of Level 2 investment properties as well as the used significant unobservable inputs: Groups of assets (Level 2) Valuation approaches and techniques Significant unobservable inputs Warehouse premises Production buildings a. Income approach a. Weighted rate of return Valuation technique: Method of capitalised rental income as application of discounted cash flows (main valuation technique) b. Term to entrance into rental deals b. Cost approach Adjusted prices for construction of identical properties and purchase prices of machinery and equipment, similar to those attached Valuation technique: Method of replacement costs – depreciated recoverable amount (ancillary supportive valuation technique) Offices Social objects a. Income approach a. Weighted rate of return b. Term to entrance into rental deals Valuation technique: Method of capitalised rental income as application of discounted cash flows (main valuation technique) b. Market approach Valuation technique: Comparability adjustments Market multiples method (supportive valuation technique) SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 100 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 31.12.2022 31.12.2021 BGN '000 BGN '000 Investments in associates 162,678 125,337 Investments in joint ventures 166 1,983 Total 162,844 127,320 19.1. Investments in associates As at 31 December 2022, the Group has significant influence in % interest Carrying amount Date of shares acquisition BGN'000 Doverie Obedinen Holding AD 24.998% 99,557 21.12.2016 Sopharma Properties REIT 41.05% 63,121 8.12.2021 162,678 As at 31 December 2021, the Group has significant influence in: % interest Carrying amount Date of shares acquisition BGN'000 Doverie Obedinen Holding AD 24.998% 81,696 21.12.2016 Sopharma Properties REIT 32.77% 43,641 8.12.2021 125,337 The principal activities of Doverie Obedinen Holding AD include acquisition, management, valuation and disposal of shares/interest in Bulgarian and foreign companies. Doverie Obedinen Holding Group includes 18 subsidiaries. They perform operations mainly in the following sectors and areas: trade in DIY goods, insurance medical services, and textile industry. The shares of Doverie Obedinen Holding AD are traded on the stock exchange, and the average monthly price of transactions realised in December 2022 is BGN 7,94 per share (December 2021: BGN 10,36). The book value per share based on accounting net assets in 2022 is BGN 2.14 (2021: BGN 2.27). Sopharma Properties REIT is an associate whose principal activities include investment of cash raised by issue of securities in real estate by means of purchasing right of ownership and other rights in rem over real estate, lease and/or sale. The company has had an associate status since 8 December 2021. SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 101 The shares of Sopharma Properties REIT are traded on the stock exchange, and the average monthly price of transactions realised in December 2022 is BGN 9.42 per share (December 2021: BGN 6.20). The book value per share based on accounting net assets in 2022 is BGN 3.66 (2021: BGN 3.35). The movement of the investments in associates is presented below: 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 125,337 62,811 Share in the current profit for the period 22,866 12,088 Acquisition of shares 16,480 17,920 Share in other comprehensive income (790) 3,709 Dividends (1,215) - Transfer from other non-current equity investments - 25,989 Share issue - 2,880 Share sale - (60) Balance at 31 December 162,678 125,337 Group's share in the assets, liabilities, revenue and results of associates is as follows: 31.12.2022 Share in assets Share in liabilities Share in revenue Share in current profit for the period Share in other comprehensive income Interest BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 % Doverie Obedinen Holding AD 509,302 413,448 124,274 18,651 (790) 24.998 Sopharma Properties REIT 37,935 4,956 5,884 4,215 - 41.05 31.12. 2021 Share in assets Share in liabilities Share in revenue Share in current profit for the period Share in other comprehensive income Interest BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 % Doverie Obedinen Holding AD 485,274 407,162 82,310 11,995 3,709 24.998 Sopharma Properties REIT 29,067 4,973 219 93 - 32.77 19.2. Investments in joint ventures As at 31 December 2022 the Group exercises joint control over Momina Krepost AD: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 102 % interest Carrying amount Date of acquisition of interest BGN'000 Momina Krepost AD 37.46 166 10.3.2021 As at 31 December 2021 the Group exercises joint control over Momina Krepost AD: % interest Carrying amount Date of acquisition of interest BGN'000 Momina Krepost AD 37.46 1,983 10.3.2021 Momina Krepost AD is a joint venture whose principal activities include development, implementation and production of medicinal products for human and veterinary medicine. As from 10 March 2021 the company has been a joint venture. The movement of investments in joint ventures is presented below: 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 1,983 - Impairment (1,593) - Share in current profit for the period (224) 4 Transfer of investments in subsidiaries - 1,694 Effect of remeasurement of previously held shares at fair value - 272 Share in other comprehensive income - 13 Balance at 31 December 166 1,983 19.3. General information about associates The table below presents summarised financial information on Group’s associates. Financial indicators Doverie Obedinen Holding AD Sopharma Properties REIT Summarised information from the statement of financial position 31.12.2022 31.12.2022 BGN’000 BGN’000 Current assets 1,689,098 2,502 Non-current assets 1,028,694 89,910 Current liabilities (1,117,533) (10,436) Non-current liabilities (1,082,352) (1,637) Net assets 517,907 80,339 including Non-controlling interest (128,533) - Adjustment to fair value (5,925) - 383,449 80,339 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 103 Summarised information from the statement of comprehensive income 2022 2022 BGN’000 BGN’000 Revenue 497,137 14,334 Net profit for the year 71,775 10,267 Other comprehensive income for the year, net of tax (3,159) - Adjustment to fair value 2,835 - Total comprehensive income for the year 71,451 10,267 Consolidated indicators Financial indicators Doverie Obedinen Holding AD Sopharma Properties REIT Summarised information from the statement of financial position 31.12.2021 31.12.2021 BGN’000 BGN’000 Current assets 1,575,921 1,998 Non-current assets 1,026,280 86,701 Current liabilities (1,002,963) (10,487) Non-current liabilities (1,170,564) (4,687) Net assets 428,674 73,525 including Non-controlling interest (107,464) - Adjustment to fair value (8,760) - 312,450 73,525 Summarised information from the statement of comprehensive income 2021 2021 BGN’000 BGN’000 Revenue 329,238 669 Net profit for the year 44,792 285 Other comprehensive income for the year, net of tax 14,834 - Adjustment to fair value 3,190 - Total comprehensive income for the year 62,816 285 Consolidated indicators The table below presents the reconciliation between the summarised financial information on the material interests in associates and their carrying amount at 31 December, included in these consolidated financial statements: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 104 Doverie Obedinen Holding AD S opharma Properties REIT 31.12.2022 31.12.2022 BGN’000 BGN’000 Net assets 383,449 80,339 Group’s share (%) 24.998% 41.05% Group’s share in net assets 95,855 32,979 Goodwill and other adjustments 3,702 30,142 Carrying amount of investment 99,557 63,121 Doverie Obedinen Holding AD Sopharma Properties REIT 31.12.2021 31.12.2021 BGN’000 BGN’000 Net assets 312,450 73,525 Group’s share (%) 24.998% 32.77% Group’s share in net assets 78,113 24,094 Goodwill and other adjustments 3,583 19,547 Carrying amount of investment 81,696 43,641 19.4. General information about joint ventures The table below presents summarised financial information on Group’s joint ventures. Financial indicators Momina Krepost AD Momina Krepost AD 31.12.2022 31.12.2021 Summarised information from the statement of financial position BGN’000 BGN’000 Current assets, including 5,345 5,881 Cash and cash equivalents 61 28 Non-current assets 10,860 11,065 Current liabilities, including (6,707) (8,030) Current financial liabilities - (1,644) Non-current liabilities, including (6,753) (5,586) Non-current financial liabilities - (2,500) Net assets 2,745 3,330 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 105 Summarised information from the statement of comprehensive income 2022 2021 BGN’000 BGN’000 Revenue 3,097 3,326 Depreciation and amortisation expense (334) (249) Interest cost (183) (85) Income tax (expense)/saving (5) 4 Net profit/(loss) for the year (598) 10 Other comprehensive income for the year, net of tax 13 23 Total comprehensive income for the year (585) 33 The table below presents the reconciliation between the summarised financial information on the material interests in joint ventures and their carrying amount at 31 December, included in these consolidated financial statements: Momina Krepost AD Momina Krepost AD 31.12.2022 31.12.2021 BGN’000 BGN’000 Net assets 2,745 3,330 Group’s share (%) 37.46% 37.46% Group’s share in net assets 1,028 1,247 Goodwill and other adjustments (862) 736 Carrying amount of investment 166 1,983 19.5. Cash flows from acquisition of interest/shares in associates 31.12.2022 31.12.2021 Cash flows from acquisition of interest/shares: BGN'000 BGN'000 Cash flows on acquisition of shares (16,480) (20,800) Cash flows on sale of shares - 213 (16,480) (20,587) SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 106 20. OTHER LONG-TERM EQUITY INVESTMENTS Other long-term equity investments include shares in the following companies: Country 31.12.2022 Interest 31.12.2021 Interest BGN '000 % BGN '000 % Traded securities Lavena AD Bulgaria 3,788 13.22 4,919 13.23 Chimimport AD Bulgaria 367 0.19 548 0.27 Bulgarian Stock Exchange AD Bulgaria 202 0.34 - - MFG Invest AD Bulgaria 169 0.46 - - Sopharma Buildings REIT Bulgaria 111 10.25 85 10.25 Achieve Life Sciences Inc. – USA USA 8 0.01 23 0.02 Central Cooperative Bank AD Bulgaria - - 70 0.06 4,645 5,645 Non-traded securities Balkanpharma Razgrad AD Bulgaria 70 - 70 - Imventure 1 KDA Bulgaria 50 1.36 50 1.36 Total 13 - 13 - 133 133 4,778 5,778 As at 31 December 2022, within “others” are stated long-term equity investments at the amount of 13 thousand (31 December 2021: BGN 13 thousand) in Group’s non-controlling interest in a total of four companies (31 December 2021: four companies). The fair value per share at 31 December 2022 and 31 December 2021 by companies is as follows: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 107 Number of shares Fair value per share 31.12.2022 Number of shares held Fair value per share 31.12.2021 BGN '000 BGN '000 Equity investments Lavena AD 1,311,183 2.89 3,788 1,312,102 3.75 4,919 Chimimport AD 463,476 0.79 367 651,045 0.84 548 Bulgarian Stock Exchange AD 22,300 9.04 202 - - - MFG Invest AD 50,000 3.38 169 - - - Sopharma Buildings REIT 66,627 1.67 111 66,627 1.28 85 Achieve Life Sciences Inc. – USA 1,796 4.70 8 1,796 12.64 23 Central Cooperative Bank AD 1 1.64 - 69,934 1.01 70 Total 4,645 5,645 Equity investments Fair value (Level 1) (Level 2) 31.12.2022 BGN'000 BGN'000 BGN'000 Lavena AD 3,788 - 3,788 Chimimport AD 367 367 - Bulgarian Stock Exchange AD 202 202 - MFG Invest AD 169 169 - Sopharma Buildings REIT 111 - 111 Achieve Life Sciences Inc. – USA 8 8 - Total 4,645 746 3,899 Equity investments Fair value (Level 1) (Level 2) 31.12.2021 BGN'000 BGN'000 BGN'000 Lavena AD 4,919 - 4,919 Chimimport AD 548 548 - Sopharma Buildings REIT 85 - 85 Central Cooperative bank AD 70 70 - Achieve Life Sciences Inc. - USA 23 23 - Total 5,645 641 5,004 The table below shows the movement between the opening and closing balances of the fair values at Level 1 and Level 2: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 108 Level 1 Level 2 Total BGN'000 BGN'000 BGN'000 Balance at 1 January 2021 6,518 5,028 11,546 Purchases 22,189 149 22,338 Sales (2,004) (35) (2,039) Transfer to investments in associates (25,989) - (25,989) Transfer from investment in subsidiaries - 144 144 Unrealised gain/(loss) included in other comprehensive income ( Note 15) (73) (282) (355) Balance at 31 December 2021 641 5,004 5,645 Purchases 674 1 675 Sales (624) (4) (628) Unrealised gain/(loss) included in other comprehensive income ( Note 15) 55 (1,102) (1,047) Balance at 31 December 2022 746 3,899 4,645 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES The long-term receivables from related parties as at 31 December include: 31.12.2022 31.12.2021 BGN '000 BGN '000 Long-term loans granted to related parties 63,355 49,792 Impairment of credit losses (157) (97) Long-term loans granted to related parties, net 63,198 49,695 Receivable under cession agreements 3,757 - Deposits placed under leases 580 1 Impairment of credit losses (64) - Deposits placed under leases, net 516 1 Total 67,471 49,696 The long-term loans are granted to an associate and to companies controlled by an associate. The movement in the allowance for impairment of receivables to related parties under long-term loans granted is as follows: SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 109 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 97 118 Increase in the allowance for credit losses recognised in profit or loss for the year 60 - Decrease in the allowance for credit losses recognised in profit or loss for the year - (21) Balance at 31 December 157 97 The terms and conditions of the long-term loans granted to related parties are as follows: Currency Contracted amount Maturity Interest % 31.12.2022 31.12.2021 '000 BGN'000 BGN'000 BGN'000 BGN'000 including interest including interest BGN 83,400 31.12.2025 3.00% 51,147 731 49,695 95 BGN 10,000 31.12.2024 4.36% 10,040 40 - - BGN 2,000 31.12.2024 3.09% 2,011 11 - - 63,198 782 49,695 95 The long-term loans granted to related parties are intended to support the financing of these companies' activities under common strategic objectives. They are secured by pledges on securities (shares) and promissory notes. 22. OTHER LONG-TERM RECEIVABLES The other non-current receivables of the Group include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Receivables on transactions in securities 3,668 3,454 Impairment of credit losses (142) (216) Receivables from transactions in securities, net 3,526 3,238 Loans granted 1,956 6,314 Impairment of credit losses (459) (6) Loans granted, net 1,497 6,308 Deposits on long-term rental agreements 642 623 Other 29 53 Total 5,694 10,222 The receivables on transactions in securities constitute receivables on a sold investment in a subsidiary maturing on 30 September 2024, which is related to the completion of statutory actions on registration of medical product permits. SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 110 The movement in the allowance for impairment of loans granted is as follows: 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 6 12 Increase in the allowance for credit losses recognised in profit or loss for the year 459 6 Transfer of the allowance to other short-term receivables (6) (12) Balance at 31 December 459 6 The movement in the allowance for impairment of receivable from an transactions in securities is as follows: 31.12.2022 31.12.2021 BGN '000 BGN '000 Balance at 1 January 216 297 Decrease in the allowance for credit losses recognised in profit or loss for the year (74) (81) Balance at 31 December 142 216 The terms and conditions of the long-term loans granted to third parties are as follows: Currency Contracted amount Maturity Interest % 31.12.2022 31.12.2021 '000 BGN'000 BGN'000 BGN'000 BGN'000 incl. interest incl. interest EUR 1,000 22.12.2024 0.10% 1,497 - - - EUR 3,000 29.6.2023 3.05% - - 6,308 440 1,497 - 6,308 440 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 111 23. INVENTORIES Inventories include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Goods 192,795 188,186 Materials 45,168 35,710 Finished products 28,097 17,608 Work in progress 10,540 8,421 Semi-finished products 1,983 6,024 Total 278,583 255,949 Materials by type are as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Basic materials 41,570 30,118 Materials in transit 1,257 3,041 Spare parts and consumables 1,194 1,313 Supplementary materials 392 484 Technical materials 344 527 Other 411 227 Total 45,168 35,710 Basic materials by type are as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Substances 20,729 18,431 Chemicals 8,061 4,204 Vials, tubes and ampoules 3,411 2,817 PVC and aluminium foil 3,294 1,154 Packaging materials 2,341 1,803 Herbs 1,875 401 Sanitary-hygienic and dressing materials 1,785 1,202 Other 74 106 Total 41,570 30,118 As at 31 December 2022, there were established special pledges on inventories at the amount of BGN 167,446 thousand (31 December 2021: BGN 119,303 thousand) as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 112 24. TRADE RECEIVABLES Trade receivables include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Receivables from customers 201,500 204,669 Impairment of credit losses (6,292) (4,681) Receivables from customers, net 195,208 199,988 Advances and other receivables from suppliers 24,511 22,954 Impairment of credit losses (167) - Advances granted and other receivables from suppliers, net 24,344 22,954 Receivables under cession agreements 4,890 4,890 Total 224,442 227,832 The receivables from customers are interest-free and are mainly denominated in BGN, RSD and EUR. Usually the Group companies negotiate with their clients payment terms within the range of 30 to 180 days for receivables under sales unless there are determined specific conditions for maturity for particular clients or in the cases where new markets and products are developed and new trade counterparts are attracted. The Group has set a common credit period of 180 days for which no interest is charged to clients, with the exception of cases of restructured receivables under a special agreement, setting a longer period and interest rates. In case of sale of medical equipment to hospitals, the credit period could exceed 2 years, due to the specific financial characteristics of counterparts. The movement in the allowance for impairment of trade receivables from third parties is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Balance at 1 January 4,681 5,546 Increase in the allowance for credit losses recognised in profit or loss for the year, net 3,999 1,099 Transfer from court and awarded receivables 150 - Transfer of the allowance to court and awarded receivables - (484) Effect of foreign currency restatements (42) 318 Amounts written-off as uncollectable (1,803) (155) Impairment written-off upon sale of subsidiary (526) (1,643) Balance at 31 December 6,459 4,681 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 113 The age structure of non-matured (regular) trade receivables is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 up to 30 days 80,282 73,649 from 31 to 90 days 80,029 86,325 from 91 to 180 days 3,057 4,481 from 181 to 365 days 750 2,765 from 1 to 2 years 2,496 4,640 over 2 years 3,002 23 Gross amount of non-matured (regular) trade receivables 169,616 171,883 Expected credit losses (325) (1,179) Non-matured (regular) trade receivables, net 169,291 170,704 The allowance for impairment of non-matured (regular) trade receivables is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 up to 30 days 196 446 from 31 to 90 days 100 194 from 91 to 180 days 26 49 from 181 to 365 days - 489 from 1 to 2 years 1 1 over 2 years 2 - Total 325 1,179 The age structure based on invoice date of past due trade receivables is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 from 31 to 90 days 18,101 10,761 from 91 to 180 days 6,248 9,304 from 181 to 365 days 3,623 5,612 from 1 to 2 years 2,804 6,835 over 2 years 1,108 274 Gross amount of past due trade receivables 31,884 32,786 Impairment of credit losses (5,967) (3,502) Past due trade receivables, net 25,917 29,284 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 114 The allowance for impairment of credit losses from past due trade receivables is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 from 31 to 90 days 47 902 from 91 to 180 days 14 359 from 181 to 365 days 2,231 521 over 365 days 3,675 1,720 Total 5,967 3,502 Most past due receivables are from state hospitals. It is the Group’s policy, with respect to all past due receivables, to accrue, invoice and collect default interest, by means of which it fully compensates for the payment delayed and the expense/losses incurred, both for special agreements with the respective debtor – hospital, and for litigation. The Group applies the simplified approach under IFRS 9 to measure expected credit losses from trade receivables, by recognising expected credit losses for the life term of all trade receivables (Note 2.16). Based on this, the loss allowance at 31 December 2022 and 31 December 2021 has been determined as follows: 31 December 2022 Current Up to 90 days past due 90-365 days past due Over 365 days past due Total Expected % of credit losses 0.19% 0.28% 23.03% 95.34% 3.12% Trade receivables (gross carrying amount) BGN'000 169,616 18,136 9,946 3,802 201,500 Expected credit loss (impairment allowance) BGN'000 (325) (51) (2,291) (3,625) (6,292) 31 December 2021 Current Up to 90 days past due 90-365 days past due Over 365 days past due Total Expected % of credit losses 0.69% 8.12% 5.84% 26.01% 2.29% Trade receivables (gross carrying amount) BGN'000 171,883 11,114 15,060 6,612 204,669 Expected credit loss (impairment allowance) BGN'000 (1,179) (902) (880) (1,720) (4,681) SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 115 As at 31 December 2022, there are established special pledges on trade receivables at the amount of BGN 82,262 thousand (31 December 2021: BGN 157,029 thousand). They are established as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). The advances granted to suppliers are regular and are mainly denominated in BGN and EUR and are for the purchase of: 31.12.2022 31.12.2021 BGN'000 BGN'000 Goods 19,214 20,584 Services 3,026 715 Raw materials and consumables 1,957 1,655 Other 314 - Impairment of credit losses (167) - Total 24,344 22,954 25. RECEIVABLES FROM RELATED PARTIES Receivables from related parties by type are as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Trade loans granted 13,996 13,621 Impairment of credit losses (1,340) - Trade loans granted, net 12,656 13,621 Receivables under contracts with customers 307 706 Impairment of credit losses (57) (46) Receivables under contracts with customers, net 250 660 Receivables under guarantorships and guarantees granted 4 9 Impairment of credit losses (1) (1) Receivables under guarantorships and guarantees granted, net 3 8 Receivables under deposits granted - 189 Advances granted - 1 Total 12,909 14,479 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 116 The trade loans granted to related parties are unsecured and are as follows: Currency Contracted amount Maturity Interest 31.12.2022 31.12.2021 '000 % BGN '000 BGN '000 BGN '000 BGN '000 including interest includin g interest to companies controlled by associates BGN 10,997 31.12.2023 3.10% 8,512 463 8,263 215 BGN 4,000 31.12.2023 3.33% 4,144 144 4,011 11 to joint ventures BGN 3,500 31.12.2022 3.50% - - 1,347 27 Total: 12,656 607 13,621 253 The receivables from contracts with customers are interest-free and denominated in BGN. The Group companies usually negotiate payment terms between 90 and 180 days for receivables on sales of finished products and up to 30 days for receivables on sales of materials (including substances – active ingredients). The Group applies the simplified approach under IFRS 9 to measure expected credit losses from trade receivables, by recognising expected losses for the life term of all trade receivables (Note 2.16). The movement in the loss allowance for impairment of receivables from related parties is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Balance at 1 January 47 76 Increase in the allowance for credit losses recognised in profit or loss for the year 1,398 - Decrease in the allowance for credit losses recognised in profit or loss for the year (47) (29) Balance at 31 December 1,398 47 The age structure of non-matured (regular) trade receivables from related parties is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 up to 30 days 250 108 from 31 to 90 days - 59 Total 250 167 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 117 The age structure based on invoice date of past due but not impaired trade receivables from related parties is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 from 31 to 90 days - 236 from 91 to 180 days - 247 from 1 to 2 years 57 56 Gross amount of past due trade receivables from related parties 57 539 Impairment of credit losses (57) (46) Total - 493 26. OTHER SHORT-TERM RECEIVABLES AND ASSETS Other receivables and prepayments of the Group include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Taxes refundable 13,019 15,845 Court and awarded receivables 13,649 15,609 Impairment of court and awarded receivables (1,002) (1,639) Court and awarded receivables, net 12,647 13,970 Loans granted to third parties 8,320 1,804 Impairment of credit losses on loans to third parties (3) - Loans granted to third parties, net 8,317 1,804 Prepayments 2,236 2,003 Receivables under deposits placed as guarantees 147 318 Funds granted to investment intermediaries 46 200 Receivables under investment transactions - 417 Other 290 693 Total 36,702 35,250 Taxes refundable include: 31.12.2022 31.12.2021 BGN'000 BGN'000 VAT 6,984 8,202 Excise tax 4,823 5,841 Income tax 1,188 1,797 Local taxes and charges and other taxes 24 5 Total 13,019 15,845 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 118 Prepayments include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Subscriptions 970 920 Insurance 540 627 Advertisement 227 - Licence and patent fees 126 125 Rentals 64 53 Vouchers 19 88 Other 290 190 Total 2,236 2,003 The loans granted to third parties, amounting to BGN 8,317 thousand (31 December 2021: BGN 1,804 thousand), are granted to two entities – counterparts, with the purpose of supporting the financing of these entities for common strategic objectives. The annual interest agreed for these loans for 2022 was between 3.05% and 4.7% (2021: between 3.05% and 4.7%). The movement in the allowance for impairment of court and awarded receivables is as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Balance at 1 January 1,639 454 (Decrease)/Increase in the allowance for credit losses recognised in profit or loss for the year (488) 884 Transfer from impairment of trade receivables (150) 484 Effect of foreign exchange restatement 1 - Impairment written-off - (172) Written-off impairment of receivables of subsidiaries upon disposal thereof - (11) Balance at 31 December 1,002 1,639 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 119 27. CASH AND CASH EQUIVALENTS 31.12.2022 31.12.2021 BGN'000 BGN'000 Cash at current bank accounts 12,318 30,385 Short-term deposits 4,155 5,143 Cash in hand 3,304 2,149 Short-term blocked funds 74 40 Cash and cash equivalents presented in the consolidated statement of cash flows 19,851 37,717 Blocked cash under court cases and issued bank guarantees 4 5 Cash and cash equivalents presented in the consolidated statement of financial position 19,855 37,722 The available cash and cash equivalents of the Group are mainly denominated in BGN, UAH and EUR (31 December 2021: BGN, RSD, UAH). As at 31 December 2022, short-term blocked cash at the amount of BGN 74 thousand (31 December 2021: BGN 40 thousand) represent mainly blocked funds under performance guarantees. 28. EQUITY Share capital As at 31 December 2022, the registered share capital of Sopharma AD amounts to BGN 134,798 thousand distributed in 134,797,899 shares of nominal value BGN 1 each. Ordinary shares issued and fully paid Shares Share capital net of treasury shares nos. BGN '000 Balance at 1 January 2021 125,786,432 101,142 Treasury shares (4,043,533) (16,628) Balance at 31 December 2021 121,742,899 84,514 Treasury shares (424,188) (1,919) Balance at 31 December 2022 121,318,711 82,595 The shares of Sopharma AD are ordinary, non-cash, with right of dividend and liquidation share and are registered for trade in the Bulgarian Stock Exchange – Sofia AD and Warsaw Stock Exchange. The treasury shares are 13,479,188 at the amount of BGN 52,203 thousand (2021: 13,055,000 at the amount of BGN 50,284 thousand). SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 120 Statutory reserves at the amount of BGN 68,628 thousand (31 December 2021: BGN 66,201 thousand) have been set aside from allocation of profit of the parent company and included all amounts for the Reserve Fund. The revaluation reserve – for property, plant and equipment, amounting to BGN 35,263 thousand (31 December 2021: BGN 36,788 thousand), has been set aside from excess of the carrying amount of property, plant and equipment of the Group companies over their fair values at the dates of the respective regular revaluation. The effect of deferred taxes on the revaluation reserve is stated directly through other components of comprehensive income for the year. The reserve of financial assets at fair value through other comprehensive income at the amount of BGN 560 thousand – a positive figure) (31 December 2021: BGN 1,644 thousand) has been formed by the impact of measurement at fair value of other long-term equity investments (including the consolidated share of the change in this reserve in associates on their valuation under the equity method). Upon derecognition of these investments, the reserve formed is not recycled through the statement of comprehensive income (through profit or loss for the period). The translation of foreign operations reserve, amounting to BGN 4,745 thousand – a negative value (31 December 2021: BGN 682 thousand – a positive value) has been set aside from exchange differences arising as a result of translation of the currency in the financial statements of foreign companies to the presentation currency of the Group. Other equity components (warrant issue) Pursuant to Art. 25 of the Statute of Sopharma AD dated 21 May 2021, the Board of Directors approved parameters and made a decision for issuing initial public offering of warrants. By means of Decision No 804 – Е dated 4 November 2011, the Financial Supervision Commission approved Prospectus for issue of 44 932 633 dematerialised, freely transferrable and registered warrants, with issue value BGN 0.28, issued by Sopharma AD pursuant to Art. 112b, Para 1 of POSA. The underlying asset of the issued warrants are future ordinary, registered, freely transferrable voting right shares, each holding one vote in the General Meeting of Shareholders, which will be issued by the Company conditionally, only in favour of warrant holders. Each registered warrant entitles the holder thereof to register one share from the future issue. The warrants’ holders may exercise their right to register the respective number of shares in future increase of the Company’s capital within a 3-month period, at a fixed price of BGN 4.13 per share. The right to exercise arises from the date on which the issue of 44 925 943 warrants was registered with the "Central Depository" AD – 11 January 2022. The warrants were admitted to trade on the main BSE market of Bulgarian Stock Exchange – Sofia AD, as from 25 January 2022. The funds raised from the warrant issue, at the amount of BGN 12,488 thousand (31 December 2021: BGN 12,512 thousand), is carried within other equity component in the statement of financial position, net of issue costs. SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 121 The retained earnings reserve includes the component 'other reserves', which contains the amounts distributed from profits of the Group companies generated in prior years, as well as the component 'accumulated profits and losses'. Retained earnings, amounting to BGN 509,869 thousand at 31 December 2022 (31 December 2021: BGN 444,634 thousand), include also the recognised accumulated actuarial loss at the amount of BGN 3,959 thousand (31 December 2021: BGN 2,604 thousand), stated upon remeasurement of defined benefit pension plans in relation with the amendment to IAS 19 Employee Benefits. Basic net earnings per share 2022 2021 Weighted average number of shares 121,495,503 125,368,350 Net profit for the year, attributable to the equity holders of the parent (BGN’000) 71,121 89,496 Net earnings per share (BGN) 0.59 0.71 Diluted net earnings per share 31.12.2022 31.12.2021 Average weighted number of shares in circulation Cumulative effect of warrants 121,495,503 125,368,350 Shares in circulation with warrants 3,417,186 - Diluted net earnings per share 124,912,689 125,368,350 Net profit for the year, attributable to the equity holders of the parent (BGN’000) 71,121 89,496 0.57 0.71 As at 31 December 2021, the effect of warrants is counter-dilutive. SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 122 29. LONG-TERM BANK LOANS Currency Contracted loan amount Maturity 31.12.2022 31.12.2021 Non-current portion Current portion Non-current portion Current portion BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Credit lines and working capital loans RSD/EUR 8,100 31.08.2024 15,797 - 15,797 14,627 - 14,627 EUR 1,100 31.10.2024 2,151 - 2,151 2,151 - 2,151 EUR 2,300 11.03.2023 - - - 804 - 2,679 EUR 10,000 31.08.2023 - - - 6,750 - 6,750 Investment-purpose loans EUR 5,210 31.03.2026 4,233 1,693 5,926 5,924 1,270 7,194 BGN 4,330 10.07.2028 1,860 416 2,276 2,275 414 2,689 EUR 12,000 25.06.2024 1,779 3,755 5,534 5,540 3,743 9,283 EUR 2,062 30.04.2025 1,075 797 1,872 1,881 796 2,677 BGN 16,000 30.06.2024 801 2,667 3,468 3,263 2,655 5,918 EUR 583 27.02.2024 63 378 441 444 380 824 BGN 4,250 16.04.2023 - 52 52 52 209 261 Total 27,759 9,758 37,517 42,907 9,467 52,374 The Group has gradually established a policy for annual re-negotiation of the terms and conditions of initially agreed long-term credit lines, including maturity terms. Starting from the date of re-negotiation, the extended credit lines are presented as short-term bank loans (Note 36). The bank loans obtained in Euro are contracted mainly at interest rate determined on the basis of EURIBOR plus a mark-up of up to 2.1%, for BGN-denominated loans – up to 2.8% fixed (2020: for EUR – EURIBOR plus a mark-up of up to 2.1%, for BGN-denominated loans – up to 2.8% fixed. The loans are intended for providing working capital. Investment-purpose loans are intended for purchase of tangible fixed assets and expanding of activities. The following collateral has been established in favour of the creditor banks: · Real estate mortgages (Note 16); · Special pledges on: - machinery and equipment (Note 16); - inventories (Note 23); - trade receivables (Note 24). SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 123 Reconciliation of liabilities arising from financial activities The table below details changes in liabilities arising from financial activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. 01/01/2022 Changes in cash flows from financing activities() Non-cash changes Other changes 31/12/2022 Disposal of subsidiaries (Note 47) Newly arising liabilities in the year Offsetting with receivables under factoring agreements Recognized revenue from government grants BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 Bank loans (Notes 29 and 36) 269,766 (77,280) - 3,686 - - (300) 195,872 Factoring agreements (Note 39) 6,370 30,836 - - (35,331) - - 1,875 Lease liabilities (Note 33) 54,486 (16,081) (48) 56,018 - - (8,827) 85,548 Dividends 608 (11) - - - - (141) 456 Government grants 7,596 34 - - - (841) 113 6,902 Total 338,826 (62,502) (48) 59,704 (35,331) (841) (9,155) 290,653 Treasury shares (Note 28) (50,284) (1,919) - - - - - (52,203) Warrant rights sold - 103 - - - - (103) - Reserve on warrant issue 12,512 (24) - - - - - 12,488 Net cash flows from financing activities 301,054 (64,342) (48) 59,704 (35,331) (841) (9,258) 250,938 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 124 01/01/2021 Changes in cash flows from financing activities() Non-cash changes Other changes 31/12/2021 Disposal of subsidiaries (Note 47) Newly arising liabilities in the year Offsetting with receivables under factoring agreements Recognized revenue from government grants BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 Bank loans (Notes 29 and 36) 321,020 (12,156) (43,513) - - - 4,415 269,766 Factoring agreements (Note 39) 36,591 193,337 - - (223,558) - - 6,370 Lease liabilities (Note 33) 67,718 (20,477) (5,539) 13,947 - - (1,163) 54,486 Dividends 909 (63) (158) - - - (80) 608 Government grants 11,354 81 (2,362) - - (1,482) 5 7,596 Total 437,592 160,722 (51,572) 13,947 (223,558) (1,482) 3,177 338,826 Treasury shares (Note 28) (33,656) (16,628) - - - - - (50,284) Reserve on warrant issue - 12,512 - - - - - 12,512 Net cash flows from financing activities 403,936 156,606 (51,572) 13,947 (223,558) (1,482) 3,177 301,054 SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 125 30. DEFERRED TAX ASSETS AND LIABILITIES The total change in deferred tax assets and liabilities of the Group for the respective financial year is as follows: 2022 2021 BGN'000 BGN'000 Balance at 1 January (7,422) (5,888) including: Deferred tax assets 1,050 2,049 including: Deferred tax liabilities (8,472) (7,937) Recognised in profit or loss for the year 2,799 (33) Recognised in other comprehensive income 99 (1,150) Derecognised on disposal of a subsidiary (41) (391) Recognised in the statement of changes in equity and the current tax return 130 44 Reserve from restatement into the presentation currency 90 (4) Balance at 31 December (4,345) (7,422) including: Deferred tax assets 2,052 1,050 including: Deferred tax liabilities (6,397) (8,472) As at 31 December 2022 the Group did not recognise deferred tax assets at the amount of BGN 2,327 thousand (31 December 2021: BGN 2,948 thousand) for aggregate temporary differences, included tax losses to carry forward at the amount of BGN 15,115 thousand (31 December 2021: BGN 20,191 thousand). On recognising deferred tax assets, the probability of a reversal of the individual differences and the abilities of the Group companies to generate sufficient taxable profit in the future, have been taken into account (Note 2.27). SOPHARMA GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR 2022 126 The change in the balance of deferred tax assets/(liabilities) for 2022 by items of temporary differences is as follows: Deferred tax assets (by temporary differences) Balance at 1 January 2022 Recognised in profit or loss for the year Recognised in other comprehensive income Derecognised on disposal of a subsidiary Recognised in the statement of changes in equity and the current tax return Reserve from restatement into presentation currency Balance at 31 December 2022 Assets/(Liabilities) Assets/(Liabilities) BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Intangible assets 89 46 - - - (24) 111 Inventories 1,953 (185) - - - (7) 1,761 Trade receivables 729 548 - (65) - (2) 1,210 Employee benefit expenses 1,407 75 - - - (18) 1,464 Other current liabilities 764 725 - - - (5) 1,484 Property, plant and equipment (8,152) 1,213 99 4 130 154 (6,552) Intangible assets acquired in business combinations (3,483) 646 - 20 - (3) (2,820) Leases 87 30 - - - (5) 112 Investment property (816) (299) - - - - (1,115) (7,422) 2,799 99 (41) 130 90 (4,345) The change in the balance of deferred tax assets/(liabilities) for 2021 by items of temporary differences is as follows: Deferred tax assets (by temporary differences) Balance at 1 January 2021 Recognised in profit or loss for the year Recognised in other comprehensive income Derecognised on disposal of a subsidiary Recognised in the statement of changes in equity and the current tax return Reserve from restatement into presentation currency Balance at 31 December 2021 Assets/(Liabilities) Assets/(Liabilities) BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Intangible assets 66 9 - - - 14 89 Inventories 3,058 (888) - (219) - 2 1,953 Trade receivables 1,664 (673) - (294) - 32 729 Employee benefit expenses 1,404 7 1 (16) - 11 1,407 Other current liabilities 615 179 - (25) 1 (6) 764 Property, plant and equipment (7,942) 702 (1,151) 260 43 (64) (8,152) Intangible assets acquired in business combinations (4,124) 643 - - - (2) (3,483) Leases 68 107 - (97) - 9 87 Investment property (697) (119) - - - - (816) (5,888) (33) (1,150) (391) 44 (4) (7,422) SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2022 127 31. NON-CURRENT PAYABLES TO RELATED PARTIES Non-current payables to related parties at 31 December include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Lease liabilities 17,906 2,591 Payables related to share purchase 6,588 7,619 Total 24,494 10,210 The lease payments due within 12 months are presented in the annual consolidated statement of financial position within current payables, within “payables to related parties” (Note 38). 32. LONG-TERM EMPLOYEE BENEFIT OBLIGATIONS The long-term employee benefits as at 31 December include: 31.12.2022 31.12.2021 BGN '000 BGN '000 Long-term retirement benefit obligations 6,306 7,300 Long-term benefit obligations for tantieme 235 322 Total 6,541 7,622 Long-term retirement benefit obligations The long-term payables to personnel include the present value of the obligation of the Group companies, operating mainly in Bulgaria and Ukraine, to pay indemnities to the hired personnel at the date of the statement of financial position on coming of age for retirement. In accordance with the Labour Code in Bulgaria each employee is entitled to indemnity on retirement at the amount of two gross monthly salaries, and if he or she has worked for at least the last 10 years of the service period for the same employer – six gross monthly salaries at the time of retirement (Note 2.23). Employer's obligations to personnel on retirement for the companies abroad are as follows: · Ukraine – the employer is obliged to pay between UAH 250 and 500 (BGN 14 and BGN 29) depending on the length of service as well as a social pension, which the company accrues after employees' retirement due to specific work conditions; · Kazakhstan – according to the Kazakhstani legislation, the employer does not have a legal obligation to personnel upon retirement; · Serbia – the employer is obliged to pay 3 average salaries. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 128 The movements in the present value of retirement benefit obligations to personnel are as follows: 2022 2021 BGN'000 BGN'000 Present value of the obligation at 1 January 7,300 7,007 Effect of disposal of subsidiaries - (82) Current service cost for the year 1,367 856 Interest cost for the year 85 91 Net actuarial (gain) recognised for the period (108) (21) Expenses from past service in relation to staff cuts - 20 Effect of restatement (101) 62 Payments made in the year (739) (658) Remeasurement gains or losses for the year, including: (1,498) 25 Actuarial (gains) arising from changes in financial assumptions (1,705) (40) Actuarial (gains) arising from changes in demographic assumptions (61) (8) Actuarial losses arising from experience adjustments 268 73 Present value of the obligation at 31 December 6,306 7,300 The amounts of long-term retirement benefits of personnel accrued in the consolidated statement of comprehensive income are as follows: 2022 2021 BGN'000 BGN '000 Current service cost 1,367 856 Interest cost 85 91 Net actuarial (gain) recognised for the period (108) (21) Expenses from past service in relation to staff cuts - 20 Components of defined benefit plan costs recognised in profit or loss (Note 8) 1,344 946 Remeasurement gains or losses on the retirement benefit obligations, including: Actuarial (gains) arising from changes in financial assumptions (1,705) (40) Actuarial (gains) arising from changes in demographic assumptions (61) (8) Actuarial losses arising from experience adjustments 268 73 Components of defined benefit plans cost recognised in other comprehensive income ( Note 15) (1,498) 25 Total (154) 971 The following actuarial assumptions were used for calculating the present value of the liabilities for the companies in Bulgaria as at 31 December 2022: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 129 · The discount factor is calculated by using 6% annual interest rate as basis. (2021: 0.6%). The assumption is based on yield data for long-term government securities with 10-year maturity; · The assumption for the future level of the salaries is based on the information provided by the Company's management and amounts to between 0% and 5.5% annual growth compared to the prior reporting period (2021: 0% and 5%); · Mortality rate – in accordance with the table on the total mortality rate of the population in Bulgaria, issued by the National Statistics Institute for the period 2019 – 2021 (2021: 2018 – 2020); · Staff turnover rate – from 0.03% to 20% for the five age groups formed (2021: between 1% and 16%). This defined benefit plan exposes the Group companies to the following risks: investment risk, interest risk, longevity risk and salary growth related risk: The management of the parent defines them as follows: · investment risk – as far as this is unfunded plan, the Group companies should monitor and balance currently the forthcoming payments under it with the ensuring of sufficient cash resources. The historical experience and the liability structure show that the annual resource required is not material compared to the commonly maintained liquid funds; · interest risk – any increase in the yield of government securities with similar term will increase the plan liability; · longevity risk – the present value of the retirement benefit liability is calculated by reference to the best estimate and updated information about the mortality of plan participants. An increase in life expectancy would result in a possible increase in the liability. A relative stability of this indicator has been observed in the recent years; and · salary growth related risk – the present value of the retirement benefit liability is calculated by reference to the best estimate of the future increase in plan participants' salaries. Such an increase would increase the plan liability. The sensitivity analysis of the main actuarial assumptions is based on the reasonably possible changes of these assumptions at the end of the reporting period, assuming that all other assumptions are held constant. The effects of the change (increase or decrease) by 1% of salary growth, discount rate and staff turnover rate on the amount of the stated current service cost and interest cost for 2022 and respectively, on the present value of the obligation for payment of defined retirement benefits, are assessed as follows: Effects of changes in the basic assumptions on the amount of stated expenses for 2022: Increase Decrease BGN '000 BGN '000 Change in salary growth 89 (77) Change in discount rate (26) 29 Change in staff turnover rate (49) 55 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 130 Effects of changes in the basic assumptions on the amount of the stated liability as at 31 December 2022: Increase Decrease BGN '000 BGN '000 Change in salary growth 430 (383) Change in discount rate (382) 433 Change in staff turnover rate (273) 304 The weighted average duration of the defined benefit obligation to personnel is from 2.3 to 21.26 years. The expected indemnity payments upon retirement under the defined benefit plan for the following five years are as follows: Forecast payments Old age and length of service retirement Poor health retirement Total BGN '000 BGN '000 BGN '000 Payments in 2023 970 26 996 Payments in 2024 503 25 528 Payments in 2025 589 24 613 Payments in 2026 516 25 541 Payments in 2027 591 24 615 3,169 124 3,293 Long-term benefit obligations for tantieme As at 31 December 2022, the long-term benefit obligations to personnel include also the amount of BGN 235 thousand (31 December 2021: BGN 322 thousand), representing a payable to personnel related to tantieme payment for a period of more than 12 months – until 2025 (2021: until 2024). SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 131 33. LEASE LIABILITIES The lease liabilities to third and related parties included in the consolidated statement of financial position are stated net of the future interest due and are as follows: 31.12.2022 31.12.2021 Lease liabilities Lease liabilities to related parties (Note 31) Total Lease liabilities Lease liabilities to related parties (Note 31) Total Term BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Up to one year 12,874 2,710 15,584 11,583 1,723 13,306 Over one year 52,058 17,906 69,964 38,589 2,591 41,180 64,932 20,616 85,548 50,172 4,314 54,486 Lease liabilities to related parties are stated within Non-current payables to related parties (Note 31) and Payables to related parties (Note 38). Minimum lease payments to third and related parties are due, as follows: 31.12.2022 31.12.2021 Third parties Related parties Total Third parties Related parties Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Term Up to one year 14,036 2,779 16,815 12,492 1,813 14,305 Over one year 55,057 18,179 73,236 40,480 2,699 43,179 69,093 20,958 90,051 52,972 4,512 57,484 Future finance cost on leases (4,161) (342) (4,503) (2,800) (198) (2,998) Present value of the lease liabilities to third and related parties 64,932 20,616 85,548 50,172 4,314 54,486 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 132 Right-of-use assets are included in the statement of financial position within property, plant and equipment, as follows: 34. GOVERNMENT GRANTS The government grants to Group companies as at 31 December include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Government grants, non-current portion 6,155 6,783 Government grants, current portion (Note 42) 747 813 Total 6,902 7,596 The government grants received as at 31 December are to the following Group companies: 31.12.2022 31.12.2021 BGN'000 BGN'000 Sopharma AD 4,007 4,427 Biopharm Engineering AD 2,716 2,969 Veta Pharma AD 179 200 Total 6,902 7,596 Land Buildings Vehicles Furniture and fixtures Total 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Book value Balance at 1 January 9 38 69,370 77,836 11,293 13,672 282 260 80,954 91,806 Increases/additions - - 52,839 12,448 2,982 2,554 197 42 56,018 15,044 Decreases/disposals (2) (29) (19,708) (20,914) (1,668) (4,933) (120) (20) (21,498) (25,896) Balance at 31 December 7 9 102,501 69,370 12,607 11,293 359 282 115,474 80,954 Accumulated depreciation 1 January Depreciation charge for the period 3 8 21,250 18,734 5,105 6,288 173 82 26,531 25,112 Depreciation written-off 2 5 12,925 15,203 2,695 2,938 128 102 15,750 18,248 31 December (1) (10) (10,141) (12,687) (1,567) (4,121) (114) (11) (11,823) (16,829) Carrying amount at 31 December 3 6 78,467 48,120 6,374 6,188 172 109 85,016 54,423 Carrying amount at 1 January 6 30 48,120 59,102 6,188 7,384 109 178 54,423 66,694 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 133 The government grants are received by the Group companies under European Operational Programmes mainly in relation to the acquisition of machinery and equipment (Note 16). The current portion of the grants, amounting to BGN 747 thousand (31 December 2021: BGN 813 thousand), will be recognised as current income over the following 12 months from the date of the annual consolidated statement of financial position and is presented as 'other current liabilities' (Note 42). 35. OTHER NON-CURRENT LIABILITIES Other non-current liabilities as at 31 December include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Payables related to share purchase 6,594 7,626 Other - 9 6,594 7,635 36. SHORT-TERM BANK LOANS The short-term bank loans of the Group as at 31 December are as follows: Currency Contracted amount Maturity 31.12.2022 31.12.2021 Bank loans (overdrafts) '000 BGN'000 BGN'000 EUR 34,200 28.02.2023 63,030 42,712 BGN 41,500 31.07.2023 32,704 38,601 EUR 5,000 25.07.2023 9,757 9,757 RSD/EUR 8,000 10.08.2023 - 29.12.2023 7,158 6,754 EUR 3,000 25.07.2023 5,859 5,858 EUR 1,500 02.09.2023 2,934 2,934 EUR 1,000 03.06.2023 1,956 1,956 UAH 128,000 20.01.2023 1,212 6,106 BGN 20,000 05.09.2023 5 19,967 BGN 9,779 05.09.2023 - 9,759 EUR 4,500 31.10.2022 - 8,760 BGN 10,000 31.07.2023 - 5,476 EUR 3,000 31.10.2022 - 7,559 124,615 166,199 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 134 Currency Contracted amount Maturity 31.12.2022 31.12.2021 BGN'000 BGN'000 BGN'000 Credit lines EUR 7,500 25.07.2023 12,025 12,025 BGN 20,000 28.02.2023 11,729 11,461 BGN 10,000 31.07.2023 9,986 10,000 BGN 24,625 31.07.2023 - 17,707 33,740 51,193 Total 158,355 217,392 The bank loans obtained in Euro are contracted mainly at interest rate determined on the basis of EURIBOR plus a mark-up of 2.55% or fixed to 3%; for BGN-denominated loans – benchmark rate of the respective bank plus a mark-up of up to 1.35% and fixed to 1.45%; for UAH – 22% fixed; for RSD – an interest rate based on BELIBOR – 1.95% (2021: EURIBOR plus a mark-up of 2.75% or fixed to 2%; for BGN-denominated loans – benchmark rate of the respective bank plus a mark-up of up to 1.5% and fixed to 1.45%; for UAH – 10.8% fixed; for RSD – an interest rate based on BELIBOR – 1.2%). The loans are for working capital. The following special pledges have been established as collateral for the above loans in favour of the creditor banks: - machinery and equipment (Note 16); - raw materials, consumables and finished products (Note 23); - trade receivables (Note 24). As at 31 December 2022, there are special pledges on receivables from related parties, subject to consolidation and eliminated for the purpose of the consolidated financial statements, at the amount of BGN 48,531 thousand (31 December 2021: BGN 60,871 thousand), established as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). 37. TRADE PAYABLES Trade payables include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Payables to suppliers 152,483 142,681 Advances from clients 23,084 799 Total 175,567 143,480 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 135 The payables to suppliers refer to: 31.12.2022 31.12.2021 BGN'000 BGN'000 Suppliers outside Bulgaria 105,634 98,554 Suppliers from Bulgaria 46,849 44,127 Total 152,483 142,681 The payables to suppliers are regular, interest-free and refer to supplies of materials, goods and services. The average credit period, for which usually no interest is charged on trade payables, is up to 180 days. 38. PAYABLES TO RELATED PARTIES The payables to related parties refer to: 31.12.2022 31.12.2021 BGN'000 BGN'000 Payables to joint ventures and associates 2,697 1,721 Payables to shareholding companies with significant influence 1,098 1,118 Payables to companies related through key management personnel 901 831 Payables to companies controlled by an associate 202 24 Other related parties 6 6 Total 4,904 3,700 The payables to related parties by type are as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Short-term lease liabilities 2,710 1,723 Payables related to share purchase 1,031 1,013 Payables on supply of goods and materials 964 848 Advance payables 125 4 Supply of services 68 106 Other 6 6 Total 4,904 3,700 The payables to related parties are regular, denominated in BGN, interest-free and are not additionally secured through a special pledge or guarantee by the Group. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 136 39. PAYABLES UNDER FACTORING AGREEMENT Companies of the Group have entered into factoring agreements with a financial institution (Factor), dated 19 January 2016, for transfer of existing unsalable receivables from debtors. The Factor is entitled to recourse for all amounts paid in advance regardless of whether they are included not in the approved credit limit. The approved credit limit as at 31 December 2022 is BGN 15,000 thousand (2021: BGN 15,000 thousand). The transferred invoices are paid in advance up to 90% (ninety per cent) of their amount with VAT included. The interest for the amounts paid in advance is 1M RIR + 1.55% on an annual basis and is deducted on a monthly basis in the end of each calendar month. The payable under the factoring agreement amounts to BGN 1,875 thousand as at 31 December 2022 (31 December 2021: BGN 6,370 thousand). The financing granted for 2022 amounts to BGN 30,950 thousand (31 December 2021: 193,905 thousand) (Note 2.18). 40. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY Payables to personnel and for social security include: 31.12.2022 31.12.2021 BGN'000 BGN'000 Payables to personnel, including: 17,949 14,682 current wages and salaries 10,137 7,692 accruals on unused compensated leaves 4,221 3,518 tantieme 3,591 3,472 Payables for social security/health insurance, including: 3,831 3,206 current payables for social security contributions 3,174 2,634 accruals on unused compensated leaves 657 572 Total 21,780 17,888 41. TAX PAYABLES Tax payables include: 31.12.2022 31.12.2021 BGN'000 BGN'000 VAT 6,327 6,039 Income taxes 996 36 Individual income taxes 730 540 Taxes on expenses 365 409 Withholding taxes 2 - Other 16 15 Total 8,436 7,039 By the date of issue of these annual consolidated financial statements the following inspections and audits of Group companies have been performed: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 137 Company Full-scope tax audit VAT inspection Inspection under the social security legislation Sopharma AD 31.12.2011 31.12.2011 30.09.2013 Sopharma Trading AD 31.12.2011 31.12.2017 30.04.2018 Biopharm Engineering AD 31.12.2014 31.10.2022 30.04.2009 Pharmalogistica AD 31.12.2005 31.12.2007 none Electroncommerce EOOD 31.12.2005 30.04.2006 none Veta Pharma AD none 30.11.2022 30.06.2016 Sopharmacy EOOD none 31.07.2020 none Sopharmacy 2 EOOD none 30.06.2019 none Sopharmacy 3 EOOD none 30.11.2017 none Sopharmacy 4 EOOD none 30.06.2022 none Sopharmacy 5 EOOD none 31.08.2020 none Sopharmacy 6 EOOD none 31.07.2019 none Sopharmacy 7 EOOD none 31.05.2019 none Sopharmacy 8 EOOD none 31.08.2020 none Sopharmacy 9 EOOD none 31.12.2020 none Sopharmacy 10 EOOD none 30.11.2022 none Sopharmacy 11 EOOD none 31.07.2022 none Sopharmacy 12 EOOD none 31.07.2022 none Sopharmacy 13 EOOD none 31.07.2022 none Sopharmacy 14 EOOD none 31.12.2018 none Sopharmacy 15 EOOD none 30.06.2022 none Sopharmacy 16 EOOD none 31.12.2019 none Sopharmacy 17 EOOD none 31.12.2020 none Sopharmacy 18 EOOD none 30.10.2021 none Sopharmacy 19 EOOD none 31.12.2017 none Sopharmacy 20 EOOD none 31.12.2013 none Sopharmacy 21 EOOD none none 31.08.2017 Sopharmacy 22 EOOD none 31.12.2012 30.04.2020 Sopharmacy 23 EOOD none 31.05.2014 30.04.2020 Sopharmacy 24 EOOD none none 30.04.2020 Sopharmacy 25 EOOD none 31.05.2019 30.04.2020 Sopharmacy 26 EOOD none 31.08.2017 none Sopharmacy 27 EOOD none 31.12.2013 none Sopharmacy 29 EOOD none 31.05.2019 none Sopharmacy 30 EOOD none 31.12.2013 30.04.2020 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 138 Company Full-scope tax audit VAT inspection Inspection under the social security legislation Sopharmacy 31 EOOD none 31.07.2022 30.04.2020 Sopharmacy 32 EOOD 31.12.2010 31.12.2019 30.04.2020 Sopharmacy 33 EOOD none none 30.04.2020 Sopharmacy 34 EOOD none none 30.04.2020 Sopharmacy 35 EOOD none 31.12.2013 30.04.2020 Sopharmacy 36 EOOD none 31.01.2015 31.05.2021 Sopharmacy 37 EOOD none 31.10.2022 30.04.2020 Sopharmacy 38 EOOD none 31.07.2017 30.04.2020 Sopharmacy 40 EOOD none none 30.04.2020 Sopharmacy 41 EOOD none 30.11.2018 31.05.2019 Sopharmacy 42 EOOD none none 30.11.2020 Sopharmacy 43 EOOD 31.12.2016 none 31.05.2019 Sopharmacy 44 EOOD none 31.12.2013 30.04.2020 Sopharmacy 45 EOOD none none 30.04.2020 Sopharmacy 46 EOOD none 31.05.2017 none Sopharmacy 47 EOOD none 31.11.2016 31.03.2020 Sopharmacy 48 EOOD none 30.06.2021 31.08.2017 Sopharmacy 49 EOOD 31.12.2015 31.12.2014 31.05.2020 Sopharmacy 50 EOOD none 31.12.2018 31.03.2020 Sopharmacy 51 EOOD none 30.09.2018 30.04.2020 Sopharmacy 52 EOOD none none 31.12.2015 Sopharmacy 53 EOOD none 30.06.2021 31.08.2017 Sopharmacy 54 EOOD none 31.08.2015 31.03.2020 Sopharmacy 55 EOOD none 31.12.2014 31.03.2020 Sopharmacy 56 EOOD none 31.12.2015 30.04.2020 Sopharmacy 57 EOOD none none 31.05.2020 Sopharmacy 58 EOOD none 31.07.2018 none Sopharmacy 63 EAD 31.12.2012 none 31.12.2019 Sopharmacy 64 AD 31.12.2016 none none PAO Vitamini 31.12.2013 31.12.2013 01.04.2014 ООО Sopharma Ukraine 31.12.2014 31.12.2014 30.06.2016 Sopharma Warsaw SP. Z.O.O. none none 06.07.2017 Sopharma Trading d.o.o., Serbia 31.03.2017 30.06.2017 15.04.2017 Tax audit of the companies in Bulgaria is performed within a 5-year period after the end of the year when the tax return for the respective liability has been submitted. The tax audit confirms ultimately the tax liability of the respective company — tax liable person except in the cases explicitly stated by law. For the companies outside Bulgaria a tax audit is performed as follows: in Ukraine – within a term of three years, in Poland and Kazakhstan – within a term of five years, and in Serbia – within a term of ten years. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 139 The companies Phyto Palauzovo AD, TOO Sopharma Kazakhstan, Pharmachim EOOD, Sopharmacy 59 EOOD, Sopharmacy 60 EOOD, Sopharmacy 61 EOOD, Sopharmacy 62 EOOD and Sopharmacy 39 EOOD have not been subject to full-scope tax audits, VAT audits and inspections under the social security regulations. 42. OTHER CURRENT LIABILITIES Other current liabilities include: 31.12.2022 31.12.2021 Payables for recovery under contracts with customers 7,877 2,631 Contract liabilities 2,664 978 Payables related to share purchase 1,032 1,014 Government grants (Note 34) 747 813 Dividend payables 456 608 Provisions under financial guarantees 158 139 Payables under deposits placed as guarantees 144 299 Deductions from work salaries 50 93 Awarded amounts under litigations 16 34 Other 653 364 Total 13,797 6,973 43. CONTINGENT LIABILITIES AND COMMITMENTS Issued and granted guarantees Sopharma AD The company provided the following collaterals in favour of banks under loans to associates: In favour of Doverie Obedinen Holding AD 31.12.2022 31.12.2021 BGN '000 BGN '000 Buildings 7,867 8,252 Land 6,624 6,624 Total 14,491 14,876 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 140 The company is a co-debtor under received bank loans, bank guarantees issued and leases, and is a guarantor to banks and suppliers, of the following companies: Maturity Currency Contracted amount Guaranteed amount Original currency 31.12.2022 BGN'000 BGN'000 Doverie Obedinen Holding AD 2027 BGN 30,000 30,000 21,500 Energoinvestment AD 2023 BGN 2000 2000 1,600 Pharmaplant AD 2023 BGN 235 460 23 Total 23,123 Sopharma Trading AD The company concluded a contract for guarantorship under a loan of MBAL Doverie AD. As at 31 December 2021 the loan payable was repaid (31 December 2021: BGN 260 thousand). Bank guarantees Sopharma Trading AD The bank guarantees issued in favour of the company amount to BGN 14,716 thousand (31 December 2021: BGN 17,978 thousand) are to secure payments to suppliers of goods, for good performance – ensuring future deliveries of pharmaceutical and medicinal products to hospitals under concluded contracts, customs office guarantees and tender participation and collateral under rental of retail sites (pharmacies). The bank guarantees have been issued by: 31.12.2022 31.12.2021 BGN '000 BGN '000 DSK AD 7,508 6,658 KBC Bank Bulgaria EAD 4,870 5,229 ING Bank N.V. 2,338 6,091 14,716 17,978 The collateral for issued bank guarantees is as follows: - Special pledge on goods in circulation at the amount of BGN 2,934 thousand (31 December 2021: BGN 2,934 thousand) (Note 23). - Special pledge on receivables from clients with a carrying amount of BGN 2,347 thousand (31 December 2021: BGN 2,347 thousand) (Note 24). As at 31 December 2022 Sopharma Trading AD granted bank guarantees at the amount of BGN 2,152 thousand (31 December 2021: BGN 1,308 thousand) as collateral under rental agreements for retail sites (pharmacies) parties to which are its subsidiaries. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 141 Sopharma Trading d.o.o. The bank guarantees issued in favour of the company amount to BGN 12,247 thousand as at 31 December 2022 (31 December 2021: BGN 26,256 thousand) and are to secure payments to suppliers of goods, for good performance – ensuring future deliveries of pharmaceutical and medicinal products to hospitals under concluded contracts, customs office guarantees and tender participation. The bank guarantees have been issued by: 31.12.2022 31.12.2021 BGN '000 BGN '000 Raiffeisen AD Belgrade 8,315 21,991 OTP Bank Serbia AD Belgrade (SG Expressbank AD Belgrade) 2,225 2,221 Eurobank AD Belgrade 1,350 1,649 Banca Intesa AD Belgrade 357 395 12,247 26,256 Insurance of performance guarantees Sopharma Trading AD As at 31 December 2022, the company has concluded contracts for instance of performance securities for participation in tenders for supply of medicinal products and consumables for hospitals and the Ministry of Health, at the amount of BGN 4,813 thousand (31 December 2021: BGN 9,743 thousand). Assets held under safe custody Sopharma Trading AD According to concluded pre-distribution contracts, the Company has received goods for safe custody amounting to BGN 4,318 thousand as at 31 December 2022 (31 December 2021: BGN 2,024 thousand). Significant irrevocable agreements and commitments Sopharma AD The Company received three government grants under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007 – 2013 and Operational Programme “Energy Efficiency” (Note 34 and Note 42), related to the acquisition of non-current assets, reconstruction of buildings and technological renovation and modernisation of tablet production facilities and implementation of innovative products in the ampoule production section and implementation of “artificial tears” innovative eye drops (Note 16). The Company undertook a commitment that for a period of 5 years after the completion of the respective projects they shall not be subject to significant modifications affecting the essence and the terms and conditions for their execution or giving rise to unjustified benefits to the company, neither modifications resulting from a change in the nature of ownership over the assets acquired in relation to the grants. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 142 On non-compliance with these requirements, the financing shall be returned. At the date of preparation of the financial statements, all contractual requirements were being fulfilled. Biopharm Engineering AD The company has assumed a commitment under a grant contract with a term of five years after completion of the project for acquisition of (a) line for production of amino acid solution for parenteral nutrition, which includes components for inflation, filling and hermitization in aseptic environment, and (b) clean rooms construction (omega profile ceilings, separation walls, doors, blocking devices, lighting, air conditioning, etc.). The term commenced on 27 April 2015 (the date on which the project was ultimately approved by the financing institution) and according to the contract the project should not suffer significant changes referring to its nature, the conditions of its performance or leading to unjustifiable benefits for the company as well as changes resultant from modification in the nature of ownership of infrastructural component or discontinuance of production activities. On non- compliance with these requirements, the financing shall be returned. At the date of approval for issue of the financial statements, all contractual requirements were fulfilled. Veta Pharma AD The company received three government grants under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007 – 2013 (Notes 34 and 42) related to enhancing the efficiency of companies and developing a favourable business environment (Note 16). The company has undertaken a commitment within 3 years after completion of the respective projects to not undergo significant changes concerning the essence and conditions of performance or resulting in undue benefits for the company, as well as changes resulting from a change in the ownership of the assets acquired in relation to the funding. Upon failure to meet these requirements, the funding is subject to recovery. As at the date of preparation of the statements, all contractual conditions have been met. 44. SEGMENT REPORTING The segment reporting in the Group is organised on the basis of two basic business segments – 'production of pharmaceutical products' and 'distribution of pharmaceutical products (goods)'. The group 'other' includes mainly production and distribution of non-pharmaceutical products. The items of income, expenses and result of business segments determined in the Group include: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 143 Manufacturing of pharmaceutical products Distribution of pharmaceutical products (goods) Other Elimination Consolidated 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 External sales 245,449 216,386 1,401,687 1,365,059 15,880 21,865 - - 1,663,016 1,603,310 Intersegment sales 128,901 115,112 81 175 625 377 (129,607) (115,664) - - Total revenue 374,350 331,498 1,401,768 1,365,234 16,505 22,242 (129,607) (115,664) 1,663,016 1,603,310 Segment result (margin) 119,322 82,532 198,378 212,172 3,374 5,775 (688) 14,386 320,386 314,865 Non-allocated operating income 13,042 13,830 Non-allocated operating expenses (245,547) (265,176) Profit from operations 87,881 63,519 Finance (costs)/income, net (6,113) (5,165) Impairment of non-current assets (20,783) (10,476) Gain (loss) on disposal of subsidiaries 1,456 37,604 Losses from associates, net 22,635 12,092 Profit before income tax 85,076 97,574 Income tax expense (8,743) (5,871) Net profit for the year 76,333 91,703 Attributable to owners of the parent 71,121 89,496 Non-controlling interests 5,212 2,207 The assets and liabilities of the business segments include: Assets by business segment Manufacturing of pharmaceutical products Distribution of pharmaceutical products (goods) Other Total 2022 2021 2022 2021 2022 2021 2022 2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment 122,397 130,440 135,586 131,138 18,813 18,305 276,796 279,883 Inventories 85,270 67,189 191,419 188,195 1,894 565 278,583 255,949 Receivables from related parties 12,659 13,827 250 652 - - 12,909 14,479 Trade receivables 20,178 27,983 195,554 187,853 8,710 11,996 224,442 227,832 Cash and cash equivalents 6,521 18,633 12,270 18,437 1,064 652 19,855 37,722 Segment assets 247,025 258,072 535,079 526,275 30,481 31,518 812,585 815,865 Non-allocated assets 441,393 389,113 Total assets 1,253,978 1,204,978 Liabilities by business segment Manufacturing of pharmaceutical products Distribution of pharmaceutical products (goods) Other Total 2022 2021 2022 2021 2022 2021 2022 2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Payables to personnel and for social security 2,424 1,799 11,609 9,159 497 407 14,530 11,365 Trade payables 40,615 13,418 134,712 129,929 240 133 175,567 143,480 Payables to related parties 1,412 1,540 3,547 2,160 (55) - 4,904 3,700 Bank loans 15,087 61,581 180,785 208,185 - - 195,872 269,766 Segment liabilities 59,538 78,338 330,653 349,433 682 540 390,873 428,311 Non-allocated liabilities 146,471 117,799 Total liabilities 537,344 546,110 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 144 The capital expenditures, depreciation/amortisation and non-monetary expenses other than depreciation/amortisation by business segment include: Manufacturing of pharmaceutical products Distribution of pharmaceutical products (goods) Other Total 2022 2021 2022 2021 2022 2021 2022 2021 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Capital expenditures 10,519 5,758 50,157 33,947 671 294 61,347 39,998 Depreciation and amortisation 10,957 11,552 31,132 32,898 1,477 1,330 43,566 45,780 Non-monetary expenses, other than depreciation and amortisation 1,715 8,122 17,579 6,791 267 985 19,561 15,898 The distribution of Group revenue by type and by geographic area is as follows: Bulgaria Europe Other countries Total 2022 2021 2022 2021 2022 2021 2022 2021 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Sales of finished products 104,175 106,499 151,366 146,510 28,352 21,929 283,893 274,938 Sales of goods 1,097,601 978,018 280,760 350,345 762 9 1,379,123 1,328,372 1,201,776 1,084,517 432,126 496,855 29,114 21,938 1,663,016 1,603,310 The carrying amount as at 31 December of Group's non-current assets other than financial instruments, distributed by geographic area, is as follows: Bulgaria Europe Other countries Total 2022 2021 2022 2021 2022 2021 2022 2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment 356,941 330,507 18,551 31,270 915 616 376,407 362,393 Intangible assets 41,199 45,572 6,943 8,815 9 34 48,151 54,421 Goodwill 5,876 2,159 (2,354) 11,261 - - 3,522 13,420 Investment property 10,568 9,446 - - - - 10,568 9,446 414,584 387,684 23,140 51,346 924 650 438,648 439,680 45. FINANCIAL RISK MANAGEMENT In the ordinary course of business, the Group can be exposed to a variety of financial risks the most important of which are market risk (including currency risk, risk of a change in the fair value and price risk), credit risk, liquidity risk and risk of interest-bearing cash flows. The general risk management is focused on the difficulty to forecast the financial markets and to achieve minimizing the potential negative effects that might affect the financial results and position of the Group. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 145 The financial risks are currently identified, measured and monitored through various control mechanisms in order to establish adequate prices for the finished products and services of the Group companies and the borrowed thereby capital, as well as to assess adequately the market circumstance of its investments and the forms for maintenance of free liquid funds through preventing undue risk concentrations. Risk management is currently performed by the management of the parent company and respectively, the managing bodies of the subsidiaries, in line with the policy defined by the Board of Directors of the parent. The Board of Directors has approved the basic principles of general financial risk management, on the basis of which specific procedures have been established for management of the separate specific types of risk such as currency, price, interest, credit and liquidity risk and the risk of use of non-derivative instruments. The structure of financial assets and liabilities at 31 December 2022 is as follows: Categories of financial instruments: 31.12.2022 31.12.2021 BGN '000 BGN '000 Financial assets Financial assets at amortised cost, including: 326,563 333,111 Receivables and loans granted (Notes 21, 22, 24, 25 and 26) 306,712 295,394 Cash and cash equivalents (Note 27) 19,851 37,717 Financial assets at fair value through other comprehensive income, including: 4,778 5,778 Equity investments (Note 20) 4,778 5,778 Total financial assets 331,341 338,889 Financial liabilities Financial assets at amortised cost, including: 456,168 494,716 Short-term and long-term bank loans (Notes 29 and 36) 195,872 269,766 Other loans and payables (Notes 35, 37, 38 and 42) 174,748 170,464 Finance lease liabilities (Note 33) 85,548 54,486 Total financial liabilities 456,168 494,716 The net effect of accrued (reversed) impairment related to financial assets and financial guarantees recognised in the statement of comprehensive income (within profit or loss) is as follows: Impairment losses, net of reversals, related to financial assets and financial guarantees recognised in the statement of comprehensive income, are as follows: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 146 31.12.2022 31.12.2021 BGN '000 BGN '000 Trade and other receivables, including from related parties 3,887 1,008 Loans at amortised cost 1,856 (46) Court and awarded receivables (488) 884 Total 5,255 1,846 Credit risk Credit risk is the risk that any of the Group's clients will fail to discharge in full and within the normally envisaged terms the amounts due under trade receivables. The Group’s credit risks arises both from its business operations, through trade receivables, and from its financing activities, including the granting of loans to related and third parties, commitments undertaken under loans and guarantees and bank deposits. The Group has developed policies, procedures and rules for control and monitoring of credit risk behaviour. Trade receivables In its business practice, the Group has applied various schemes of distribution until arriving at its current effective approach, which considers the market environment, various forms of payments, as well as the inclusion of trade rebates. The Group works with counterparts with whom it has a history on its main markets, and partners with over 70 Bulgarian and foreign licensed distributors of medicinal products. Work with the NHSSO and with distributors working with state hospitals also require the adoption of a deferred payment policy in Bulgaria. In this sense, even though credit risk concentration exists, this risk is controlled by means of selection, ongoing monitoring of the liquidity and financial stability of sales partners, as well as direct communication therewith and seeking quick measures upon indications for problems. The Group’s credit policy envisages assessing each new customer’s creditworthiness before proposing standard delivery and payment conditions. The Group uses provisioning matrixes to calculate expected credit losses from trade receivables and contract assets. The latter are grouped into groups (portfolios) from various client segments sharing similar characteristics, incl. for credit risk. The percentages applied in the provisioning matrix are based on days past due for each portfolio. Each matrix percentage is initially determined based on historical data observed by the Group companies for a period of three years. The method is based on analysis of the history and assessing behaviour for each invoice within a group issued over at least the last three years, including pays past due, going period by period among the different past due ranges, payments and outstanding receivables, etc. Based on that, the loss percentage is determined as bad debt for the given group of factors versus past due invoices by days. The period of occurrence on an economic loss from uncollectability is determined by customer portfolios: wholesalers, pharmacy market, hospital market, and by geographic regions. This period is examined and historically assessed. The Group does not have a practice to request collateral of trade receivables, and does not insure them. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 147 Second, the Group makes the impairment provisioning matrixes for each portfolio precise by adjusting certain percentages based on historical data for the behaviour of payments under the invoices issued and historical losses from bad debt, by including scenarios and forecast information about certain macro factors. Historical percentages are adjusted to reflect the effect of the future behaviour of macroeconomic factors for which a statistical dependence has been identified and which are considered to impact the customers’ ability to service and settle their payables. Court and awarded receivables Upon determining the collectability of court and awarded receivables, the management analyses on an individual basis the overall exposure from each counterpart (counterpart type) in order to determine the actual likelihood of their collection. Upon establishing it is highly unlikely to collect a given receivable (group of receivables), it is assessed what portion thereof is secured (pledge, mortgage, guarantors, and bank security) to thus guarantee collectability (through potential future realisation of the collateral or payment by the guarantor). The receivables or portion thereof for which the management determines are highly unlikely to be collected, are 100% impaired. Loans and financial guarantees granted The assessment of each credit exposure for the management’s purposes is a process that requires the use of models to reflect impact on exposure by changes in market conditions and the debtor’s operation, estimated cash flows and time left to maturity. The assessment of the credit risk of loans granted leads to further judgement on the possibility of default, on the loss coefficients related to this judgement and to correlation between counterparts. The Company measures credit risk by using probability of default (PD), exposure at default (EAD) and loss given default (LGD). To determine the credit risk of loans and financial guarantees granted, and of certain individual trade receivables, the Group’s management has developed a methodology that includes two main components: determining the debtor’s credit rating, and statistical models for calculating marginal PD by year for each rating. With respect to the rating, it uses internal credit ratings of its counterparts based on the global methodologies of world’s leading rating agencies. The rating reflects financial indebtedness, liquidity, profitability ratios, etc. quantitative (for instance, sales volumes) and qualitative (for instance, financial policy, diversifications, etc.) criteria depending on the respective methodology and industry. By means of statistical models based on historical global data about probability of default (PD) and transitions between different ratings, as well as forecasts for key macroeconomic indicators (GDP growth, inflation, etc.), the necessary marginal PD are determined by year for each rating. Based on the specific rating established and the analysis of the debtor’s characteristics and the loan/guarantee, incl. changes which have occurred therein compared to the prior period, the instrument’s stage is determined (Stage 1, Stage 2, and Stage 3). The Group considers that a certain financial instrument has undergone a significant increase in credit risk when one or more of the following quantitative or qualitative criteria are met: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 148 Quantitative criteria: · An increase in the probability of default (PD) for the financial instrument’s lifetime at the reporting date versus the possibility of default for the instrument’s lifetime at the date on which the asset was initially recognised · Payment is past due for over 30 days, but less than 90 days, past due · An actual or expected significant adverse change in the debtor’s operating result, above the permissible change range, measured based on the debtor’s main financial and operating indicators · A significant change in the value of the collateral, which is expected to increase the loss and risk of default. Qualitative criteria: · Significant adverse changes in the business, financial and/or economic conditions of the debtor; · Actual or expected adverse changes in the debtor’s operating results; · A significant change in the collateral quality, which is expected to increase the risk of default; · Early signs of cash flow/liquidity issues, such as delays in servicing trade creditors/bank loans. The criteria used to identify a substantial increase in credit risk are monitored, and their viability is reviewed on a periodic basis by the Group’s Finance Director. The Company designates a financial instrument as non-performing and the credit loss as incurred, when it meets one or more of the following criteria: Quantitative criteria · The debtor’s contract payments are over 90 days past due · Significant adverse changes have occurred or are expected in the debtor’s business, financial conditions and economic environment, manifest in a serious decrease in the debtor’s main financial and operational indicators; · The debtor states a number of losses and negative net assets; · Significant adverse changes have occurred or are expected in value of the loan’s key collateral, incl. loss of collateral. Qualitative criteria The debtor is unable to pay due to significant financial difficulties. This includes cases when: · The debtor is in default of the financial contract, for instance with respect to interest payments, collaterals and/or another significant contract, including for financing; · Adverse changes in the debtor’s business, market, environment, and regulations; · Concessions and reliefs have been made in relation to the debtor’s financial difficulties; · There is probability that the debtor declares insolvency. The default definition is subsequently applied to modelling the probability of default (PD), the exposure at default (EAD), and the loss given default (LGD) determined through calculation of the Group’s expected credit losses. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 149 Expected credit losses have been determined by discounting the product of: the probability of default (PD), exposure at default (EAD), and the loss given default (LGD), determined as follows: · PD is the probability of the debtor not meeting their financial obligations, either over the next 12 months, or over the financial asset’s lifetime (lifetime PD) determined based on public PD data from generally accepted sources and statistical models of the impact of forecast macroeconomic factors. Moreover, the Company’s management has conducted historical analysis and has identified the main economic variables impacting credit risk and expected credit losses per loan (portfolio) type. · EAD is the amount payable to the Company by the debtor at default, over the next 12 months or over the remaining period of the loan, determined in accordance with the specific instrument’s characteristics (amount due, repayment plans, interest, term, etc.). · LGD is the Company’s expectation for the amount of loss from a non-performing exposure. LGD varies depending on the type of counterpart, the type and superiority of the claim and the presence of collateral or other credit support. LGD is measured as a loss percentage for an open exposure at default. · The discount rate used to calculate expected credit losses (ECL) is the instrument’s initial effective interest or in the case of financial guarantees and other instruments without an applicable interest rate – the risk-free rate for the respective period, currency, etc. The Group applies a number of policies and practices to lower the credit risk from loans granted. Most frequently, it accepts collateral. The Company assigns valuation to external experts – independent valuators, of the collateral received, as part of the process of granting loans. This valuation is reviewed on a periodic basis, but at least once per year. The table below presents the quality of the Group’s financial assets, contract assets and financial guarantee contracts, as well as the maximum exposure to credit risk according to the credit rating adopted: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 150 31.12. 2022 Note Internal credit risk categorisation Expected credit losses (IFRS 9) Gross carrying amount Impairment loss (allowance) Carrying amount BGN '000 BGN '000 BGN '000 Long - term loans to related parties 21 Initially negotiated loans – Stage 1 Lifetime (credit- impaired) 63,355 (157) 63,198 Short - term loans to related parties 25 Initially negotiated loans – Stage 1 Lifetime (credit- impaired) 4,144 - 4,144 Short-term loans to related parties 25 Renegotiated Stage 2 Lifetime (credit- impaired) 9,852 (1,340) 8,512 Long - term loans to third parties 22 Initially negotiated loans – Stage 1 Lifetime (credit- impaired) 1,956 (459) 1,497 Short-term loans to third parties 26 Renegotiated Stage 2 Lifetime (credit- impaired) 8,320 (3) 8,317 Trade and other receivables from related parties 21, 25 N/A For a 12- month period 4,648 (122) 4,526 Trade and other receivables from third parties 24, 26 N/A For a 12- month period 223,954 (7,436) 216,518 (incl. court receivables) 26 13,649 (1,002) 12,647 Financial assets 316,229 (9,517) 306,712 31.12. 2021 Note Internal credit risk categorisation Expected credit losses (IFRS 9) Gross carrying amount Impairment loss (allowance) Carrying amount BGN '000 BGN '000 BGN '000 Long - term loans to related parties 21 Initially negotiated loans – Stage 1 Lifetime (credit- impaired) 49,792 (97) 49,695 Short - term loans to related parties 25 Renegotiated Stage 2 Lifetime (credit- impaired) 13,621 - 13,621 Long - term loans to third parties 22 Renegotiated Stage 2 Lifetime (credit- impaired) 6,314 (6) 6,308 Short - term loans to third parties 26 Renegotiated Stage 2 Lifetime (credit- impaired) 1,714 - 1,714 Short - term loans to third parties 26 Underperforming Stage 3 Lifetime (credit- impaired) 90 - 90 Trade and other receivables from related parties 21, 25 N/A For a 12- month period 905 (47) 858 Trade and other receivables from third parties 24, 26 N/A For a 12- month period 229,644 (6,536) 223,108 (incl. court receivables) 26 15,609 (1,639) 13,970 Financial assets 302,080 (6,686) 295,394 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 151 The table below provides information about the Group’s exposure to credit risk and the impairment of credit losses for loans granted, trade receivables and other receivables as at 31 December 2022: Category Correlation to an external credit rating Average percentage of expected impairment loss Gross carrying amount Impairment loss (allowance) BGN '000 BGN '000 Initially negotiated loans (Stage 1) B3 1.20% 51,304 (616) Initially negotiated loans (Stage 1) Ba3 0.00% 10,040 - Renegotiated loans (Stage 2) Caa1 0.00% 8,771 - Renegotiated loans (Stage 2) B3 0.04% 8,061 (3) Initially negotiated loans (Stage 1) Bа1 0.00% 4,144 - Initially negotiated loans (Stage 1) B1 0.00% 3,967 - Renegotiated loans (Stage 2) B1 100.00% 1,340 (1,340) Trade and other receivables (Stage 1) N/A 3.05% 214,953 (6,556) Underperforming trade receivables (court and awarded receivables) N/A 7.34% 13,649 (1,002) 316,229 (9,517) The Group has concentration of receivables from related parties (trade receivables and loans), as follows: 31.12.2022 31.12.2021 BGN'000 BGN'000 Client 1 63.63% 77.44% Client 2 12.49% 12.89% Client 3 10.59% 6.25% The Group manages concentration of receivables from related parties on a current basis by applying credit limits and additional collaterals in the form of pledge on securities and other assets and applying promissory notes. The concentration of the first five clients in the Group’s trade receivables is as follows: 31.12.2022 % credit exposure versus the total amount of trade receivables 31.12.2021 % credit exposure versus the total amount of trade receivables BGN'000 % BGN'000 % Client 1 17,124 9% 12,809 6% Client 2 7,704 4% 11,624 6% Client 3 5,303 3% 6,659 3% Client 4 4,499 2% 5,881 3% Client 5 4,126 2% 4,063 2% SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 152 Cash The Group’s cash and payment operations are concentrated in different first-class banks. To calculate expected credit losses for cash and cash equivalents, it applies a model based on the bank’s public ratings as determined by internationally recognised rating firms like Moody’s, Fitch, S&P, BCRA and Bloomberg and the reference public data about PD referring to the rating of the respective bank. The management monitors changes in a bank’s rating on an ongoing basis in order to assess the presence of increased credit risk, ensure the current management of incoming and outgoing cash flows and the allocation of cash in the bank accounts and banks. Foreign currency risk The Group companies perform their operations with active exchange with foreign suppliers and clients and therefore, they are exposed to currency risk. The Group through the companies in Belarus, Ukraine and Serbia carries out business in these countries and, therefore, has significant exposure in BYN, UAH and RSD. The currency risk is related with the adverse floating of the exchange rate of these currencies against BGN in future business transactions as to the recognised assets and liabilities denominated in foreign currency and as to the net investments in foreign companies. The rest of the companies abroad perform sales mainly to the local markets, which leads to currency risk to their currencies as well – Polish Zloty (PLN), US Dollar (USD), British Pound (GBP) and Kazakhstani Tenge (KZT). Most operations of the Group companies are usually denominated in BGN and the fact that the BGN is fixed to the EUR reduces the potential currency volatility for the companies of the Group. To control foreign currency risk, there is an implemented system in the whole Group for planning import supplies, sales in foreign currency as well as procedures for daily monitoring of US dollar exchange rates and control on pending payments. The exposures of almost all subsidiaries in Bulgaria to foreign currency risk are insignificant because almost all sales are performed to the local market in Bulgarian Levs (BGN). The import of goods is performed mainly in Euro (EUR). The loans denominated in a foreign currency have been granted mainly in EUR. The assets and liabilities of the Group denominated in BGN and presented by a foreign currency are as follows: 31 December 2022 in BGN in EUR in RSD in USD in UAH in other currency Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 4,770 - - 8 - - 4,778 Financial assets at amortised cost, including 222,660 23,821 60,126 6,790 7,258 5,908 326,563 Loans and receivables, 212,483 21,084 59,343 6,695 3,252 3,855 306,712 Cash and cash equivalents 10,177 2,737 783 95 4,006 2,053 19,851 Total financial assets 227,430 23,821 60,126 6,798 7,258 5,908 331,341 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 153 31 December 2022 in BGN in EUR in RSD in USD in UAH in other currency Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Short-term and long - term bank loans 123,272 67,555 3,833 - 1,212 - 195,872 Other loans and liabilities 65,480 60,357 45,299 2,697 435 480 174,748 Lease liabilities 65,695 18,997 - 417 141 298 85,548 Total financial liabilities 254,447 146,909 49,132 3,114 1,788 778 456,168 31 December 2021 in BGN in EUR in RSD in USD in UAH in other currency Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 5,755 - - 23 - - 5,778 Financial assets at amortised cost, including 221,866 31,236 57,173 7,445 10,372 5,019 333,111 Loans and receivables, 202,525 29,651 48,550 7,103 3,372 4,193 295,394 Cash and cash equivalents 19,341 1,585 8,623 342 7,000 826 37,717 Total financial assets 227,621 31,236 57,173 7,468 10,372 5,019 338,889 31 December 2021 in BGN in EUR in RSD in USD in UAH in other currency Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Short-term and long-term bank loans 125,949 132,073 5,638 - 6,106 - 269,766 Other loans and liabilities 70,321 57,365 37,012 3,600 1,476 690 170,464 Lease liabilities 49,532 3,641 - 1,091 - 222 54,486 Total financial liabilities 245,802 193,079 42,650 4,691 7,582 912 494,716 Foreign currency sensitivity analysis The foreign currency sensitivity of the Group exposures is mainly related with the Ukrainian Hryvnia (UAH), and the Serbian Dinar (RSD). With regard to the other currencies in which the Group operates or in which other companies of the Group operate (Polish Zloty, US Dollar and Kazakhstani Tenge) the foreign currency risk of the Group is limited, because their exposures in these currencies are relatively small and are more easily regulated by the managing bodies of the respective subsidiaries. The effect of foreign currency sensitivity to 10% increase/decrease in current exchange rates of BGN to the Serbian Dinar (RSD), Belarusian Ruble (BYN), Ukrainian Hryvnia (UAH), US Dollar (USD) and in general to the other foreign currency exposures, based on the structure of foreign currency assets and liabilities at 31 December and on the assumption that the influence of all other variables is ignored, has been measured and presented as impact on the post-tax consolidated financial result and on the equity of the Group. The impact in 2022 of a 10% increase/decrease in the exchange rates of RSD, UAH, USD against BGN on the Group’s profit (following taxation) is: SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 154 31.12.2022 31.12.2021 RSD USD UAH RSD USD UAH BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Financial result 934 332 449 1,234 250 229 Retained earnings 934 332 449 1,234 250 229 Other currencies include mainly: BGN 3,284 thousand in PLN (31 December 2021: BGN 2,046 thousand in PLN and BGN 1,099 thousand in MDL net financial assets). In case of 10% increase/decrease in the exchange rates of PLN (for 2021: MDL and RUB) against BGN the final effect on the Group’s profit (following taxation) is: 31.12.2022 31.12.2021 PLN MDL PLN MDL BGN '000 BGN '000 BGN '000 BGN '000 Financial result 266 - 166 97 Retained earnings 266 - 166 97 The effect on equity is of the same amount and in a direction of a decrease and reflects in the component 'retained earnings'. The Group analyses currency exposure and takes timely measures to mitigate effects thereof on the Group’s results. Price risk The Group companies are exposed to price risk of inventories based on three main factors: (a) a possible increase of purchase prices of raw materials and consumables, since a significant portion of the raw materials used are imported and they represent a significant share of production costs; (b) a possible increase in supplier prices of goods; and (c) the growing competition on the Bulgarian pharmaceutical market, affecting the prices of pharmaceuticals. For the purpose of mitigating this influence, the management of the Group applies a strategy aimed at optimisation of production costs, validation of alternative suppliers that offer beneficial commercial conditions, expanding product range by means of new generic products development and last but not least, adoption of a flexible marketing and price policy. Price policy is a function of three main factors – structure of expenses, prices of competitors and purchasing capacity of customers. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 155 The Group is exposed to a significant price risk also with regard to the shares held thereby, classified as other long-term equity investments, mostly through the parent company. For this purpose, the management monitors and analyses all changes in security markets and also uses consulting services of one of the most authoritative in the country investments intermediaries. In addition, at this stage, the management has taken a decision for a reduction in its operations on stock markets, retaining of the purchased shares for longer periods with current monitoring of the reported by the respective issuer financial and business indicators as well as the development of the operations in the environment of crisis. Liquidity risk The liquidity risk is the adverse situation when the Group encounters difficulty in meeting unconditionally its obligations within their maturity. The Group generates and maintains a significant volume of liquid funds. An internal source of liquid funds for the Group is its main economic activity of its companies generating sufficient operational flows. Banks and other permanent counterparts represent external sources of funding. To isolate any possible general liquidity risk, the group implements a system of alternative mechanisms of acts and prognoses, the final aim being to maintain good liquidity and, respectively, ability to finance its economic activities. This is supplemented by current monitoring of the maturities of assets and liabilities, control over cash outflows and ensuring their current balancing with inflows, including renegotiation of maturities and optimisation of debt structure, increase and internal restructuring of self-generated funds and their investment. Maturity analysis The table below presents the financial non-derivative liabilities of the Group, classified by remaining term to maturity, determined against the contractual maturity at the consolidated financial statements date. The table is prepared on the basis of undiscounted cash flows and the earliest date on which a payable becomes due for payment. The amounts include principal and interest. Maturity analysis as at 31 December 2022 up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years over 5 years Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN ’000 BGN ’000 BGN '000 Short-term and long-term bank loans 1,804 80,271 5,270 84,122 24,925 3,437 202 200,031 Other loans and liabilities 98,687 51,821 8,543 2,645 2,475 4,675 7,013 175,859 Lease liabilities 1,405 2,923 4,217 8,270 15,182 32,552 25,502 90,051 Total liabilities 101,896 135,015 18,030 95,037 42,582 40,664 32,717 465,941 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 156 Maturity analysis as at 31 December 2021 up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years over 5 years Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN ’000 BGN ’000 BGN '000 Short-term and long-term bank loans 63,024 2,261 34,630 132,920 33,160 6,781 994 273,770 Other loans and liabilities 93,031 59,721 1,287 1,447 2,545 6,137 9,350 173,518 Lease liabilities 1,219 2,489 3,614 6,670 12,119 21,915 9,458 57,484 Total liabilities 157,274 64,471 39,531 141,037 47,824 34,833 19,802 504,772 Risk of interest-bearing cash flows Interest-bearing assets in the structure of the Group are: cash, bank deposits and loans granted at fixed interest rate. On the other hand, the borrowings of the Group in the form of long-term and short-term loans are usually with a floating interest rate. This circumstance makes the cash flows of the Group partially dependent on interest risk. This risk is covered in two ways: (a) optimisation of resources and structure of credit resources for achieving relatively lower price of attracted funds; and (b) combined structure of interest rates on loans comprising two components – a permanent one and a variable one; the correlation between them, as well as their absolute value, are maintained in a proportion favourable for the Group companies. The fixed component has a relatively low absolute value and sufficiently high relative share in the total interest rate. This circumstance eliminates the probability of a significant change in interest rate levels in case of variable component updating. Thus the probability for an unfavourable change of cash flows is reduced to a minimum. The managing bodies of the Group companies together with the management of the parent currently monitor and analyse the exposure of the respective company to the changes in interest levels. Simulations are carried out for various scenarios of refinancing, renewal of existing positions, and alternative financing. The impact of a defined interest rate shift, expressed in points or percentage, on the financial result and equity is calculated based on these scenarios. For each simulation, the same assumption for interest rate shift is used for all major currencies. The calculations are made for major interest-bearing positions. Interest analysis interest-free with floating interest % with fixed interest % Total 31 December 2022 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 4,778 - - 4,778 Financial assets at amortised cost, including: 224,175 5,133 97,255 326,563 Receivables and loans 213,234 15 93,463 306,712 Cash and cash equivalents 10,941 5,118 3,792 19,851 Total financial assets 228,953 5,133 97,255 331,341 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 157 Interest analysis interest-free with floating interest % with fixed interest % Total 31 December 2022 BGN '000 BGN '000 BGN '000 BGN '000 Short-term and long-term bank loans 9 191,183 4,680 195,872 Other loans and liabilities 172,851 1,895 2 174,748 Lease liabilities - 4,289 81,259 85,548 Total financial liabilities 172,860 197,367 85,941 456,168 Interest analysis interest-free with floating interest % with fixed interest % Total 31 December 2021 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 5,778 - - 5,778 Financial assets at amortised cost, including: 228,668 22,040 82,403 333,111 Receivables and loans 213,710 15 81,669 295,394 Cash and cash equivalents 14,958 22,025 734 37,717 Total financial assets 234,446 22,040 82,403 338,889 Short-term and long-term bank loans 31 255,755 13,980 269,766 Other loans and liabilities 164,311 6,151 2 170,464 Lease liabilities - 3,711 50,775 54,486 Total financial liabilities 164,342 265,617 64,757 494,716 The table below demonstrates Group's sensitivity to possible changes in interest rates by 0.50% based on the structure of assets and liabilities as at 31 December and with the assumption that the influence of all other variables is ignored. The effect is measured and presented as impact on the financial result after taxes and on equity. Increase / decrease in interest rate Impact on post-tax financial result and equity profit/(loss) 31.12.2022 31.12.2021 BGN’000 BGN’000 Increase (888) (1,195) Decrease 888 1,195 Capital risk management The capital management objectives of the Group are to build and maintain capabilities to continue its operation as a going concern and to provide return on the investments of shareholders and economic benefits to other stakeholders and participants in its business as well as to maintain an optimal capital structure to reduce the cost of capital. Analogous approach is applied also at the level of a separate Group company with regard to its capital structure and financing. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 158 The Group currently monitors capital availability and structure on the basis of the gearing ratio. This ratio is calculated as net debt divided by the total amount of employed capital. Net debt is calculated as total borrowings (current and non-current ones) as presented in the consolidated statement of financial position less cash and cash equivalents. Total employed capital is equal the sum of equity (including non-controlling interest) and net debt. It is a characteristic feature for both presented periods that the Group finances its operations both through its own generated profit and by maintaining a certain level of trade and other current payables and loans (bank, commercial ones). The strategy of the parent company's management was to maintain the ratio within 25-35% at a Group level. The table below shows the gearing ratios based on capital structure: 31.12.2022 31.12.2021 BGN'000 BGN'000 Total borrowings, including: 283,295 330,622 Bank loans 195,872 269,766 Lease liabilities and factoring 87,423 60,856 Less: Cash and cash equivalents (19,851) (37,717) Net debt 263,444 292,905 Total equity of the Group 716,634 658,868 Total capital of the Group 980,078 951,773 Gearing ratio 0.27 0.31 The liabilities shown in the table are disclosed in Notes 29, 31, 33, 36 and 39.. Fair value measurement The fair value concept presumes realisation of the financial instruments through sales, based on the position, assumptions and judgements of independent market participants on the main or more profitable market for given assets or liabilities. However, in most cases especially in regard of trade receivables and payables as well as loans and deposits with banks, the Group expects to realise these financial assets also through their total refund or respectively, settlement over time. Therefore, they are presented at amortised cost. In addition, a large part of the financial assets and liabilities are either short-term in their nature (trade receivables and payables, short-term loans) or are presented in the consolidated statement of financial position based on market value (deposits placed with banks, investments in securities, loans with floating interest rate) and therefore, their fair value is almost equal to their carrying amount. For receivables and loans with a fixed interest rate, the methodology applied in determining it uses as starting point for calculations Group’s observations of market interest rates. As far as no sufficient market experience, stability and liquidity exist in regards of purchases and sales of certain financial assets and liabilities, still no adequate and reliable quotes of market prices are available thereof, due to which alternative assessment methods and techniques are used. The management of the parent company is of the opinion that the estimates of the financial assets and liabilities presented in the statement of financial position are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 159 46. ACQUISITIONS AND INCREASING INTERESTS IN SUBSIDIARIES 46.1 Acquisition of subsidiaries In 2022, the Group did not acquire or incorporate new subsidiaries. In 2021, the Group did not acquire new subsidiaries. In 2021, the Group incorporated the following companies: date of incorporation effective interest % amount of capital contribution BGN'000 Through SIA BRIZ SIA BACH 2.11.2021 100.00% 11,884 As at 30 November 2021 the Group disposed of its interest in SIA BACH (Note 47). In 2022, cash was paid at the amount of BGN 2,338 thousand for subsidiaries acquired in 2020 (2021: BGN 2,338 thousand). 46.2 Increasing interest (purchases of non-controlling interests) The Group performed the transactions for purchase of additional shares of non-controlling interests. In 2022 the Group acquired the following shares: Increases in interests transaction date % change in interest acquired net assets (purchases of non-controlling interest) BGN '000 Sopharma Trading AD 30.12.2022 5.91% 5,564 Rap Pharma International OOD 17.8.2022 20.00% (292) 5,272 In 2021 the Group acquired the following shares: Increases in interests transaction date % change in interest acquired net assets (purchases of non-controlling interest) BGN '000 Sopharma Trading AD 31.12.2021 5.17% 4,384 ООО Zdorovey 21.1.2021 3.25% 4 ООО Zdorovey Pharm 21.1.2021 2.11% 2 OOO Pharmacevt Plus 21.1.2021 4.01% (33) 4,357 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 160 The acquisition price of the additional shares purchased in 2022, the effects and cash outflows are as follows: Increases in interests Total (purchases of non-controlling interests) BGN'000 Direct acquisition 10,859 Total acquisition price 10,859 Fair value of the acquired net assets (5,272) Effects undertaken by the Group at the expense of the group reserve – “accumulated profit” 5,587 Cash outflow on increase in interest (purchasing of non-controlling interest) 10,859 The acquisition price of the additional shares purchased in 2021, the effects and cash outflows are as follows: Increases in interests Total (purchases of non-controlling interests) BGN'000 Direct acquisition 8,421 Indirect acquisition through a subsidiary 84 Total acquisition price 8,505 Fair value of the acquired net assets (4,357) Effects undertaken by the Group at the expense of the group reserve – “accumulated profit” 4,148 Cash outflow on increase in interest (purchasing of non-controlling interest) 8,421 47. DISPOSAL OF SUBSIDIARIES AND JOINT VENTURES 47.1 Total disposal of subsidiaries and joint ventures In 2022 the Group disposed of its interest in the following subsidiary: Company Date of disposal Effective interest % disposed of Rap Pharma International OOD 11.11.2022 100.00% SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 161 In 2021 the Group disposed of its interest in the following subsidiaries: Company Date of disposal Effective interest % disposed of Momina Krepost AD 10.3.2021 60.93% Sopharma Buildings REIT 8.6.2021 40.38% UAB Recessus 1.10.2021 50.98% SOOO Brititrade 30.11.2021 80.00% ООО Tabina 30.11.2021 80.22% ООО Farmacevt Plus 30.11.2021 63.09% ООО Galenapharm 30.11.2021 90.60% ODO Medjel 30.11.2021 82.00% ODO Alenpharm-plus 30.11.2021 91.98% ODO SalusLine 30.11.2021 77.00% ZAO Interpharm 30.11.2021 90.00% ООО Zdorovei 30.11.2021 70.10% BOOO Spetzfarmacia 30.11.2021 70.00% ООО Bellerofon 30.11.2021 85.80% OOО Zdorovei Pharm 30.11.2021 45.57% SIA BACH 30.11.2021 100.00% SIA Briz 30.12.2021 100.00% SIA Briz Trading 30.12.2021 100.00% The net assets of the companies disposed of in 2022 are presented, as follows: Disposal with loss of control 11.11.2022 BGN'000 PPE (Note 16) 123 Intangible assets (Note 17) 170 Inventories 462 Trade receivables 80 Other current receivables and assets 173 Cash and cash equivalents 116 Deferred tax assets 41 Trade payables (2,500) Current lease liabilities (48) Other payables (67) Net assets/(liabilities) (1,450) SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 162 The financial result from disposal of subsidiaries is as follows: 2022 BGN'000 Income from disposal of Group subsidiary 98 Adjusted with: Negative net assets written-off 1,450 Goodwill (40) Reserve on restatement of foreign operations into the presentation currency (52) Gain on disposal of subsidiaries 1,456 Net cash flows from disposal pf subsidiaries Cash received for subsidiaries sold in 2022 98 Cash received for subsidiaries sold in prior years 417 Less: Cash of the companies disposed of (116) Net cash flows from disposal of subsidiaries 399 The net assets of the companies disposed of in 2021 are presented, as follows: Disposal with loss of control 31.12.2021 BGN'000 PPE (Note 16) 21,774 Intangible assets (Note 17) 317 Investment property (Note 18) 634 Other long-term equity investments (Note 20) 2,832 Inventories 29,792 Trade receivables 12,599 Other current receivables and assets 5,956 Cash and cash equivalents 2,624 Long-term bank loans (15,718) Non-current lease liabilities (2,894) Deferred tax liabilities 391 Long-term benefit obligations (82) Non-current government grants (2,262) Other non-current liabilities (3,771) Trade payables (42,767) Short-term bank loans (25,100) Current portion of long-term bank loans (2,695) Current lease liabilities (2,645) Current government grants (100) Other payables (14,045) Net assets/(liabilities) (35,160) SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 163 The financial result from disposal of subsidiaries is as follows: 2021 BGN'000 Income from disposal of Group subsidiary 1,504 Fair value of the retained interest 2,110 Adjusted with: Negative net assets written-off 35,160 Non-controlling interest (1,196) Reserve on restatement of foreign operations into the presentation currency 26 Gain on disposal of subsidiaries 37,604 Net cash flows from disposal pf subsidiaries Cash received for subsidiaries sold in 2021 1,472 Less: Cash of the companies disposed of (2,624) Net cash flows from disposal of subsidiaries (1,152) 48. RELATED PARTY TRANSACTIONS Related parties Relation type Relationship period Telecomplect Invest AD Shareholding company with significant influence 2022 2021 Donev Investments Holding AD Shareholding company with significant influence 2022 2021 Momina Krepost AD Joint venture 2022 as from 10 March 2021 Sopharma Properties REIT Company related through shareholding company with significant influence 2022 as from 08.12.2021 Doverie Ovedinen Holding AD Associate 2022 2021 DOH Group companies Companies controlled by an associate 2022 2021 Sofprint Group AD Company related through a main shareholder 2022 2021 Sofconsult Group AD Company related through key management personnel 2022 2021 VES Eectroinvest Systems EOOD Company related through key management personnel 2022 2021 Eco Solar Invest OOD Company related through key management personnel 2022 2021 Sirius OOD Company related through key management personnel - until 14.06.2021 Melnitsa Stefanovo village EOOD Company related through key management personnel - until 14.06.2021 OKP Investments OOD Company related through key management personnel - until 14.06.2021 Alpha In EOOD Company related through key management personnel 2022 2021 Consumpharm OOD Company related through key management personnel 2022 as from 14.06.2021 г. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 164 Supplies from related parties: 2022 2021 BGN ‘000 BGN ‘000 Supply of inventories from: Companies related through key management personnel 10,577 8,936 Joint ventures 298 - Associates 128 22 Companies controlled by an associate 43 81 11,046 9,039 Supply of services from: Companies controlled by an associate 1,106 969 Shareholding companies with significant influence 425 383 Associates 514 126 Companies under a common indirect control through key management personnel 266 269 Joint ventures 3 - 2,314 1,747 Supply of property, plant and equipment from: Companies controlled by an associate 1,558 463 Shareholding companies with significant influence - 17 1,558 480 Other supplies from: Companies controlled by an associate 261 235 261 235 Interest expenses: Associates 33 - Shareholding companies with significant influence 9 170 42 170 Total supplies 15,221 11,671 Sales to related parties Sales of inventories to: Companies controlled by an associate 1,389 943 Companies related through key management personnel 1,109 700 2,498 1,643 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 165 Sales of services to: 2022 2021 BGN ‘000 BGN ‘000 Companies controlled by an associate 281 285 Companies related through key management personnel 219 229 Associates 7 7 507 521 Fees on guarantorships and warranties to: Joint ventures 7 14 Companies controlled by an associate - 6 7 20 Interest on loans granted: Companies controlled by associates 1,934 1,918 Joint ventures 46 26 Associates 11 2 1,991 1,946 Cessions Joint ventures 71 - 71 - 5,074 4,130 Leases In the reporting period the Group recognised assets, liabilities and payments in relation to leases with related parties: Lease liabilities as at 31 December in relation to leases with related parties are as follows: 31.12.2022 31.12.2021 BGN ‘000 BGN ‘000 Recognised lease liabilities at 1 January 4,314 174 Increases 19,305 4,373 Lease payments in the period (2,462) (233) Lease payments written-off (541) - Lease liabilities at 31 December 20,616 4,314 Right-of-use assets as at 31 December in relation to leases with related parties are as follows: 31.12.2022 31.12.2021 BGN ‘000 BGN ‘000 Right-of-use assets at 1 January 4,315 172 Increases 19,263 4,427 Depreciation accrued (2,482) (284) Derecognised carrying amount of right-of-use assets (572) - Right-of-use assets at 31 December 20,524 4,315 The newly arisen right-of-use assets and lease liabilities are under a lease concluded with an associate and with a company controlled by an associate. SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2022 166 The accounts and balances with related parties are presented in Notes 21, 25, 31 and 38. The composition of key management personnel of the Group includes the disclosed in Note 1.1 Executive Director and the members of the Board of Directors of the parent company. Salaries and other short-term benefits of key management personnel and Executive Directors, members of the Board of Directors and General Managers of the Group’s subsidiaries amount to BGN 3,325 thousand (2021: BGN 5, 6,614 thousand) and include: · current wages and salaries – BGN 3,001 thousand (2021: BGN 6,095 thousand); · tantieme – BGN 324 thousand (2021: BGN 519 thousand); Salaries and other short-term benefits of key management personnel of the parent company amount to BGN 1,214 thousand (2021: BGN 1,256 thousand) and include: · current wages and salaries – BGN 971 thousand (2021: BGN 969 thousand); · tantieme – BGN 243 thousand (2021: BGN 287 thousand). 49. EVENTS AFTER END OF THE REPORTING PERIOD On 23 January 2023 the parent company concluded a transformation agreement through the merger of Biopharm Engineering AD in accordance with Art. 262 of the Commercial Act, as a result of which the entire property of the transforming company (Biopharm Engineering AD) will be transferred to the receiving company (Sopharma AD), which will become its legal successor. The transforming company (Biopharm Engineering AD) will be terminated without liquidation. The contract was submitted for approval to the Financial Supervision Commission on 27 January 2023. By means of Letter No РГ – 05 – 684 – 1 dated 24.02.2023 Financial Supervision Commission requested additional information and data, as well as adjusted documents in relation to the merger application. These were deposited to the Financial Supervision Commission on 24 March 2023. No other significant events occurred after 31 December 2022 that require additional adjustments and/or disclosures in the consolidated financial statements as at 31 December 2022. Consolidated management report – Sopharma Group 2021 SOPHARMA GROUP 26 April 2023 CONSOLIDATED MANAGEMENT REPORT 2022 1 CONTENT I. General information about Sopharma Group ................................................................................ 5 1. Main activities .................................................................................................................................. 5 2. Registration and activity of the Company ........................................................................................ 5 3. Controlled companies ...................................................................................................................... 6 4. Board of directors ............................................................................................................................. 8 5. Shareholder structure as at 31 December 2022 .............................................................................. 8 II. Recent developments ................................................................................................................... 8 1. Industrial activity .............................................................................................................................. 8 2. Products ........................................................................................................................................... 8 3. Distribution ....................................................................................................................................... 9 III. Information under Article 39 of the Accountancy Act ............................................................. 10 1. An overview of the company's performance and the main risks it faces (Art. 39, para 1 of the Accountancy Act / ............................................................................................................................... 10 2. Analysis of financial and non-financial key performance indicators of the Group /Article 39, item 2 of the Accountancy Act/ ..................................................................................................................... 12 3. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act/ .............................................................................. 15 4. Future development of Sopharma Group (article 39, item 4 of the Accountancy Act) and planned economic policy in the following year (Article 247 (3) of the Commerce Act) ................................... 15 5. Research and development (article 39, item 5 of the Accountancy Act) ....................................... 16 6. Information on the acquisition of own shares required by Article 187d of the Commerce Act/ Article 39, Item 6 of the Accountancy Act/ ........................................................................................ 19 7. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/ ..................... 19 8. Use of financial instruments /Article 39, item 8 of the Accountancy Act/ ..................................... 19 IV. Information under Article 247 and Art. 240b of the Commerce Act ........................................ 21 1. Information under Art. 247 of the Commerce Act ......................................................................... 21 2. Information under art. 240b of the Commercial Law on the obligation of Board members to notify in writing the Board of Directors or the Management Board when they or their related parties conclude contracts with the company outside its usual activity or substantially deviate from market conditions ........................................................................................................................................... 24 V. Information on Annex 2 to art. 10, item 1 of Regulation 2 of LPOS .............................................. 24 2 1. Information given in value or quantitative terms about the main categories of goods, products and / or services provided, including their share in sales revenue of the Group in general and changes in the reporting year ............................................................................................................. 24 2. Information about the revenues allocated by separate categories of activities, domestic and foreign markets and information on sources for supply of materials needed for production of goods or the provision of services with the degree of dependence on any individual seller or buyer / user, in case their share exceeds 10 per cent of the expenses or sales revenue, provide information for each person for his share in sales or purchases and links with the issuer ......................................... 24 3. Information on significant transactions ......................................................................................... 24 4. Information regarding transactions between the issuer and related parties during the reporting period, proposals for concluding such transactions, as well as transactions that are outside its usual activity or substantially deviate from market conditions when, the issuer or its subsidiary is party, indicating the value of the transactions, the nature of relatedness and any information necessary to assess the impact on the financial position of the issuer ................................................................... 25 5. Information about events and indicators unusual for the issuer that have a significant impact on its activity and realized income and expenses; assessment of their impact on the current year results ................................................................................................................................................. 26 6. Information on off-balance sheet transactions - nature and business purpose, the financial impact of transactions on the activity, if the risks and benefits of these transactions are material to the issuer and the disclosure of this information is essential for assessing the financial position of the issuer .................................................................................................................................................. 26 7. Information on shares of the issuer, its major investments in the country and abroad (in securities, financial instruments, intangible assets and real estate), as well as investments in equity securities outside its group of companies under Accountancy Act and the sources /methods of financing ............................................................................................................................................. 26 8. Information about the concluded by the issuer, its subsidiary or parent company in their capacity as borrowers, loan contracts specifying the terms and conditions, including the deadlines for repayment as well as information about guarantees and commitments .......................................... 26 9. Information about the concluded by the issuer, its subsidiary or parent company in their capacity of lenders, loan agreements, including the provision of guarantees of any kind, including related parties, and the specific terms, including the deadlines for payment and the purpose for which they were granted ...................................................................................................................................... 27 10. Information on the use of funds from the issuance of new issue of securities during the reporting period ................................................................................................................................. 28 11. Analysis of the relationship between the financial results reflected in the financial statements for the financial year and earlier published forecasts for these results ............................................. 28 3 12. Analysis and evaluation of the policy on the management of financial resources, including the ability to meet its obligations, possible threats and measures that the issuer has taken or will take to resolve them ....................................................................................................................................... 28 13. Assessment of the feasibility of investment intentions, indicating the amount of available funds and possible changes in the financing structure of this activity ............................................... 28 14. Information about changes in the reporting period in the basic principles of management of the issuer and its group of companies under the Accounting Law ..................................................... 28 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management .......................................... 29 16. Information about changes in management and supervisory boards during the accounting year 29 17. Information on the amount of remuneration, rewards and / or benefits of each of the members of the management and supervisory bodies for the financial year, paid by the issuer and its subsidiaries, regardless of whether they have been included in the expenses of the issuer, or arising from profit distribution, including: ......................................................................................... 29 18. Information on held by members of management and supervisory bodies, the procurators and the senior management of the issuer shares, including the shares held by each of them individually and as a percentage of shares of each class and provided by the issuer options on its securities - type and amount of securities on which options have been set, exercise price of the options, purchase price, if any, and the term of the options. ............................................................ 29 19. Arrangements (including after the end of the financial year) as a result of which future changes may occur in the holding of shares or bonds by current shareholders or bondholders There are no such arrangements. ................................................................................................................. 30 20. Information about pending legal, administrative or arbitration proceedings relating to liabilities or receivables of the issuer of at least 10 percent of its equity; if total liabilities or receivables of the issuer in all proceedings exceeds 10 per cent of its equity, provide information about each case separately ................................................................................................................ 30 21. Information about the Investor Relations Director, including telephone number and correspondence address: ................................................................................................................... 30 VI. Information Annex 3 to Article 10, paragraph 2, item 4 of Ordinance 2 of LPOS ............................. 30 1. Structure of the capital of the Company, including securities not admitted to trading on a regulated market in Bulgaria or another Member State, indication of the different classes of shares, the rights and obligations of each class of shares and the portion of the total capital represented by each class ............................................................................................................................................ 30 2. Information regarding the direct and indirect ownership of 5 percent or more of the voting rights at the General Meeting of the Company, including details of the Shareholders, the size of their shareholding and the type of shareholding ........................................................................................ 31 4 3. Information about shareholders with special control rights .......................................................... 31 4. Agreements between Shareholders which are known to the Company and which may lead to restrictions on the transfer of shares or voting right. ........................................................................ 31 5. Significant contracts of the Company that take effect, are amended or terminated due to a change in control of the company in a mandatory tender offer and the effects thereof, except where disclosure of this information may cause serious damage to the company; exemption under the preceding sentence shall not apply in cases where the company is obliged to disclose information under the Law ................................................................................................................. 32 5 I. General information about Sopharma Group 1. Main activities Sopharma Group (the Group) is a leading Bulgarian producer, exporter and local distributor of pharmaceutical products with a strong presence in Eastern and South-eastern Europe, offering a wide range of prescription medicines and OTC products, food supplements, cosmetics and medical devices. The Group operates in the following areas: • production of pharmaceutical products including medicines, primarily generics, herbal-based substances and food supplements, which is mainly done by “Sopharma” AD (the Company); • production of medicinal products and medicinal cosmetics, as plasters, bandages and sanitary- hygiene products focused at the production site in Sandanski city; • distribution of pharmaceuticals, medical supplies, sanitary materials, vitamins, food supplements and cosmetics, which is mainly performed by “Sopharma Trading” in Bulgaria and in Serbia. 2. Registration and activity of the Company “Sopharma” AD is a company registered in Bulgaria under the Provisions of the Commercial Act, with its registered office in Sofia, 16 Iliensko shose Str. “Sopharma” AD was established in 1933. The court registration of the Group is from 15.11.1991, decision №1/1991 of Sofia City Court. “Sopharma” AD is a public company under the Law on Public Offering of Securities. The Company conducts the production and marketing of medicinal substances and dosage forms; research, engineering and implementation activities in the field of phytochemistry, chemistry and pharmacy, production of medical products and cosmetics, incl. - plasters, bandages, sanitary-hygiene products, herbal cosmetics, concentrates for hemodialysis. “Sopharma” AD provides services related to production, as well as to ancillary and supporting activities. 6 3. Controlled companies Sopharma Group consists of “Sopharma” AD and the following subsidiaries, directly or indirectly controlled by the Company. Additionally, the Group has investments in two associated companies (“Doverie - obedinen holding” AD, 24.998% stake and “Sopharma Imoti” REIT, 35.65% stake) and in one joint venture (“Momina krepost” AD, 37.46% stake). Company Interest as at 31.12.2022 in % “Sopharma Trading” AD 87.25 “Pharmalogistica” AD 89.39 “Elektroncommerce” EOOD 100.00 “Biopharm Engineering” AD 97.15 “Phyto Palauzovo” AD 95.00 “Veta Pharma” AD 99.98 “Sopharmacy” EOOD ** 87.25 “Sopharmacy 2” EOOD ** 87.25 “Sopharmacy 3” EOOD ** 87.25 “Sopharmacy 4” EOOD ** 87.25 “Sopharmacy 5” EOOD ** 87.25 “Sopharmacy 6” EOOD ** 87.25 “Sopharmacy 7” EOOD ** 87.25 “Sopharmacy 8” EOOD ** 87.25 “Sopharmacy 9” EOOD ** 87.25 “Sopharmacy 10” EOOD ** 87.25 “Sopharmacy 11” EOOD ** 87.25 “Sopharmacy 12” EOOD ** 87.25 “Sopharmacy 13” EOOD ** 87.25 “Sopharmacy 14” EOOD 87.25 “Sopharmacy 15” EOOD 87.25 “Sopharmacy 16” EOOD 87.25 “Sopharmacy 17” EOOD 87.25 “Sopharmacy 18” EOOD 87.25 “Sopharmacy 19” EOOD ** 87.25 “Sopharmacy 20” EOOD ** 87.25 “Sopharmacy 21” EOOD ** 87.25 “Sopharmacy 22” EOOD ** 87.25 “Sopharmacy 23” EOOD ** 87.25 “Sopharmacy 24” EOOD ** 87.25 “Sopharmacy 25” EOOD ** 87.25 “Sopharmacy 26” EOOD ** 87.25 “Sopharmacy 27” EOOD ** 87.25 “Sopharmacy 28” EOOD ** 87.25 “Sopharmacy 29” EOOD ** 87.25 “Sopharmacy 30” EOOD ** 87.25 7 “Sopharmacy 31” EOOD ** 87.25 “Sopharmacy 32” EOOD ** 87.25 “Sopharmacy 33” EOOD ** 87.25 “Sopharmacy 34” EOOD ** 87.25 “Sopharmacy 35” EOOD ** 87.25 “Sopharmacy 36” EOOD ** 87.25 “Sopharmacy 37” EOOD ** 87.25 “Sopharmacy 38” EOOD ** 87.25 “Sopharmacy 39” EOOD ** 87.25 “Sopharmacy 40” EOOD ** 87.25 “Sopharmacy 41” EOOD ** 87.25 “Sopharmacy 42” EOOD ** 87.25 “Sopharmacy 43” EOOD ** 87.25 “Sopharmacy 44” EOOD ** 87.25 “Sopharmacy 45” EOOD ** 87.25 “Sopharmacy 46” EOOD ** 87.25 “Sopharmacy 47” EOOD ** 87.25 “Sopharmacy 48” EOOD ** 87.25 “Sopharmacy 49” EOOD ** 87.25 “Sopharmacy 50” EOOD ** 87.25 “Sopharmacy 51” EOOD ** 87.25 “Sopharmacy 52” EOOD ** 87.25 “Sopharmacy 53” EOOD ** 87.25 “Sopharmacy 54” EOOD ** 87.25 “Sopharmacy 55” EOOD ** 87.25 “Sopharmacy 56” EOOD ** 87.25 “Sopharmacy 57” EOOD ** 87.25 “Sopharmacy 58” EOOD ** 87.25 “Sopharmacy 59” EOOD ** 87.25 “Sopharmacy 60” EOOD ** 87.25 “Sopharmacy 61” EOOD ** 87.25 “Sopharmacy 62” EOOD ** 87.25 “Sopharmacy 63” EOOD ** 87.25 “Sopharmacy 64” EOOD ** 87.25 PAO “Vitamini” 100.00 “Sopharma” Warsaw Sp. z. o. o 100.00 “Sopharma” Poland Sp. z. o. o - in liquidation 60.00 OOO “Sopharma” Ukraine 100.00 TOO “Sopharma” Kazakhstan 100.00 “Sopharma Trading” D.o.o. 87.25 “Pharmachim” EOOD 100.00 effective interest in percent indirect interest 8 4. Board of directors “Sopharma” AD has a one tier management system with a Board of Directors of five members as follows: Ognian Donev, PhD – Chairman, Vessela Stoeva – Deputy Chairman and members – Alexander Tchaoushev, Bissera Lazarova and Ivan Badinski. The company has two procurators - Simeon Donev and Ivan Badinski. The company is represented and managed by the Executive Director Ognian Donev, PhD. Members of the key management personnel of the Group include the disclosed in Note №1 Executive Director and members of the Board of Directors of the Company. Additionally, it includes the executive directors, the board of directors and the managers of subsidiaries of the Group. 5. Shareholder structure as at 31 December 2022 II. Recent developments 1. Industrial activity The production activities of the Company are realized and developed in the following areas: • Substances and preparations based on plant raw materials (phytochemical production); • Ready-to-use formulations, incl.: ü Hard tablets, coated tablets, film-coated tablets, capsules; ü Galenic - suppositories, drops, syrups, ointments; ü Parenteral - injection solutions, lyophilic powder for injections. • Medical and cosmetic products, incl.: ü Plasters; ü Bandages; ü Sanitary-hygiene products; ü Herbal cosmetics; ü Concentrates for hemodialysis; ü Infusion solutions. 2. Products “Sopharma” AD The Company has more than 200 products in its portfolio: incl. nearly 190 medicinal products and 27.89% 20.68% 10.00% 5.23% 5.14% 20.86% 10.20% "Donev Investments Holding" AD "Telecomplect invest" AD "Sopharma" AD (treasury shares) CUPF "Alianz Bulgaria" "Telso" AD Other legal persons Other physical persons 9 11 groups of medical devices. Medicinal products mainly include generics and 15 traditional products, 12 of the products are plant-based. The Company's traditional products (in particular Tabex, Carsil and Tempalgin) make a major share to its export market income, while the company's generic products are of major importance for domestic sales, Analgin being the leader among these products. The product portfolio of “Sopharma” AD focuses on the following therapeutic areas: cardiology, gastroenterology, pain management, cough and cold, immunology and dermatology, respiratory tract and asthma, neurology and psychiatry, urology and gynecology, nephrology, surgery, orthopedics and traumatology. The most significant pharmaceutical products in terms of their contribution to the amount of revenues are: Ø Carsil – traditional plant-based product used to treat gastro-enterology diseases (liver diseases); Ø Tempalgin – traditional analgesic (painkiller); Ø Tabex – traditional plant-based smoking cessation drug; Ø Tribestan – traditional plant-based product that stimulates the functions of the sexual system; Ø Broncholitin – traditional plant-based product used to suppress cough; Ø Analgin – generic analgesic (pain reliever); Ø Nivalin – traditional plant-based product used for diseases of the peripheral nervous system; Ø Methylprednisolon – generic medicine for cases of severe allergies and certain life- threatening conditions; Ø Vitamin C – widely used nutritional supplement; Ø Valeriana – generic non-prescription herbal medicine used to reduce stress; Ø Medical devices – gauzes, compresses and dressings. 3. Distribution “Sopharma Trading” AD The company is a leading distributor of pharmaceutical products and cosmetics in Bulgaria, with a market share in the pharmaceutical products segment of 21.79% (according to IQVIA). “Sopharma Trading” AD is the exclusive distributor on the Bulgarian market of particular pharmaceutical products of several leading international pharmaceutical and other companies in the field of healthcare such as Amgen, Astra Zeneca, GE Healthcare, Johnson and Johnson, Abbot Diagnostics, Hartmann, Novartis and Novo Nordisk. The Company has more than 15 000 products (particularly pharmaceutical products, medical equipment and devices, accessories, cosmetics, vitamins and food supplements) in its portfolio, including the brands of “Sopharma” AD, and holds exclusive rights for Bulgaria over brands of strategic partners such as “Aboca”, “Colief”, “Jamieson”, “Planter's”, “Premax”, “Skincode”, “SVR” Laboratories, “US Pharmacia” and “Wyeth”, specialized services (such as software solutions for pharmacies and advice and consulting services) and national logistics services. “Sopharma Trading” AD cooperates with more than 400 partners and over 3 500 clients. 10 III. Information under Article 39 of the Accountancy Act 1. An overview of the company's performance and the main risks it faces (Art. 39, para 1 of the Accountancy Act / Key financial indicators Indicators 1-12/2022 1-12/2021 Change BGN '000 BGN '000 % Revenues 1 663 016 1 603 310 3.7% EBITDA 139 980 116 706 19.9% Operating profit 87 881 63 519 38.4% Net profit 76 333 91 703 -16.8% CAPEX 85 154 43 536 95.6% 31.12.2022 31.12.2021 BGN '000 BGN '000 Non-current assets 681 487 633 746 7.5% Current assets 572 491 571 232 0.2% Owners’ equity 716 634 658 868 8.8% Non-current liabilities 129 998 122 218 6.4% Current liabilities 407 346 423 892 -3.9% * acquired tangible and intangible long-term assets Indicators 1-12/2022 1-12/2021 EBITDA/ Revenues 8.4% 7,3% Operating profit/Sales Revenue 5.3% 4,0% Net profit/ Sales Revenue 4.6% 5,7% 31.12.2022 31.12.2021 Debt/ Equity 0,75 0,83 Net debt*/ EBITDA on annual basis 1,9x 2,5x * net debt includes bank loans and leasing and factoring liabilities less cash, taking into account the effects of the adoption of IFRS 16 Leasing, effective from 1 January 2019. Risks related to the Group’s business and the industry the Group operates in • The Group faces significant competition; • Part of Sopharma Trading's revenues in Bulgaria is generated from sales to state hospitals, which predetermines a high degree of business risk; • The Group is dependent on regulatory approvals; • Government regulations affecting the Group's business may change, thus possibly increasing compliance costs or otherwise affecting its operations; • Part of the Group’s revenues, in particular in Bulgaria, depends on the inclusion of the Group’s medicines in reimbursement lists; 11 • The Group’s production facilities and processes are subject to strict requirements and regulatory approvals that may delay or disrupt the Group’s operations; • The Company’s ability to pay dividends depends on a number of factors and there can be no guarantee that the Company will be able to pay dividends in accordance with its dividend policy or at all in any given year; • The Group is subject to operational risk, which is inherent to its business activities; • The Group is subject to numerous environmental and health and safety laws and regulations and is exposed to potential environmental liabilities; • Litigations or other out-of-court proceedings or actions may adversely affect the Group’s business, financial position and results of operations. Risks, related to Bulgaria and other markets in which the Group operates • The macroeconomic environment, particularly in Bulgaria, Russia and Ukraine, has a significant effect on the Group’s operations and position; • The political environment in Bulgaria and in the export markets, especially Russia, Belarus and Ukraine, has a significant effect on the Group operations and financial position; • Risks related to the Bulgarian legal system; • Developing legal frameworks in some countries in which the Group sells its products, in particular Russia, Belarus and the Ukraine, may negatively impact the Group’s operations in these countries; • Risks relating to exchange rates and the Currency Board in Bulgaria; • Interpretations of tax regulations may be unclear and tax laws and regulations applicable to the Group may change. Currency risk The Group companies perform their activities in active exchange with foreign suppliers and customers and are therefore exposed to currency risk. Through the companies in Ukraine and Kazakhstan, the group carries out business operations in these countries and, accordingly, has substantial exposures in Ukrainian hryvnia and Kazakh tenge. The currency risk is related to the negative movement of the exchange rates of these currencies against the Bulgarian lev in the future business operations, the recognized assets and liabilities in foreign currency and the net investments in foreign companies. The rest of the companies abroad sell mainly on local markets, leading to currency risk and against their currencies - the Serbian dinar and the Polish zloty. In order to control the currency risk, a system of planning of import deliveries, for foreign currency sales, as well as procedures for daily monitoring of movements in the dollar exchange rate and control of forthcoming payments, is introduced. The exposure of subsidiaries in Bulgaria in foreign currency is insignificant, as almost all sales are made on the local market in Bulgarian leva. Imports of goods are fully realized in euro. Borrowings denominated in foreign currency are mainly denominated in euro. 12 2. Analysis of financial and non-financial key performance indicators of the Group /Article 39, item 2 of the Accountancy Act/ Operating revenues Sales revenues of the Group increased with BGN 59,7 million or 3.7%, reaching BGN 1 663 million in 2022 compared to BGN 1 603,3 million in 2021. Adjusted for the deconsolidation of the companies sold at the end of last year in Latvia and Belarus, sales growth was 10%. Sales of goods increased with BGN 50,7 million or 3.8%, reaching BGN 1 379,1 million in 2022 compared to BGN 1 328,4 million in 2021. After adjustment for the deconsolidation of distribution companies and pharmacy chains in Latvia and Belarus, the growth of sales of goods for the nine months of 2022 was 11%. Sales of finished products increased by BGN 9 million, or 3.3%, to BGN 283,9 million in 2022 compared to BGN 274,9 million in 2021. On a consolidated basis, the growth in sales of finished products in Bulgaria for 2022 was 3.3% compared to the previous period. "Sopharma" AD retains its market share and according to IQVIA data, by the end of 2022 it occupies 2.48% (tenth position) of the total volume of the Bulgarian pharmaceutical market in terms of value and 9.46% (first position) of sales in kind terms. The positions of the main competitors of the Company in the country are as follows: Novartis –6.86% (4.03% in kind), Roche – 5.35% (0.14% in kind), Merck Sharp & Dohme– 4.37% (0.15% in kind), Pfizer – 3.72% (0.65% in kind), Teva – 3.55% (9.19 % in kind), Astrazeneca – 3.11% (0.36% in kind), Abbvie – 3.05% (0.06 in kind), Swixx Biopharma – 2.95% (0.92 in kind), Bayer – 2.61% (1.82% in kind). The products with the largest share of sales in the country are Analgin, Sophazolon, Vicetin, Fomotidine, Vitamin C, Paracetamol, Bromhexine, Methylprednisolone. On a consolidated basis for 2022, sales revenue in Russia increases by 11%, in Moldova by 61%, in Serbia by 73%, in Latvia by 13%, in Belarus by 9%, in Mongolia by 113%. Growth was also registered in the countries of the Caucasus region (Georgia with 61%, Azerbaijan with 26% and Armenia with 10%) and Central Asia (Uzbekistan with 7% and Kazakhstan with 50%). In Vietnam, sales revenue fell by 13%, in Ukraine by 7%, in Poland by 5%. Contract and contract manufacturing sales also registered a 31% growth, reaching BGN 6 million. Other operating revenues decreased by BGN 0,8 million to BGN 13 million in 2022 compared to BGN 13,8 million in 2021. Operating expenses For the current period the expenses of materials increased by BGN 16 million to BGN 99,1 million, as the most significant change was registered in the expenses of substances, which increased by BGN 5 million, as well as in the expenses for electricity and heat, increasing by BGN 1,4 million and BGN 3 million, respectively. Personnel expenses decreased by BGN 2,2 million to BGN 147,8 million as a result of the decrease in the average number of personnel in the Group (4,764 workers and employees compared to 5,507 for 2021), mainly as a result of the sale of the companies in Latvia and Belarus at the end of 2021. The external service expenses decreased by BGN 5,8 million to BGN 70,1 million with the most significant change in construction costs, which decreased by BGN 7,4 million, which increase by BGN 0,7 million and in the production costs, which decrease by BGN 0,5 million. 13 Financial income and expenses Financial income and expenses in 2022 net registered a loss of BGN 6,1 million, which is a increased of the loss by BGN 0,9 million compared to the same period of the last year. Financial income decreased by BGN 3,3 million, interest income from overdue receivables decreased by BGN 1,3 million and net foreign exchange gains on foreign currency loans and leases decreased by BGN 1,5 million. Financial expenses decreased by a total of BGN 2,4 million, while interest expenses on loans received for the current period decreased by BGN 3,5 million as a result of a decrease in the Group's bank exposure due to the sale of shares in the Baltic States and Belarusian companies at the end of last year, as well as the ongoing trend in the current year of reducing bank debt through the generated positive free cash flow in the Group. An increase of BGN 1,9 million was recorded in the costs for the impairment of receivables from granted commercial loans. Financial result from the activity Earnings before interest, taxes and depreciation (EBITDA) increased by BGN 23,3 million or by 20%, while in 2022 it amounted to BGN 140 million compared to BGN 116,7 million in 2021. After adjustment due to the deconsolidation of the companies sold at the end of 2021 in Latvia and Belarus, the growth amounted to 25%. The main factors for this adjusted growth are the increase in sales in both main business segments by a total of 10% with insignificant changes in the gross profit margin, as well as the good management of operating expenses (sales, marketing, logistics and administrative expenses), whose increase is below 3% despite severe inflationary pressure. Profit from operating activities increased by BGN 24,4 million or by 38%, to BGN 87,9 million in 2022 compared to BGN 63,5 million in 2021. Net profit decreased by BGN 15,4 million or 17% to BGN 76,3 million in 2022 compared to BGN 91,7 million in 2021. The most significant contribution to its reduction is the profit registered in the previous reporting period from the acquisition and disposal of subsidiaries in the amount of BGN 36,1 million, as well as the impairment charges of non-current assets in the amount of BGN 20,8 million in 2022. The impairments are the result of recognition of impairment of goodwill, reported upon acquisition of Sopharma Trading D.o.o. Serbia, in the amount of BGN 9,6 million, as well as due to the depreciation of property, machinery and equipment in the amount of BGN 9,6 million period of profits from associated companies in the amount of BGN 10,5 million. 116,706 63,519 91,703 139,980 87,881 76,334 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 EBITDA Operating profit Net profit 1-12/2021 1-12/2022 14 Assets Non-current assets at the end of 2022 increased by BGN 47,7 million compared to the end of last year. The acquired tangible and intangible fixed assets for the period amounted to BGN 85,2 million, of which those related to leasing contracts amount to BGN 56 million. The parent company invested BGN 4,1 million in 2022 in the construction of new production facilities for the processing of technical cytisine, which are pending inspection and certification by МЕА. Substantial technological improvements and modernization of phytochemical production were also carried out, as a result of which an increase in production capacity was achieved. Investments in associates and joint ventures increased by BGN 35,5 million as a result mainly of the reported share in current profit and the increased share in the associate “Doverie-obedinen holding” AD. Current assets at the end of 2022 increased by BGN 1,3 million compared to the end of last year, which is mainly due to the increase in material stocks by BGN 22,6 million. Cash and cash equivalents decreased by BGN 17,9 million. Owners’ equity and liabilities The equity of Sopharma Group increased by BGN 57,7 million compared to 31.12.2021 as a result of the reported net current profit. The liabilities decreased by BGN 8,8 million compared to the end of 2021. Total liabilities on bank loans, leasing and factoring of the Group decreased by BGN 47,4 million, as the net debt after deduction of cash and cash equivalents decreased with BGN 29,5 million to BGN 263,4 million. The trade liabilities increased by BGN 32,1 million compared to the end of the last year as a result of the BGN 22,3 million increase in advances received from customers. Cash flows 31.12.2022 BGN '000 31.12.2021 BGN '000 Net cash flows from operating activities 110 082 (75 963) Proceeds of amounts by factoring after interest and fees 30 836 193 337 Purchases of property, plant and equipment, intangible assets, net (21 733) (26 055) Payments under lease agreements (16 081) (20 447) Free cash flow (normalized) 103 104 70 842 The free cash flow (normalized with the revenues from factoring and payments under leasing contracts), generated for 2022, amounts to BGN 103,1 million inflow compared to BGN 70,8 million inflow in 2021. Ecology and environmental protection “Sopharma” AD maintains and observes its commitments in compliance with the national legislation in the field of environmental protection. The company applies measures to: - separate collection of waste, minimization, recovery and recycling of production and household waste; - provide appropriate personnel training on environmental and pollution prevention issues; - responsibly fulfill the imperative requirements of the Packaging and Waste Ordinance and pays its product tax in accordance with Regulation for Packaging and Wastage from Packaging; - measure annual emissions of waste gases into the ambient air from the Solid Form Factory; 15 - once every two years, own periodic measurements (STI) of waste gases in the atmospheric air are carried out at the Steam Power Plant Installation at sites “A” and “B”. Emissions are measured and reported in 2021. - “Sofiyska Voda” AD measures on a monthly basis emission in wastewater at production sites A and B. - every quarter the drinking water from the production plants is given for testing (short chemical and microbiological analysis) in an accredited laboratory; - twice a year the groundwater and wastewater are given for testing in an accredited laboratory according to the permits for water abstraction and for use of surface water body. The total amount of waste delivered in 2022 is 314,17 tons. In 2022 the separately collected waste decreased by 28.8% compared to the previous year. Production waste is disposed with licensed recyclers. The annual emissions of waste gases into the ambient air as well as the emissions in the wastewater are within the required standards. The requirements of the Discharge Permit are fulfilled. Once a month, a report is made on the packaging imported and / or marketed by type of material for which a monthly installment is paid to “EcoBulpak Bulgaria” AD, with which “Sopharma” AD has concluded a contract for the recovery of packaging waste. Personnel As at 31 December 2022, the average number of employees of Sopharma Group is 4 764 (compared to 5 507 in 2021). The average number of employees of “Sopharma” AD as at 31 December 2022 is 1 715 (at 1 860 in 2021) and of “Sopharma Trading” AD is 776 (compared to 826 in 2021). 3. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act/ On 23 January 2023, the Company entered into an agreement for transformation by merger of the subsidiary company "Biopharm Engineering" AD in accordance with the provisions of Article 262 of the Commercial Law, as a result of which all the property of the transforming company ("Biopharm Engineering" AD) will transfer to the receiving company ("Sopharma" AD), which will become its legal successor. The transforming company ("Biopharm Engineering" AD) will be terminated without liquidation. The contract was submitted for approval to the Financial Supervision Commission on 27.01.2023. 4. Future development of Sopharma Group (article 39, item 4 of the Accountancy Act) and planned economic policy in the following year (Article 247 (3) of the Commerce Act) The Group envisages key moments of the strategy: • to increase sales of its existing portfolio, as well as by adding new products in categories in which the Company has a strategic interest. To this end, the company is actively exploring various opportunities to acquire products that would complement and diversify its own portfolio; • to achieve a phased transformation of its production processes and capacities through the optimization of the Company's production capacity through the purchase and modernization of new machinery and equipment and the transfer of production activities and technologies. In addition to this, a strategy has been developed and is in the process of implementation to optimize the processes of planning, supplies, production, distribution through active management along 16 supply chains. This would allow the development of new business segments such as potential contract manufacturing; • continued operation of the production in full accordance with the good manufacturing practices approved in the EU; • to implement new technologies to support the automation of business processes; • to develop its personnel through training in order to increase qualifications and competencies and to preserve and maintain the reputation of a preferred employer with opportunities for career development, as well as to work closely with specialized higher education institutions and offer a career start to personnel; • to implement a diversity policy in order to create a working environment free from prejudice, cultivating an atmosphere of respect and mutual trust, fostering a corporate culture of mutual respect and valuing each individual. Managers and employees carry out their activities professionally, impartially, with dignity and integrity, avoiding conflicts of interest; • implement a green policy in order to reduce the carbon footprint by using energy from renewable sources. • "Sopharma" AD will strive to achieve a stable result of developing eight to ten new products per year for its pharmaceutical business. Apart from Bulgaria, the main markets for finished products continue to be Russia and Ukraine. The Group's plans are to increase its presence in the Russian market through increased investments in marketing and advertising activities and human resources. In addition, expansion of the portfolio and relations with various counterparties is planned. In Ukraine, in view of the military conflict at this stage, the main immediate goal is to maintain market presence through its distribution company for the local market "Sopharma Ukraine" and the production company PAO "Vitamini". In the remaining traditional markets in Poland, Serbia, Belarus, Kazakhstan, Moldova, the countries of the Caucasus region and the Baltic States, the Group continues its presence and plans to strengthen its positions through additional marketing activities and the imposition of products in therapeutic groups where there is potential for growth . The group will continue to look for opportunities for an even more active presence in a highly developing market such as that of Vietnam.. 5. Research and development (article 39, item 5 of the Accountancy Act) The Group focuses its research and development mainly on generic products. Research and development projects are focused on finding and developing new formulas and composition or physical properties (such as medicine form or tablet form) of a product in order to adapt it to current market needs. The Parent Company mainly submits applications for new product authorizations including new product forms in Bulgaria and / or export markets and for existing products in new markets. Intellectual Property Although oriented towards generic pharmaceutical products, “Sopharma” AD has been known for years with the traditional production of several unique products based on plant extracts obtained from own-produced technologies. These products are protected not only by trademark, but also by patent or company know-how. 17 Regarding the generic products it produces, for their market distinctiveness, Sopharma Group relies on brand names, all of which are registered trademarks of the Company. In all the years of existence, Sopharma Group has generated and defended its industrial property. As a result, the Group owns a large number of industrial property sites, the majority of which - registered rights (trademarks, patents, designs) and fewer unregistered objects - mainly technology. These assets are the result of the Group's special policy towards product and technological update, and in particular innovation. New developments and products During the reporting period January - December 2022 in the Division "Development and Regulatory Compliance" the following activities were performed: ü New medicines During the reporting period, a marketing authorization was obtained for 10 new medicinal products: - Diclofenac Diethylamine 23.2 mg/g gel (DCP); - Paracedol Duo 200 mg/ 500 mg fct (Bulgaria); - Dusopharm 100 mg tablets (Russia); - Dusopharm 200 mg tablets (Russia); - Furosemide Sopharma inj (MRP-Georgia); - Haloperidol Sopharma inj (MRP-Georgia); - Gorloin 5 mg/1.5 mg comp. lozenges (Moldova, Kazakhstan, Azerbaijan); - Nexopral 20 mg gastro-resistant tablets (Bulgaria); - Felogel Max 23,2mg/g gel (Poland); - Tempaforte effervescent powder for oral solution – (Belarus). ü New registrations and re-registrations / changes New registrations of medicinal products • Documentation for registration of 13 medicinal products has been submitted: - Pethidin 50 mg/mlsolution for injection (DCP – Denmark, Switzerland, Norway, Finland); - Aminophyllin Sveikuva 24 mg/ml solution for injection (Lithuania); - Glicerax Pico 7,5mg/ml oral drops, solution (Bulgaria); - Suxamethonium Sopharma 10mg/ml sol.for.inj. – (Bulgaria) - Suxamethonium Sopharma 20mg/ml sol.for.inj. – (Bulgaria); - Tempaforte 500 mg eff. Powder – (Azerbaijan); - Tempaforte 1000 mg eff. Powder - (Azerbaijan). - Dexamethasone Sopharma 4mg/ml sol.for inj. (Lithuania); - Dexketoprofen Sopharma 50mg/2ml sol.for inj – (Ukraine); - Ketorolac 30mg/ml sol.for inj. – (Ukraine). - Otofix ear drops. (Ukraine); 18 - Carsil 110 mg caps. – (Georgia); - Analgin max 1000 mg eff powder in sachet – (Georgia). Re-registrations / changes • Renewed Marketing Authorizations for 48 medicinal products. • Submission of documentation for the renewal of the Marketing Authorizations for 70 medicinal products. • 301 changes for medicinal products approved by agencies. • 261 changes for medicinal products submitted to agencies. Food additives • 4 food supplements have been notified for Bulgaria. Cosmetic products • 4 Cosmetic products are registered. ü Developments • Pharmaceutical development of 13 new medicinal products / projects: - Citisinicline 3,0 mg tablets – Project with the company Achieve; - Suxamethonium 10 mg/ml solution for injection; - Suxamethonium 20 mg/ml solution for injection; - Keterolac 30 mg/ml solution for injection; 1 ml; - Sodium picosulfate 7,5 mg/ml oral drops; - Dexketoprophenum 25 mg tablets; - Betagamma caps.; - Buscolizin 10 mg tablets; - Antistenocardin 25 mg tb; - Ketorolac 10 mg/ml tb; - Valeriana 30 mg tb.; - Xylmetazoline/Dexpanthenol nasal spray; - Paracetamol 500 mg tb. ü Transfer and validation of technological processes • 24 production processes / technologies are validated / optimized. ü Prepared documentation for qualification / production • Documentation for qualification of raw materials for production - 125; • Production regulations - 103; Documentation for qualification of finished forms - 230. 19 6. Information on the acquisition of own shares required by Article 187d of the Commerce Act/ Article 39, Item 6 of the Accountancy Act/ In the current year 424 188 treasury shares were purchased and no shares sold. The treasury shares purchased during the year amount to 0.3% of the Company's share capital and the average acquisition price is BGN 4,50 per share. Shares Equity, net of treasury shares Number BGN '000 Balance at 1 January 2021 125 786 432 101 142 Treasury shares (4 043 533) (16 546) Expense on treasury shares - (82) Balance at 31 December 2021 121 742 899 84 514 Treasury shares (424 188) (1 919) Balance at 31 December 2022 121 318 711 82 595 The Board of Directors is authorized to buy treasury shares under certain conditions, according to the decisions of the GMS, held on 23 June 2010, of the EGMS from 30 November 2011, of the EGMS from 1 November 2012, of the EGMS from 28 February 2013 and of the EGMS from 23 February 2018. Number and nominal value of the own shares held and the proportion of the capital they represent “Sopharma” AD holds 13,479,188 treasury shares, representing 10% of the company's capital. 7. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/ “Sopharma” AD has no branches. 8. Use of financial instruments /Article 39, item 8 of the Accountancy Act/ Overall risk management focuses on the difficulties in predicting financial markets and minimizing potential negative effects that may affect the financial performance and position of the Group. Financial risks are currently identified, measured and monitored by various control mechanisms introduced to determine adequate prices for the group's products and services and borrowed capital and to adequately assess the market circumstances of the investments made by them and forms of maintenance of the free liquid assets, without allowing unjustified concentration of risk. Risk management is carried out on an ongoing basis by the management of the parent company and respectively the management of the subsidiaries in accordance with the policy defined by the Board of Directors. The Board of Directors has adopted basic principles for general financial risk management, on the basis of which specific procedures have been developed for the management of individual specific risks, such as currency, price, interest, credit and liquidity, and the risk of using non-derivative instruments. 20 Credit risk Credit is the risk that the clients of the Group will not be able to pay fully and within the usual time limits the amounts due from them under the trade receivables. Trade receivables are presented in the statement of financial position in net amount after deducting the accrued impairment for doubtful and bad debts. Such impairments are made where and when there are events identifying loss of collectability under previous experience. The Group has developed policies and procedures for assessing the creditworthiness of its counterparties and setting credit rating and credit limits by group of clients. Cash in the Group and the payment operations are concentrated in various premium banks. In the distribution of cash flows between them, the management of the Company and the subsidiaries take into account a number of factors, including the capital, security, liquidity, credit potential and rating of the bank, etc. Liquidity risk The liquidity risk is expressed in the negative situation that the Group will not be able to meet unconditionally all its obligations according to their maturity, including due to the presence of over- inflation, and the indexation of trade accounts for companies operating in such an environment. The Group generates and maintains a sufficient volume of liquidity. An internal source of liquidity for the Group is the main business of its companies generating sufficient operating flows. External sources of funding are banks and other permanent partners. Risk of interest-bearing cash flows In the structure of the Group's assets, interest-bearing assets are represented by the cash at floating rate and the loans granted at a fixed interest rate. On the other hand, the borrowed funds of the Group in the form of long-term and short-term loans are usually with variable interest rates. This circumstance partly puts the cash flows of the Group in line with interest rate risk. The coverage of this risk is achieved in two ways: (a) optimizing sources of credit resources to achieve a relatively lower cost of borrowed funds; (b) combined structure of interest rates on loans, which contains two components - fixed and variable, the ratio between which and their absolute value can be achieved and maintained at a favorable rate for the companies in the Group. The fixed component has a relatively low absolute value and a large enough relative share in the total interest rate. This circumstance eliminates the probability of a significant change in interest rates with a possible update of the variable component. This also minimizes the probability of a change in the unfavorable direction of cash flows. The management of the companies in the Group together with the management of the Company are currently monitoring and analyzing its exposure to changes in interest rates. Different scenarios of refinancing, renewal of existing positions and alternative financing are simulated. Based on these scenarios, the effect on financial result and equity is measured when changing with certain points or percentages. For each simulation, the same assumption of interest rate change applies to all major currencies. Calculations are made for significant interest-bearing items. 21 IV. Information under Article 247 and Art. 240b of the Commerce Act 1. Information under Art. 247 of the Commerce Act Information concerning the course of activity and the condition of the Company and explanations regarding the annual financial statements Section II, item 2 describes the operations and the position of the Group and explains the annual financial statements. Remuneration received during the year by members of the Board of directors The remuneration and other income of the key management and executive directors, the members of the Board of directors and the managers of the Group's subsidiaries amount to BGN 3,325 thousand (2021: BGN 6,614 thousand), including: • current – BGN 3,001 thousand (2021: BGN 6,095 thousand); • tantieme – BGN 324 thousand (2021: BGN 519 thousand). The remuneration and other short-term income of the Board of directors of the Company for 2022 amounting to 1,214 thousand BGN (2021: BGN 1,256 thousand) are as follows: • current – BGN 971 thousand (2021: BGN 969 thousand); • tantieme – BGN 243 thousand (2021: BGN 287 thousand). Acquired, held and transferred by the members of the Boards during the year shares and bonds of the company The Company's shares acquired, owned and transferred by the members of the Board of Directors in 2022 are as follows: Members of the Board of directors 31.12.2022 31.12.2021 Shares Relative share of the capital % Shares Relative share of the capital % Acquired shares in 2022 Transferred shares in 2022 Change Ognian Ivanov Donev 6 608 350 4.90% 6 608 350 4.90% - - - Vessela Lyubenova Stoeva 150 0.0001% 150 0.0001% - - - Ognian Kirilov Palaveev - - 187 520 0.14% - - - Alexander Viktorov Tchaushev 262 442 0.19% 262 442 0.19% - - - Bissera Nikolaeva Lazarova - - - - - - - Ivan Venetskov Badinski 2 030 0.0015% 350 0.0003% 1 680 - 1 680 Simeon Ognianov Donev 195 450 0.14% 195 450 0.14% - - The Company has no issued bonds. 22 Rights of members of the Board to acquire shares and bonds of the company The Articles of Association of “Sopharma” AD do not contain any restrictions on the right of the members of the Board of directors to acquire shares and bonds of the company. Participation of members of the Board of directors in commercial companies as unlimited liability partners, the holding of more than 25 percent of the capital of another company, as well as their participation in the management of other companies or co-operatives, such as procurators, managers or board members Participation of the members of the Board of Directors by more than 25 per cent of the capital of other companies: Ognian Ivanov Donev has a direct / indirect significant share (over 25%) of the capital of the following companies: • “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str. • “Telecomplect” AD, UIC 831643753, with headquarters in Sofia, 5 Lachezar Stanchev Str. • “Sofprint Group” AD, UIC 175413277 with seat and headquarters: Sofia, 12 Pozitano Str. • “Sofconsult Group” AD, UIC 175413245, with seat and headquarters: Sofia, 12 Pozitano Str. • “Sopharma” AD, UIC 831902088, with seat and headquarters: 16 Iliensko Shose Str.; • “Energoinvestment” AD, UIC 200929754, with a registered office in Sofia, 9 P. R. Slaveykov Square • “Simba Private Kindergarten” EOOD, UIC 204683684, with seat and headquarters in Sofia, 16 Iliensko Shose Str. • “Selso” EOOD, UIC 206522151, with headquarters in Sofia, 12 Pozitano Str. Vessela Lyubenova Stoeva controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “VES elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square • “Eco Solar Invest” OOD, UIC 201634905, with headquarters: Sofia, 48 Alabin Str. • “Aquatex” OOD, UIC 203934379, with headquarters: Sofia, 9 P. R. Slaveykov Square • “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square. Alexandar Victorov Tchaushev controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “Alpha In” EOOD, UIC 131156322, with headquarters in Sofia, 1B Dimcho Debelianov Str. • "Assa Asset Management" OOD, UIC: 131156297, with headquarters: Sofia, 1B DIMCHO DEBELYANOV str.; Entrance A; Floor 3; App. 8. Ivan Venetskov Badinski does not hold a direct / indirect significant share (over 25%) of the capital of companies. Bissera Nikolaeva Lazarova controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “Consumpharm” OOD, UIC 121148366, with headquarters in Sofia, 80 Yanko Sakazov Blvd. Participation of Board members in the management of other companies or cooperatives as procurators, managers or board members: 23 Ognian Ivanov Donev participates in the managing/controlling body in the following companies: • “Sopharma Trading” AD, UIC 103267194, with headquarters in Sofia, 5 Lachezar Stanchev Str. – Chairman of the Board of Directors. • “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str. – Chairman of the Supervisory Board. • “Telecomplect” AD, UIC 831643753, with address management in Sofia, 5 Lachezar Stanchev Str., Building A – Chairman of the Supervisory Board. • “Doverie Capital” AD, UIC 130362127, with headquarters in Sofia, 82 Knyaz Dondukov Blvd. – Member of the Supervisory Board. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Мember of the Board of Directors and Executive Director. Vessela Lyubenova Stoeva participates in the management/supervisory body for the following companies: • “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square - Мember of the Board of Directors. • “VES Elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square – Manager. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Deputy Chairman of the Board of Directors. Alexandar Victorov Tchaushev participates in the management/supervisory body of the following companies: • “DK-Domostroene” AD, UIC 102148397, with registered office in Burgas, PO Box 8000, Pobeda area – Мember of the Board of Directors. • “Alpha IN” EOOD, UIC 131156322; with seat and headquarters: Sofia, 1b Dimcho Debelyanov Str. – Manager. • “Sopharma” AD, UIC 831902088, with seat and headquarters: Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors. Ivan Venetskov Badinski participates in the management/supervisory body of the following companies: • “Sopharma” AD, UIC 831902088, with seat and headquarters: 16 Iliensko Shose Str. – Member of the Board of Directors and Procurator. Bissera Nikolaeva Lazarova participates in the management/supervisory body of the following companies: • Sopharma Imoti REIT, UIC 175059266, with seat and headquarters in Sofia, 5 Lachezar Stanchev Str. – Member of the Board of Directors. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors. Planned economic policy in the next year (Article 247, paragraph 3 of the Commerce Act) The information is reflected in Section III, paragraph 4 of this Report - Future development of the Company (Article 39, paragraph 4, of the Accountancy Act). 24 2. Information under art. 240b of the Commercial Law on the obligation of Board members to notify in writing the Board of Directors or the Management Board when they or their related parties conclude contracts with the company outside its usual activity or substantially deviate from market conditions In 2022 there are no contracts outside the ordinary business of the company or significantly deviate from market conditions. V. Information on Annex 2 to art. 10, item 1 of Regulation 2 of LPOS 1. Information given in value or quantitative terms about the main categories of goods, products and / or services provided, including their share in sales revenue of the Group in general and changes in the reporting year The information is included in Section III, item 2 of this document. The Group does not publish quantitative information due to the specifics of the production. 2. Information about the revenues allocated by separate categories of activities, domestic and foreign markets and information on sources for supply of materials needed for production of goods or the provision of services with the degree of dependence on any individual seller or buyer / user, in case their share exceeds 10 per cent of the expenses or sales revenue, provide information for each person for his share in sales or purchases and links with the issuer Information about the revenues allocated by separate categories of activities, domestic and foreign markets are provided in Section III item 2 of this report. For 2022, there are no customers whose relative share exceeds 10% of total sales revenue. The raw materials used exceed 3,500 nomenclature numbers that have a dynamic structure and diverse origin (synthetic, vegetable), aggregate (liquid, solid, gaseous). The main share of raw materials is secured by imports. Sources of supply are validated manufacturers, which is in line with regulatory requirements and aims to maintain consistency and traceability in terms of quality. The respective counterparty companies operate according to the requirements of GMP, GDP and other industry standards. “Sopharma” AD is working with a number of Bulgarian and foreign suppliers as their selection is done according to procedure developed in-house and aims to provide an alternative security in the supply and competitive flexibility in trade relations. Non-negotiable conditions that “Sopharma” AD implies in the negotiation process are: consistent quality, competitive prices and attractive payment terms, rhythmic and timely deliveries which prevent the accumulation of inventories on the one hand, while guaranteeing the regularity of the production process. In 2022 none of the suppliers’ share exceeds 10% of the total cost of services rendered and materials. 3. Information on significant transactions The Group has adopted that significant transactions are those that result or may be reasonably assumed to lead to favorable or unfavorable change in the amounts of 5 or more percent of sales revenues or net profit. There are no such transactions. 25 4. Information regarding transactions between the issuer and related parties during the reporting period, proposals for concluding such transactions, as well as transactions that are outside its usual activity or substantially deviate from market conditions when, the issuer or its subsidiary is party, indicating the value of the transactions, the nature of relatedness and any information necessary to assess the impact on the financial position of the issuer Information regarding the transactions between “Sopharma” AD and related parties during the period is specified in Notes to the Annual Financial Statements “Related Party Transactions”. At the Regular General Meeting of Shareholders, held on 3 June 2022, the following transactions were voted between the Company and related parties: Real estate lease agreement between "Sopharma" AD as lessee and "Sopharma Imoti" REIT as lessor under the following basic conditions of the proposed transaction: • Lease term: 10 /ten/ years; • Maximum leased area: Office space in building A of the Complex, leased with a gross lettable area of 4 637,46 sq.m., Parking spaces in the underground parking lot of the Complex (level -2) with a lettable area of 1 051,68 sq.m. and the leased area of the warehouse in the amount of 30,49 sq.m.; • Other conditions: The rental price is updated annually every January, starting from January 1 of the year following the first calendar year of the rental period (ie starting from 2023), in accordance with the Harmonized Index of Consumer Prices in the 27 countries of the EU (HICP EU-27) (and in case of its elimination, the substitute index according to EUROSTAT) for all goods and services for the previous year, published by EUROSTAT; • Fee for services: to cover the costs of providing maintenance and management services for the building at a fixed rate of 2,70 euros per sq.m. from the rental area of the office space, per month, excluding VAT. The fee for services is indexed annually every January, starting from January 1 of the year following the first calendar year of the rental period (ie starting from 2023), in accordance with the Harmonized Index of Consumer Prices of the Bulgarian National Statistical Office Institute; • Other receivables: payment of consumables (electricity, heat and cold energy, water) needed in the leased office space and warehouse for the benefit of utility service providers; payment of the part of the local household waste fee for the Complex deducted from the gross rental area of the office space, warehouse space and parking spaces for the benefit of the budget of the Metropolitan Municipality - Izgrev region. • The estimated value (without VAT) of the costs of the rental price and remuneration for services under the transaction, fixed at the time of its conclusion, for the functionally separated office spaces, for the entire maximum lease term of 10 years, for which it is proposed to conclude it, is in the amount of BGN 17,989,299.60 (seventeen million nine hundred eighty-nine thousand two hundred ninety-nine leva and sixty stotinki). 26 • The estimated value (without VAT) of the costs of the rental price under the transaction, fixed at the time of its conclusion, for the functionally separated parking spaces, for the entire maximum rental period of 10 years, for which it is proposed to conclude it, is in the amount of BGN 1 314 900. (one million three hundred fourteen thousand nine hundred leva). • The estimated value (without VAT) of the costs of the rental price under the transaction, fixed at the time of its conclusion, for the functionally separated parking spaces, for the entire maximum lease term of 10 years, for which it is proposed to conclude it, is in the amount of BGN 32 142 ( thirty-two thousand one hundred forty-two leva). “Sopharma” AD has not concluded transactions outside of its usual activities or that substantially deviate from the market conditions. The group has not concluded any transactions outside of its usual activities or that substantially deviate from the market conditions. 5. Information about events and indicators unusual for the issuer that have a significant impact on its activity and realized income and expenses; assessment of their impact on the current year results In 2022 there were no events and indicators of unusual nature for the Group. 6. Information on off-balance sheet transactions - nature and business purpose, the financial impact of transactions on the activity, if the risks and benefits of these transactions are material to the issuer and the disclosure of this information is essential for assessing the financial position of the issuer The contingent obligations took by the Group as at 31 December 2022 are stated in the annual financial statements in the note "Contingent Liabilities and Commitments". 7. Information on shares of the issuer, its major investments in the country and abroad (in securities, financial instruments, intangible assets and real estate), as well as investments in equity securities outside its group of companies under Accountancy Act and the sources /methods of financing The information on shareholdings and major investments, domestic and foreign, of “Sopharma” AD are listed in the Notes to the annual financial statements - "Investments in subsidiaries", "Other long- term capital investments" and "Investments in associates". Information regarding investments in intangible assets and real estate is presented in the Notes “Intangible assets”, “Property, plant and equipment” and “Investment property”. 8. Information about the concluded by the issuer, its subsidiary or parent company in their capacity as borrowers, loan contracts specifying the terms and conditions, including the deadlines for repayment as well as information about guarantees and commitments The information on concluded by “Sopharma” AD and its subsidiaries loan agreements are listed in the notes to the annual consolidated financial statements "Long-term bank loans" and "Short-term bank loans." 27 9. Information about the concluded by the issuer, its subsidiary or parent company in their capacity of lenders, loan agreements, including the provision of guarantees of any kind, including related parties, and the specific terms, including the deadlines for payment and the purpose for which they were granted Long-term loans to related parties: • Recipient - Doverie Invest EAD; Contract amount - BGN 83,400 thousand; interest rate – 3.00%; maturity – 31.12.2025; balance as of 31.12.2022 – BGN 51,147 thousand; • Recipient - "Industrial Holding Doverie" AD; Contract amount – BGN 10,000 thousand; interest rate – 4.36%; maturity – 31.12.2024; balance as of 31.12.2022 – BGN 10,040 thousand; • Recipient – “Doverie United Holding” AD; Contract amount – BGN 2,000 thousand; interest rate – 3.09%; maturity – 31.12.2024; balance as of 31.12.2022 – BGN 2,011 thousand. Long-term loans to related parties were granted to assist in financing the activities of these companies for common strategic objectives. They are secured by pledges of securities (shares) and promissory notes. Long-term loans granted to third parties: • Recipient – Sopharmacy MC; Contract amount – EUR 3000 thousand; interest rate – 3.05%; maturity – 29.06.2023; balance as of 31.12.2022 – BGN 0 thousand. The long-term loans provided to third parties are for the purpose of supporting the financing of activities of these enterprises for common strategic goals. They are secured by pledges of securities (shares), pledges of machinery and equipment and real estate mortgages. Short-term loans to related parties: To other related parties: • Beneficiary - Doverie Capital AD; Contract amount - BGN 4,000 thousand; interest rate – 3.33%; maturity – 31.12.2023; balance as of 31.12.2022 – BGN 4,144 thousand; • Recipient - Doverie Grizha EAD; Contract amount - BGN 10,997 thousand; interest rate – 3.10%; maturity – 31.12.2023; balance as of 31.12.2022 – BGN 8,512 thousand. To joint ventures: • Recipient - "Momina Krepost" AD; Contract amount - BGN 3,500 thousand; interest rate – 3.50%; maturity – 31.12.2023; balance as of 31.12.2022 – BGN 0 thousand. Short-term loans granted to related parties are to help finance the activities of these companies for achieving their strategic purposes. They are secured by pledges of shares, securities and promissory notes. Information on the loans of the subsidiaries of “Sopharma” AD will be available in the consolidated financial statements of the Group. The commercial loans provided by “Sopharma” AD to third parties are as follows: • Recipient – "Pharmaplant" AD; Contractual amount BGN 4,184 thousand; interest rate – 4.30%; 28 maturity – 31.12.2023; balance as at 31.12.2022 – BGN 187 thousand; • Recipient – "Pharmaplant" AD; Contractual amount BGN 949 thousand; interest rate – 4.70%; maturity – 31.12.2023; balance as at 31.12.2022 – BGN 72 thousand; • Recipient – Sopharmacy MC; Contract amount - 695 thousand euros; interest rate – 3.05%; maturity – 31.12.2023; balance as of 31.12.2022 – BGN 1,568 thousand; • Recipient – Sopharmacy MC; Contract amount – 3,000 thousand euros; interest rate – 3.05%; maturity – 31.12.2023; balance as of 31.12.2022 – BGN 6,490 thousand; The loans granted to third parties are for the purpose of supporting the financing of activities of these enterprises for common strategic goals. They are secured by pledges of securities (shares). 10. Information on the use of funds from the issuance of new issue of securities during the reporting period In 2022, there was no new issue of securities. 11. Analysis of the relationship between the financial results reflected in the financial statements for the financial year and earlier published forecasts for these results There are no published forecasts of financial results. 12. Analysis and evaluation of the policy on the management of financial resources, including the ability to meet its obligations, possible threats and measures that the issuer has taken or will take to resolve them The management of the parent company and respectively the managements of the subsidiaries currently control the collection of receivables, the implementation of financial ratios of banking contracts and ensure regular servicing of their obligations. Financial risk management is fully disclosed in the "Financial Risk Management" as part of the consolidated financial statements of the Company. 13. Assessment of the feasibility of investment intentions, indicating the amount of available funds and possible changes in the financing structure of this activity The planned investment program for 2023 includes investments of BGN 11 million for the acquisition of lands, buildings, machinery, equipment and software. Sources of funding are its own funds from regular business. The Company is not experiencing difficulties in carrying out its investment intentions and payments for operating activity thanks to the generated positive to cash flow and good liquidity. 14. Information about changes in the reporting period in the basic principles of management of the issuer and its group of companies under the Accounting Law During the reporting period there were no changes in the main management principles of “Sopharma” AD and its economic group. 29 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management The information is provided in item 3 of the Corporate Governance Declaration pursuant to Art. 100n para 8 of LPOS, which is a separate report, published together with the management report. 16. Information about changes in management and supervisory boards during the accounting year During the reporting period, there were no changes in the management and supervisory bodies of “Sopharma” AD. 17. Information on the amount of remuneration, rewards and / or benefits of each of the members of the management and supervisory bodies for the financial year, paid by the issuer and its subsidiaries, regardless of whether they have been included in the expenses of the issuer, or arising from profit distribution, including: “Sopharma” AD prepares a separate report on the implementation of the remuneration policy of the members of the Board of Directors. 18. Information on held by members of management and supervisory bodies, the procurators and the senior management of the issuer shares, including the shares held by each of them individually and as a percentage of shares of each class and provided by the issuer options on its securities - type and amount of securities on which options have been set, exercise price of the options, purchase price, if any, and the term of the options. Information about the shares held by the members of the Board of directors of “Sopharma” AD is indicated in Section IV of this report - information under Art 247 par. 2 from Commerce Act. Members of the Audit Committee 31.12.2022 31.12.2021 Rel. share of capital % Number of shares Rel. share of capital % Number of shares Rel. share of capital % Tzvetanka Zlateva - - - - - Vasil Naidenov 386 0.000003% 386 0.000001% - Kristina Atanasova - Eliot - - - - - By Decision № 804 - Е of 4 November 2021, the Financial Supervision Commission approved a Prospectus for an issue in the amount of 44,932,633 dematerialized, freely transferable and registered warrants, with an issue value of BGN 0.28, issued by “Sopharma” AD under Art. 112 b, para. 11 of the LPOS. The underlying asset of the issued warrants are future ordinary, registered, dematerialized, freely transferable shares, giving the right to one vote in the General Meeting of Shareholders, which will be issued by the company on condition only in favor of the owners of warrants. Each subscribed warrant entitles its holder to subscribe for one share of a future issue. Holders of warrants may exercise their right to subscribe for the respective number of shares from a future increase in the company's capital within 3 years at a fixed price of BGN 4.13 per share. The right to exercise arises from the date on which the issue of 44 925 943 warrants was registered with the "Central Depository" AD – 11 January 2022. The warrants are admitted to trading on the BSE main market of the Bulgarian Stock Exchange, starting from 25 January 30 2022. Member of the Board of Directors 31.12.2022 Number of warrants Rel. share of total number of subscribed warrants % Ognian Ivanov Donev 12 508 500 27.84% Vessela Lyubenova Stoeva - - Ognian Kirilov Palaveev - - Alexander Victorov Tchaushev - - Bissera Nikolaeva Lazarova - - Ivan Venetskov Badinski - - Simeon Ognianov Donev - - As of 31 December 2022 no member of the Audit Committee has warrants. 19. Arrangements (including after the end of the financial year) as a result of which future changes may occur in the holding of shares or bonds by current shareholders or bondholders There are no such arrangements. 20. Information about pending legal, administrative or arbitration proceedings relating to liabilities or receivables of the issuer of at least 10 percent of its equity; if total liabilities or receivables of the issuer in all proceedings exceeds 10 per cent of its equity, provide information about each case separately There are no pending legal, administrative or arbitration proceedings relating to liabilities or receivables. 21. Information about the Investor Relations Director, including telephone number and correspondence address: Director of Investor Relations of “Sopharma” AD is Pelagia Viatcheva, tel. +359 2 8134 523, correspondence address - Sofia, 5 Lachezar Stanchev Str., Building A, fl. 11. VI. Information Annex 3 to Article 10, paragraph 2, item 4 of Ordinance 2 of LPOS 1. Structure of the capital of the Company, including securities not admitted to trading on a regulated market in Bulgaria or another Member State, indication of the different classes of shares, the rights and obligations of each class of shares and the portion of the total capital represented by each class The total number of issuers by “Sopharma” AD as at 31 December 2022 is 134 797,899 with a nominal value of BGN 1 per share. All issued shares are registered, dematerialized, ordinary and indivisible, in accordance with the Articles of Association of the company. All issued shares are of one class. Each 31 share gives the right to one vote in the General Meeting of Shareholders, the right to a dividend and a liquidation share, proportional to the nominal value of the share. Structure of the capital of “Sopharma” AD as at 31 December 2021: • Physical persons: 6 162 – 13 754 896 shares – 10.20% • Legal persons: 130 – 121 043 003 shares – 89.80% The capital of the Company may be increased by a decision of the General Meeting of Shareholders adopted by majority as required by law. In case of capital increase, each Shareholder has the right to acquire shares of the new emission, which correspond to their share in the capital before the increase. A shareholder cannot participate in person or by proxy in voting related to: ü Claims against them. ü Taking action or refusal to act, related to the fulfillment of obligations to the Company. ü Taking of decision under art. 114, par. 1 of LPOS, in case they are an interested party within the meaning of LPOS. 2. Information regarding the direct and indirect ownership of 5 percent or more of the voting rights at the General Meeting of the Company, including details of the Shareholders, the size of their shareholding and the type of shareholding Shareholders holding more than 5 percent of the Company’s capital as at 31 December 2022 are as follows: SHAREHOLDERS Number of shares % of the capital “Donev Investment Holding” AD, UIC: 831915121, Sofia, 12 Positano Str. 37 600 000 27.89% “Telecomplect invest” AD, UIC: 201753294, Sofia, 9 Slaveykov Square 27 881 287 20.68% “Sopharma” AD, UIC: 831902088, Sofia, 16 Iliensko Shose Str. 13 479 188 10.00% CUPF “Allianz Bulgaria”, UIC: 130477720, Sofia, 42 Damian Gruev Str. 7 054 547 5.23% "Telso" AD, UIC: 131176385, Sofia, 12 "Positano" St. 6 935 350 5.14% 3. Information about shareholders with special control rights The Articles of Association of “Sopharma” AD do not provide special control rights. 4. Agreements between Shareholders which are known to the Company and which may lead to restrictions on the transfer of shares or voting right. 32 There are no such agreements. 5. Significant contracts of the Company that take effect, are amended or terminated due to a change in control of the company in a mandatory tender offer and the effects thereof, except where disclosure of this information may cause serious damage to the company; exemption under the preceding sentence shall not apply in cases where the company is obliged to disclose information under the Law There are no such contracts. Date: 26 April 2023 Ognian Donev, PhD Sofia city /Executive Director/ OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:25:24 +03'00' This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 1 DECLARATION for corporate governance according to art. 40 of the Accounting Act and art. 100n, para 8 of LPOS of SOPHARMA GROUP The undersigned Ognian Ivanov Donev, in his capacity as an Executive Director of “Sopharma” AD, declare the following: I. Information on compliance, as appropriate, with the Bulgarian Corporate Governance Code prepared by the National Corporate Governance Commission (NCGC), approved by the Deputy Chairman of the Financial Supervision and Corporate Governance Commission, which is applied by Sopharma Group in addition to the Code. The public companies in Sopharma Group adopted and continue to comply with the established in October 2007, with subsequent amendments in 2012, 2016 and 2021, National Code of Corporate Governance (NCCU), approved by the Deputy Chairman of the Financial Supervision Commission. Good corporate governance is a set of balanced relationships between the Management bodies of the Group, its shareholders and all stakeholders - employees, business partners, creditors of the company, potential and future investors and society as a whole. Along with the principles of recommendatory nature, public companies in Sopharma Group have established a certain set of requirements for corporate governance, compliance with which is mandatory for their management bodies, namely: • Protection of shareholders' rights; • Ensuring fair treatment of all shareholders, regardless of the number of shares held by them; • Recognition of the rights of the interested parties and promotion of the cooperation between the companies and the interested parties; • Ensuring timely and accurate disclosure of information on all matters related to the companies, including the financial condition, results, ownership and management of the companies; • Supporting the strategic management of the companies, control over the activities of the management and its accountability to the company and the shareholders. The Corporate Governance Code is applied on a "comply or explain" basis. This means that its recommendations are complied with, and whether or not there is a deviation from them, the managements of the public companies in the Group periodically disclose information on corporate governance of the nature and scope provided for in the NCGC, namely: • The actions of their managements are aimed at establishing the principles of good corporate governance, increasing the confidence of shareholders, investors and persons interested in the management and activities of the Group. • The managements of the public companies in the Group complies with Program for corporate governance, which is consistent with existing regulations, internationally recognized standards of good corporate governance and the National Corporate Governance Code. • The managements of these companies in the Group approves the Disclosure Policy in accordance with the legal requirements and the Articles of Association. “Sopharma” AD participates in the establishment of the National Corporate Governance Commission. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 2 1. MANAGEMENT OF THE PARENT COMPANY “SOPHARMA” AD - BOARD OF DIRECTORS 1.1. Functions and responsibilities The Board of Directors of “Sopharma” AD manages the Company independently and responsibly in accordance with the established vision, goals and strategies of the Company and the interests of the shareholders. The members of the Board of Directors give a guarantee for their management in the amount of their quarterly gross remuneration. During their term of office, the members of the Board of Directors shall be guided in their activities by the generally accepted principles of integrity, loyalty, managerial and professional competence. The Board of Directors complies with the Code of Ethics of the Company's employees, adopted by the Board of Directors on March 26, 2007. The management of “Sopharma” AD, represented by the Board of Directors, also: • monitors the results of the activities in the Parent Company and the Group and, if necessary, initiates changes in the management; • treats all shareholders equally, acts in their interest and with the care of a good trader; • strives to follow the economic, social and environmental priorities of the Company; • encourages the implementation and monitors the compliance of the subsidiaries with the adopted principles of sustainable development at group level, also promotes the establishment of a culture of sustainable development; • ensures and controls the integrated functioning of the accounting and financial reporting systems; • ensures and controls the construction and operation of a risk management system, incl. for internal control and internal audit; • is responsible for the creation and reliable functioning of the financial information system of the Parent Company and the Group; • gives the guidelines, approves and controls the implementation of: the business plan of the Parent Company and the Group, essential transactions and etc.; • reports on its activities to the General Meeting of Shareholders, preparing an annual report and submitting it for approval to the GMS. 1.2. Election and dismissal of members of the Board of Directors The General Meeting of Shareholders elects and dismisses the members of the Board of Directors of “Sopharma” AD, in accordance with the law and the Articles of Association of the Company, observing the principles of continuity and sustainability of the work of the Board of Directors. All members meet the legal requirements for holding office. In case of proposals for election of new members of the Board of Directors, the principles of compliance of the competence of the candidates with the nature of the activity of the Parent Company and the Group. 1.3. Structure and competence The number of members and the structure of the Board of Directors are determined in the Articles of Association of the Company. The company is managed and represented by a Board of Directors, which consists of five individuals meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. The composition of the Board of Directors elected by the General Meeting is structured in a way that guarantees the professionalism, impartiality and independence of the decisions and actions of its members in connection with the management of the Group. The Board of Directors shall ensure a proper distribution of tasks and responsibilities among its This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 3 members. The main functions of the members of the Board of Directors and the number of independent members is enshrined in the Articles of Association of the Company. The main function of the independent directors is to control the actions of the executive management and to participate effectively in the work of the Company in accordance with the interests and rights of shareholders. There is one independent member of the Board of Directors of “Sopharma” AD. The competencies, rights and obligations of the members of the Board of Directors follow the requirements of the law, the Articles of Association and the standards of good professional and managerial practice. The members of the Board of Directors of “Sopharma” AD have appropriate knowledge and experience, which is required by their position. After their election, the new members of the Board of Directors should be familiar with the main legal and financial issues related to the activities of the Group. The company stimulates the raising of the qualification of the members of the Board of Directors. The members of the Board of Directors have the necessary time to perform their tasks and duties. The Articles of Association of the Company do not specify the number of companies in which the members of the Board of Directors may hold managerial positions, in order not to limit their activities. The election of the members of the Board of Directors of the Parent Company is done through a transparent procedure, which provides, among other things, timely and sufficient information about the personal and professional qualities of the candidates for members. The number of consecutive terms of office of the members of the Board of Directors ensures the effective operation of the Parent Company and compliance with legal requirements. According to the Articles of Association of the Parent Company, the members of the Board of Directors may be re-elected without restriction. 1.4. Remuneration of the members of the Board of Directors The Management of all public companies of the Group have prepared and implements a Remuneration Policy, which is adopted by the General Meeting of Shareholders. The Remuneration Policy has been developed in accordance with Ordinance № 48 of March 20 2013 of the Financial Supervision Commission and the Law on public offering of securities. The amount and structure of the remunerations are determined by the General Meeting. In accordance with the legal requirements and good practice for corporate governance, the amount and structure of remuneration take into account: • The obligations and the contribution of each member of management bodies in the activity and the results of the respective company. The members of the management bodies receive a permanent remuneration in the form of an amount determined by the General Meeting of Shareholders, paid under the terms and conditions of the management contracts concluded between them and the Company. • The possibility for selection and retention of qualified and loyal members of the management bodies. • The need for compliance of the interests of the members of the management bodies, the long-term interests and the sustainable development of the companies. The remunerations of the members are formed on the basis of the results of the company's activity and is in accordance with the business strategy, goals, values and long-term interests of the Group. • The executive member of the Board of Directors receives a permanent remuneration in the form of an amount determined by the General Meeting of Shareholders, paid under the terms and conditions of the management contract concluded between him and the Company. • The remunerations and bonuses of the members of the management bodies and of the Executive Director of the Company must be determined by the General Meeting of Shareholders. According to the Articles of Association of the Parent Company, in case of a positive financial result /profit/ and by decision of the General Meeting, the Executive Director is entitled to receive a one-time remuneration of up to one percent of the net profit of the Company. • The remunerations and bonuses of the members of the management bodies and of the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 4 Executive Director of the Company must be determined by the General Meeting of Shareholders. • The remuneration of the independent directors is only permanent without additional incentives and reflects their participation in meetings, as well as the implementation of their tasks to control the actions of the executive management and to participate effectively in the work of the company. So far, the executive member has not been granted shares, stock options or other financial instruments. By qualified majority, the management bodies may decide to determine the range of employees, among which an amount of up to 2% of the value of the Parent Company's profit for each financial year shall be distributed as a bonus. The same is possible only in the presence of a decision of Shareholders to determine the specific amount of the bonus on the General Meeting, which adopts the relevant audited annual financial statements and if there is a positive financial result /profit/. The disclosure of information about the remuneration of the members of the Board of Directors is in accordance with the legal norms and the Articles of Association of the public companies in the Group and the Parent Company. Shareholders have easy access to the adopted company policy for determining the remuneration and bonuses of the members of the Board, as well as to information on the annual remuneration and additional incentives received by them. Information on the remuneration of the members of the Board of Directors is presented in the annual financial report, in the Report on the implementation of the Remuneration Policy of the Board of Directors and is published on the websites of the companies. 1.5. Conflict of interests The members of the management bodies shall endeavor to avoid and prevent any actual or potential conflict of interest. The procedures for avoiding and disclosing conflicts of interest are regulated in the Articles of Association of the companies, internal document and rules. The members of the management bodies have an obligation to immediately disclose conflicts of interest and to provide the shareholders with access to information on transactions between the companies and its subsidiaries and members of management bodies or related persons. Every potential conflict should be disclosed to management bodies. A potential conflict of interest exists when the company intends to enter into a transaction with a legal entity in which a member of the management body or related persons have a financial interest. Art. 114 of the LPOS describes in detail the hypotheses under which the persons who manage and represent a public company, including the persons - representatives of a legal entity that is a member of the management body of the public company, without being expressly authorized by the general meeting of the public company, cannot undertake certain transactions. Article 114 of the Law on public offering of securities and subsequent, provide an opportunity for shareholders to review and approve in advance transactions involving interested parties and related parties in order to avoid conflicts of interest and violate the rights of shareholders. 1.6. Committees The work of the management body is supported by committees, as the management body determines the need for their establishment in accordance with the specifics of the company. In accordance with the requirements of the current legislation and on the basis of the criteria determined by it, the management body proposes to the General Meeting of Shareholders of the company to elect an audit committee that meets the legal requirements and specific needs of the company. Committees are set up on the basis of a written structure, scope of tasks, functioning and reporting procedures. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 5 The Audit Committee of “Sopharma” AD consists of three people, with a 3-year term determined by the GMS. The members of the Audit Committee meet the requirements of the Independent Financial Audit Act. 2. INDEPENDENT FINANCIAL AUDIT AND INTERNAL CONTROL The Audit Committee of “Sopharma” AD and its members, in their capacity as persons in charge of general management, provide supervision of internal audit activities and monitor the overall relationship with the external auditor, including the nature of non-audit services provided by the Group's auditor. The management of “Sopharma” AD, assisted by the Audit Committee, motivates in writing before the General Meeting its proposal for selection of an auditor, guided by the established requirements for professionalism. The management of the companies in the Group ensures compliance with the applicable law regarding the independent financial audit. A rotation principle is applied in the proposals and selection of an external auditor. The auditors are selected by the GMS for each financial year. The companies of Sopharma Group have a system in place for internal control, which includes identifying the risks associated with the activities of the Company and supporting their effective management. It also ensures the effective functioning of reporting and disclosure systems. 3 . PROTECTION OF SHAREHOLDERS 'RIGHTS The management of the public companies in Sopharma Group guarantees equal treatment of all shareholders, including minority and foreign shareholders and protects their rights, as well as facilitates their exercise within the limits allowed by applicable law and in accordance with the Articles of Association of the companies. The managements provide information to all shareholders about their rights, financial results of the company and corporate events through an information disclosure system and the company's website. 3.1. General meeting of the shareholders Information on the rules according to which general meetings of shareholders are convened and held, including voting procedures, is available to all shareholders. The corporate managements of the public companies in Sopharma Group provide sufficient and timely information on the date and place of the General Meeting, as well as complete information on the issues to be considered and resolved at the meeting. During the General Meeting, the management of the respective public company of the Group ensures the right of all shareholders to express their opinion and ask questions. • Shareholders with voting rights have the opportunity to exercise their voting rights at the General Meeting of the public company in person or through representatives, as well as by correspondence or electronically. The procedure for the participation of the shareholders in the General Meeting is announced in the Invitation. • The management maintains a database of contacts of its shareholders holding 5 or more than 5% of the company's capital, which allows sending direct messages to them or to a specific person. • The management exercises effective control by creating the necessary organization for the voting of the authorized persons in accordance with the instructions of the shareholders or in the ways permitted by law. • The management organizes and conducts regular and extraordinary General Meetings of the company's shareholders in accordance with statutory procedures that ensure equal treatment of all shareholders, including minority and foreign, and the right of each shareholder to express its views on the agenda of the General Meeting. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 6 • The management determine the procedures for holding the General Meeting of Shareholders in a manner that does not complicate or increase the cost of voting unnecessarily. • The management takes actions to encourage the participation of shareholders in the General Meeting of Shareholders, incl. by providing the opportunity for remote presence through technical means (including the Internet) in cases where this is possible and necessary, and does not contradict the NCCU. • The managements of the public companies in Sopharma Group believe that the prerequisites for sufficient transparency in relations with investors, financial media and capital market analysts have been created. • The processes and procedures for holding General meetings of Shareholders guarantee equal treatment of all shareholders, including minority and foreign shareholders, and protect their interests. All members of the Managements try to attend the General Meetings of the shareholders of the Company. 3.2. Materials of the General Meeting of Shareholders The materials related to the General Meeting of Shareholders are available to the shareholders from the day of announcing the invitation to convene it in the Commercial Register. They are submitted to the Financial Supervision Commission and are published on the company's website , as well as in the relevant media, at least 30 days before the date of the General Meeting and upon request are provided free of charge to shareholders. The texts in the written materials related to the agenda of the General Meeting are specific and clear and do not mislead the shareholders. All proposals regarding major corporate events are presented as separate items on the agenda of the General Meeting, incl. the profit distribution proposal. The public companies of Sopharma Group maintain on their websites a special section on the rights of shareholders and their participation in the General Meeting of Shareholders. The managements of these companies assists the shareholders entitled under the current legislation to include additional issues and to propose decisions on issues already included in the agenda of the General Meeting. 3.3. The managements of the public companies in the Group guarantee the right of the shareholders to be informed about the decisions taken by the General Meeting of Shareholders. The minutes of the General meetings of shareholders are published within the statutory period, subject to the requirements for maximum publicity and transparency of information provided, its simultaneous publication, using sufficiently accessible platforms for information disclosure, including its own website. All materials from the held general meetings of the shareholders shall be kept accessible to the shareholders and all interested parties for a period determined in the LPOS. In 2022 the public companies of Sopharma Group held General Meetings of Shareholders as follows: “Sopharma” AD held one GMS, “Sopharma Trading” AD held one GMS, “Momina Krepost” AD held one GMS, “Sopharma Imoti” REIT held three GMS and “Doverie Obedinen Holding” AD held one GMS. The Board of Directors considers that preconditions have been created for sufficient transparency in the relations with investors, financial media and capital market analysts. 3.4. Equal treatment of shareholders of one class All shareholders in one class are treated equally. All shares within one class give equal rights to shareholders of the same class. 3.5. The management of the public companies in Sopharma Group guarantee the provision of sufficient information to investors regarding the rights granted by all shares of each class before their This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 7 acquisition. 3.6. Consultations between shareholders on fundamental shareholder rights Within the limits allowed by the current legislation and in accordance with the provisions of the Articles of Association of the respective companies, the managements of the public companies in Sopharma Group do not prevent the shareholders from consulting each other on issues related to their basic shareholder rights allows the commission of abuses. 3.7. Shareholder transactions with controlling rights and abusive transactions The managements of the public companies in Sopharma Group do not allow the implementation of transactions with shareholders with controlling rights, which violate the rights and/or legitimate interests of other shareholders, including under the terms of negotiations with itself. 3.8. Remuneration policy The management bodies of the public companies in the Group prepare an Report on the implementation of the remuneration policy of the members of the Board of Directors in 2022. The report reveals the way in which the Remuneration Policy is implemented, paying special attention to avoiding the creation of incentives for excessive risk-taking, conflict of interest or other behavior leading to adverse consequences. The amount and structure of the remunerations are determined by the General Meeting of the company. 4 . DISCLOSURE OF INFORMATION The managements of the public companies in the Group approve the Policy for disclosure of information in accordance with the legal requirements and the Articles of Association. In accordance with the adopted information disclosure policy, managements establish and maintain a disclosure system. The information disclosure policy guarantees equality of the addressees of the information (shareholders, stakeholders, investment community) and does not allow misuse of inside information and manipulation of the market of financial instruments. The managements of the public companies in Sopharma Group also: • ensure that the disclosure system provides complete, timely, accurate and comprehensible information that allows for objective and informed decisions and assessments; • promptly disclose the capital structure of the companies and agreements that lead to the exercise of control in accordance with its rules for disclosure of information; • within the limits of the current legislation and in accordance with the provisions of the Articles of Association of the companies ensure that the rules and procedures under which the acquisition of corporate control and extraordinary transactions such as mergers and sale of significant assets are clearly and timely disclosed; • approve and control the observance of internal rules for preparation of the annual and interim reports and the procedure for disclosure of information; • have adopted a Disclosure Policy, which ensure the timely disclosure of any material periodic and incidental information about the companies, their managements, their corporate managements, their operational activities, their shareholder structure; • disclose non-financial information on an annual basis in accordance with national law and applicable European law. The non-financial statement is part of the annual report, which includes information on how and to what extent the company's activities can be classified as environmentally sustainable, such as: what part of its turnover is due to products and services related to economic activities which qualify as environmentally sustainable; what part of its capital expenditure, where applicable, and what part of its operating costs are related to assets or processes related to economic This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 8 activities that qualify as environmentally sustainable. As part of the disclosure system, Sopharma Group maintain a website with approved content, scope and periodicity of the disclosed information. The Groups website is: www.sopharmagroup.com. The information disclosed through the Groups website includes: Ø basic commercial and corporate information identifying the Group; Ø up-to-date information on the shareholder structure; Ø the rules and the adopted policies related to the activities and functioning of the Group; Ø information on the structure and composition of the management and control bodies of the Parent Company, as well as basic information on their members, including information on their committees; Ø financial statements for the last 10 years; Ø the materials for the forthcoming general meetings of the shareholders of “Sopharma” AD, as well as additional ones, received by law; Ø information on the decisions taken by the general meetings of shareholders for at least the last three years, incl. information on the dividends distributed by the Group for this period; Ø information for auditors; Ø information about upcoming events; Ø information on issued shares and other financial instruments; Ø important information related to the activities of the Group; Ø information on the rights of shareholders, incl. sufficient information on the right of shareholders to request the inclusion of issues and to propose decisions on issues already included in the agenda of the General Meeting under Article 223a of the Commerce Act; Ø contact information with the Investor Relations Director of “Sopharma” AD. The Group also maintains foreign language versions of the corporate website with similar content in the following languages: English, Russian and Polish. The Group periodically discloses information about corporate governance. Disclosure of corporate governance information is in accordance with the "comply or explain" principle. The managements of the public companies in Sopharma Group ensure the disclosure of any material periodic and incidental information about the Group, through channels that provide equal and timely access to relevant information by users. In 2022 the public companies in the Group disclose the publicly regulated information by providing it to the Financial Supervision Commission and to the public. Regulated information is disclosed to the public in a way that ensures it reaches the widest possible range of people at the same time, and in a way that does not discriminate against them. This is done through the X3NEWS information system, the Investor.bg information system, as well as on the Warsaw Stock Exchange, including through the Polish Information Agency (PAP). 5. STAKEHOLDERS. SUSTAINABLE DEVELOPMENT. Sustainable development is the achievement of a balance between social and environmental principles, such as socially justified and environmentally friendly economic development. It aims to meet the needs of the current generation without compromising the ability of future generations to meet their own needs. The Corporate Managements are committed to establishing specific actions and policies regarding the sustainable development of the companies, including the disclosure of information related to climate and social aspects of their activities. The Managements ensure effective interaction with stakeholders. This category includes certain groups of persons who are directly affected by the Group and who in turn can influence its activities, incl. suppliers, customers, employees, creditors, public pressure groups and other employees. The companies of the Group identify the stakeholders in relation to its activities based on their degree and areas of This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 9 influence, role and attitude to its sustainable development. In its Disclosure Policy, the managements comply with legal requirements and the principles of transparency, accountability and business ethics. The managements of the companies guarantee sufficient information to all interested parties about their legally established rights. In accordance with this policy, the management of the companies in the Group develop specific rules for taking into account the interests of stakeholders, which rules ensure their involvement in resolving certain issues requiring their position. These rules guarantee the balance between the development of the companies in the Group and the economic, social and environmentally friendly development of the environment in which it operates. Corporate managements of the companies in Sopharma Group maintain effective relationships with stakeholders. Periodically, in accordance with the legal norms and the good international practice for disclosure of non-financial information, the Group informs about economic, social and environmental issues concerning the interested parties, such as: fight against corruption; work with employees, suppliers and customers; the social responsibility of the Group; environmental protection and human rights violations. The managements of the companies in the Sopharma Group guarantee the right for timely and regular access to relevant, sufficient and reliable information about the Group when the interested parties participate in the corporate governance process. 6. INSTITUTIONAL INVESTORS, FINANCIAL INSTRUMENTS MARKETS AND OTHER INTERMEDIARIES The corporate managements of the public companies in the Sopharma Group ensure effective interaction of the companies with their shareholders - institutional investors, as well as with the regulated markets of financial instruments and investment intermediaries on these markets. Managements of the companies use the services of investment intermediaries whose recommendations or actions are based on market information and principles. The same applies accordingly to the operators of markets on which financial instruments issued by the Company are traded. “Sopharma” AD encourages the involvement of investment intermediaries and institutional investors in defining corporate governance policies and practices of the Parent Company. The company is listed on the Bulgarian and Warsaw Stock Exchanges, as market operators disclose and document the criteria and procedures for recognizing the requirements for listing on the main market. II. Explanation of which parts of the Corporate Governance Code under item 1, letter “a” or letter “b” of Art. 100 “n” para. 8 are not observed and what are the grounds for this, respectively when the issuer has decided not to refer to any of the rules of the Corporate Governance Code - grounds for this The public companies of Sopharma Group comply with all parts of the Corporate Governance Code under p. 1, letter “a”. III. Description of the main characteristics of the issuer's internal control and risk management systems in connection with the financial reporting process The internal control system of the financial reporting and reporting in the companies of Sopharma Group has been developed as a result of studies of good accounting and control practices in Bulgaria and of large pharmaceutical groups, as well as in compliance with national legal requirements, incl. for companies and groups listed on regulated markets. It is in a constant process of monitoring by the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 10 management and of further development and improvement. Most of the parameters that will be provided in this document are from the practice of the companies with the most developed internal control systems, namely - “Sopharma” AD and “Sopharma Trading” AD. The internal control system of the financial reporting and reporting of the companies in the Group are set of behavioral and technical principles, rules, means, procedures and control actions, which are specially developed and adapted to the specifics of the companies, its activities and reporting system. It is aimed at: • ensuring current monitoring and directing the reporting activities towards their goals and expectations of its various users, and achieving their necessary efficiency and effectiveness, incl. when using the borrowed resources; and • ensuring adequate and timely addressing of identified business risks that have an impact on financial, management and operational reporting. In particular, it is designed to create leadership comfort that: • the companies in the Group comply with the applicable legal requirements in the field of accounting, reporting and other directly related areas and especially the requirements of the Accounting Act and International Financial Reporting Standards; • the Group follows the instructions and guidelines of the top management regarding the reporting and documentation; • there is the required efficiency and effectiveness of the financial and accounting process, incl. consolidation and documentary justification; • there is a high degree of security in the protection and maintenance of the assets of the companies in the Group, incl. and prevention of fraud and error; and • there is the provision of reliable, high-quality and timely financial and operational information for internal and external users. The main components of the internal control system for financial reporting and reporting include: a) adoption and observance of the ethical principles and rules of conduct, which are adopted by the Code of Ethics of the employees in the companies of Sopharma Group and with regard to financial reporting and accounting and all related processes, procedures and actions of all staff of the company; b) development and determination of an optimal structure of units involved in the processes related to financial reporting, with clearly defined responsibilities and delegations, powers and obligations, incl. through developed written internal documents; (c) developing policies for the selection, training and development of staff involved in accounting and financial reporting; (d) development, implementation and maintenance of control procedures and rules for each stage of the processes related to accounting, financial reporting and reporting, with priority phased introduction of formalized written procedures; e) development of procedures for identification, monitoring and management of risks related to accounting, financial reporting and accounting, incl. the development of adequate measures and actions for their minimization; and f) development and maintenance of adequate organization of the information system, incl. controls for access, input, processing and retrieval of data, changes in the system, distribution of responsibilities of its employees, as well as storage and protection of the integrity and authenticity of data in the system. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 11 Control environment Ethical principles and rules related to the processes of accounting, financial reporting and accounting The managements of the various levels of the companies in the Group has introduced and constantly monitor the observance of ethical values such as integrity, independence and objectivity as the foundations of the professional conduct of all persons involved in the processes related to accounting and financial reporting in the Group. They are the framework against which the control environment is built and which have influenced the effectiveness of model design, administration and ongoing monitoring of other components of internal control in the field of accounting and financial reporting. Integrity and ethical behavior are a product of the established general ethical and behavioral standards of the companies in the Group. They are clearly communicated with all financial and accounting and control staff and they are constantly validated in practice. The ethical principles that guide professional conduct that should be followed by all persons directly or indirectly involved in accounting and financial reporting processes are: objectivity; impartiality; independence; conservatism; transparency; methodological justification; consistency and use of independent experts. These principles are applied at all stages of financial reporting when: choosing an accounting policy; accounting closing; the preparation and application of accounting estimates and the preparation of public and management financial statements, other public reports and documents containing financial information. Management bodies responsible for the individual components of the overall accounting and financial reporting process Management bodies that have certain responsibilities and powers regarding the process of financial reporting and resp. other related processes are different for the Group companies. For the Group they include: the Board of Directors, the Audit Committee, the Chief Financial Officer, the Chief Accountant, the Head of the Reporting Department and the Head of the Internal Audit Department. Their functions and responsibilities can be summarized as follows: • The Board of Directors accepts and confirms: the accounting policy and the changes in it for each reporting period, the developed accounting estimates as of the date of each reporting period, incl. the applied methodology; financial statements and other public documents containing financial information; the functions, organization and responsibilities of all structural units and their heads, engaged in the processes of and related to financial reporting; the development, implementation and ongoing monitoring of the functioning of the individual components of the internal control system, incl. the activity of the Internal Audit Department; • The Audit Committee independently monitors the implementation of the financial reporting processes, the applied accounting policies and the effectiveness of the internal control system of the company, incl. risk management, as well as the implementation and results of the external and internal audit; • The CFO is responsible for the overall organization, operation and ongoing control of accounting and financial reporting. He directly manages the whole process, makes all key decisions related to financial statements and other public documents with financial information. It also approves at the first level the accounting policy, the main reporting methodologies and evaluates and accepts the work of used independent experts (appraisers, actuaries, consultants, etc.) involved in the financial reporting process. He monitors on an ongoing basis, together with the Chief Accountant and the Head of the Reporting Department, the effects and risks on the financial statements of the identified business risks for the company; • The Chief Accountant organizes and manages the accounting activities of the company - controls and methodologically directs the current accounting, manages the preparation of financial and management reports; is responsible for the development and implementation of accounting This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 12 methodologies and techniques; is responsible for the process of closing the accounts and preparing all accounting estimates, proposes and develops accounting policies and changes in them, monitors ongoing changes in IFRS. It is the direct contact with the used internal and external experts for the purposes of financial reporting; • The Reporting Department and its head carry out the overall organization, methodological support and implementation of the process related to the preparation of the consolidated financial statements of the company, incl. the current control, instruction, monitoring and analysis of the financial statements for the purposes of consolidation of the companies of Sopharma Group; • The Internal Audit Department performs ex-post control over the operations and activities related to the preparation of the company's financial statements and compliance with the established internal controls over the individual routine and non-routine processes. Policy and practice related to human resources in the financial and accounting departments The companies of the Group have established policies and rules related to the management of human resources involved in the process of financial reporting and other processes related to it. These include imposed and implemented policies and procedures in the selection and appointment of such staff, aimed at education and professional experience, computer literacy and foreign language skills of the candidates. Personnel management policies also include those related to the continuous additional professional training, updating and expanding the knowledge and skills of the employed specialists. It is obligatory to conduct trainings in case of changes in normative acts, IFRS, tax laws and others, directly related to their work. The purpose of this policy is to increase their expertise and improve their skills to increase efficiency in the performance of their duties. Process of the Group for risk assessment related to financial reporting The Board of Directors, the Audit Committee, the Chief Financial Officer and the Chief Accountant of the Groups public companies have a key role in the process of continuous identification, monitoring and control of business risks, incl. to establish and control the effects of those of them that have a direct impact on individual processes and objects of accounting, financial reporting and reporting of the company. Together, they provide comprehensive monitoring of the risk management process. Risk factors related to sound financial reporting include external and internal events, transactions and circumstances that may arise and adversely affect the entity's ability to create, maintain and process accounting and operational data in a manner that ensures reliable financial statements, reports and reports. The following factors are defined in the Group as main: a) external risks are defined as: change in the business environment and the market environment of the companies and its main products; the activity of competitors; change in the legal and regulatory framework; changes in key suppliers or customers; unscrupulous or malicious actions by outsiders; rapid corporate growth and group growth; development of companies in which it holds significant investments in the form of participations and/or loans. b) the internal risks include: change of the technological base of the companies, the manner and intensity of use of its assets and resources; new products and activities; new accounting policies and IFRS; changes in the staff of the departments responsible for and/or financial reporting; changes in information systems; errors in work and/or insufficient knowledge or skills of staff, rapid expansion abroad; application of multiple estimates - in particular the application of fair values and the calculation of the recoverable amount of certain non-current assets, with the participation of external experts. Risk factors that are recurring and/or related to the application of accounting policies and estimates are currently monitored by the chief accountant of the Group, who proposes management solutions and properly reflects their effects in the financial statements. The new risk factors are identified by the CFO of the Parent Company and are assessed and developed by him, together with the Chief Accountant and the Head of the Reporting Department. If necessary, the help of independent consultants This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 13 is used, incl. and the application of new IFRSs. The general monitoring of the process of managing the risks related to financial reporting is carried out by the audit committee of the company. Information system of the companies in the Group. Accounting Department - organization of the accounting function in the companies in the Group and the financial reporting process Information System information system of “Sopharma” AD includes infrastructure (physical and hardware components), software, people, procedures and data. In 2013, the Company implemented the Microsoft Dynamics AX ERP system. It covers all processes of sales, warehousing, master planning, production and accounting. The system has been adapted and implemented, taking into account the specifics of the company itself, but good practices have been borrowed from the pharmaceutical sector and other industries. In addition to the main information system, the Company also uses the following systems: Hermes - human resources management system, which covers the entire management cycle related to planning, evaluation, remuneration and human capital development in “Sopharma” AD. The connection between them is that Hermes data is entered into Microsoft Dynamics AX. The quality of information generated by Microsoft Dynamics AX and other products provides significant opportunities for management to make adequate, reasonable and timely decisions in the management and control of activities for the preparation of various financial and management reports and other public documents with financial information. The information system of “Sopharma Trading” AD includes infrastructure (physical and hardware components), software, people, procedures and data. The company started in 2014 the phased implementation of the SAP ERP system. It covers all major transaction processes in the Company. The system has been adapted and implemented, taking into account the specifics of the Company itself, but good practices have been borrowed from the pharmaceutical sector and other industries. In addition to the main information system, the Company also uses the following systems: FM + transport planning and management, mobile application for driver management (on SAP mobile platform), KNAPP WMS and SAP WMS - warehouse management, SAP Hybris - online management sales, Hermes - HR management. The connection between them is made through interfaces. The quality of the information generated by the ERP system SAP and other products provides significant opportunities for the Management to make adequate, reasonable and timely decisions in the management and control of the activities for the preparation of various financial and management reports and other public documents with financial information. Given the smaller scale of the other companies in the Group, each of them uses software appropriate to its needs. The information system relevant to the objectives and process of financial reporting covers methods and documentation that: • identify and reflect all valid transactions and operations; • describe transactions and operations in a timely manner in sufficient detail to enable them to be properly classified for financial reporting purposes; • assess the value of transactions and operations in a way that reflects their appropriate monetary value in the financial statements; • determine the time period during which the transactions and operations have occurred in order to allow their recording in the appropriate accounting period; • present the transactions and operations and related disclosures in the financial statements in accordance with the requirements of the reporting framework. The "Information Technology" Department is responsible for the risk-free functioning of the information system in the Parent company and in ”Sopharma Trading” AD – “Business and Technological Development”. In each of the companies in the Group was established “Information technology” department, which is responsible for the smooth functioning of the different types of software. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 14 Accounting Department - fulfillment of the accounting function and key role in the financial reporting process The Accounting Department of the Parent Company is directly subordinated to the Executive Director. It is headed by a chief accountant. It consists of: Deputy Chief Accountant, and heads of sectors and operational accountants. Structurally, it consists of the following sectors: fixed assets, materials, cost, sales, foreign exchange operations, lev operations, wages. According to its functional characteristics, it covers and fully implements the accounting function in the Company, internal accounting control and preparation of financial statements. His responsibilities include the correct and consistent application of the developed accounting policies, the development and implementation of an internal chart of accounts; accounting methodologies, current accounting; current accounting analysis and control of reporting data and documentation; summarizing and classifying the reporting data for the purposes of the financial statements; the preparation and/or processing of the input data for the accounting estimates together with the engaged experts, as well as the reporting of established deviations and discrepancies to the Financial Director; and compliance with regulatory requirements in the field of accounting, taxes and other related areas. The accounting department of “Sopharma Trading” AD is managed by a chief accountant, who is directly subordinated to the Financial Director. Structurally, the accounting department consists of two structural areas: 1) accounting of Sopharma Trading, which involves one deputy chief accountant and 8 operational accountants and 2) group accounting, which involves one senior accountant and 1 operational accountant. The financial and accounting operations of the company in Serbia and in the Retail segment in Bulgaria are taken care of by two separate accounting teams. In each of the companies in the Group there are respective structures that ensure the good functioning of both the company itself and the control of its financial and accounting activities. The accounting policy of the Parent Company and the Group, respectively, for the purposes of preparing the consolidated financial statements, is subject to annual approval at two levels - by the Financial Director and the Board of Directors of the Parent Company. The most important aspects of it, necessary for the correct understanding of the financial statements, must be disclosed. The choice of the reporting framework is defined on the basis of the requirements of the Accounting Act. The company applies the International Financial Reporting Standards (IFRS) adopted by the European Union. Ongoing control over the proper application of IFRS is performed by the Chief Accountant, the Chief Financial Officer and the Audit Committee. Additional confirmation of the correctness of the application is received from external auditors. The preparation of the financial statements of the Parent Company for public use is the result of a complete process of accounting closing of the reporting period. This process is formalized through documents and rules adopted by the Management. They are related to the performance of certain actions and procedures, and resp. the preparation of certain documents by persons from the Accounting Department or by other officials and these actions and procedures are aimed at: carrying out inventories; analysis of accounts; sending confirmation letters; determining best estimates such as depreciation, revaluation, impairment and accruals based on reasonable assumptions, consolidation and classification of accounting data; studies and analyzes of certain legal documents (contracts, lawsuits, opinions of legal advisers); studies and evaluation of expert reports (appraisers, actuaries, internal auditors, other internal experts and officials); preparation of reports and financial packages for consolidation; preparation, analysis and discussion of draft financial statements. The closing process is led directly by the Chief Accountant and Head of Reporting Department, with the CFO monitoring and finalizing key issues related to the recognition, classification, valuation, presentation and disclosure of certain items, transactions and events, and the overall presentation of the financial statements – individual and consolidated financial statements of the Parent Company. ! This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 15 Control activities The control actions, which are envisaged in the developed and implemented internal controls by processes, include: reviews of the implementation and the results of the activity; information processing; physical controls and division of duties and responsibilities. The general controls related to financial reporting can be categorized as procedures related to current and periodic reviews and analyzes of financial indicators and the input data for them, through which the performance and results of the company's activities are presented in the financial statements. These, in turn, include such reviews and analyzes of actual reported performance data against budgetary, forecast, previous periods and industry. Such financial analyzes are performed with the QlikView platform - upgrading the ERP system Axapta 2009. They can usually contain proposals for optimization or revision of certain budgets. The controls assigned to the Parent Company's information systems cover both the controls of the application programs and the general IT controls, which are policies and procedures that help to ensure the continuous proper functioning of the information systems. The typical controls on the application programs that are set are: checking the mathematical accuracy of records, maintaining and reviewing accounts and turnover sheets, automated controls, such as input checks and checks on the sequence of numbering and non-automatic tracking of exception reports. Common IT controls include: program change controls, controls that restrict access to programs or data, controls on the deployment of new releases of bundled software applications, and controls on system software that restrict access or ongoing monitoring of the use of system utilities that could change financial data or records without leaving a trace for follow-up. At “Sopharma Trading” AD the general controls relevant to financial reporting can be categorized as procedures relating to ongoing and periodic reviews and analyses of financial performance and inputs that are used to present the performance and results of the Company's operations in the financial statements. These, in turn, include such reviews and analyses of actual reported performance data against budget, forecast, prior period and industry data. Such financial analyses are performed using the SAP ERP and SAP Bl platform. For management purposes, separate forms have been established and approved under which monthly reports are prepared. The reports contain actual and budget figures, analysis of variances, comparison of current with previous period. They may also normally contain proposals for optimization or revision of certain budgets. Most of the Group companies have an Information Technology department responsible for implementing control activities. The applied physical controls of the companies of the Group include: a) measures for the physical security of the assets - secure facilities and premises, as well as special conditions for access to assets and documents; b) a special procedure for granting access to computer programs and data files; c) periodic inventories - procedures for organizing and conducting inventories by physical counting /weighing/ sending appropriate letters for confirmation and comparison with the amounts reflected in the control inventories and accounting documents/registers. Procedures have been introduced for the timely analysis of the results of the inventories, development of solutions for their accounting and resp. approval by the Executive Director. The developed and implemented procedures for management, organization and implementation of the main routine processes (supplies and sales), as well as for the processes of preparation and acceptance of complex estimates (depreciation, impairment, revaluation, actuarial calculations and long- term provisions) also provide internal controls. They are aimed at: authorization of the individual operation and the issued primary documents; review and verification of the issued documents and the assets involved in the operation; subsequent recalculation and comparison with other documents (contracts, applications, confirmations, price lists, etc.) and persons, as well as the division of duties and This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 16 responsibilities of the participating officials at each step of the process, to ensure mutual control between them, as and to reduce the possibility of allowing a person to be in a position to both commit and conceal errors or fraud in the normal course of his or her duties. The Group is in the process of constantly expanding the formalized control procedures and activities. Ongoing monitoring of controls An important priority goal of the management of the companies in Sopharma Group, in the person of the CFO is to establish and maintain continuous and effective internal control. Ongoing monitoring of controls by management includes an assessment of whether they are operating as intended and whether they are being modified in an appropriate manner to reflect changes in conditions. Ongoing monitoring of controls may include activities such as management review of whether internal management reports are being prepared in a timely manner and whether key data in them are in line with third-party confirmation and its projections, and internal auditors' assessment of compliance with policies and procedures. on the implementation of routine processes (sales and deliveries) by the staff employed in them, incl. the set internal controls, incl. and in comparison with the contracts with the counterparties, as well as supervision over the observance of the ethical norms or the policy for business practice by the legal department of the companies and the department for relations with the investors. Ongoing monitoring is carried out to ensure that controls continue to be effective over time. Internal auditors, as well as other staff performing supervisory, monitoring or control functions, incl. the accounting department and the reporting department also contribute to the ongoing monitoring of internal controls over the company's processes through their assessments of individual controls or groups of controls. They usually provide such information periodically, in the course of their duties and functions, and their assessments of the functioning of certain internal controls, focusing considerable attention on assessing their effectiveness, communicating with relevant persons information on identified strengths and weaknesses of internal controls and make recommendations for their improvement. Ongoing monitoring activities include the use of external information that identifies problems or identifies areas for improvement. Such countries are customers, suppliers and servicing banks. In addition, the regulatory body, represented by the FSC, may also communicate with the company's management issues that affect the functioning of internal control, for example, exchange of information directly monitored by the Commission related to the implementation of certain actions or transactions of the company or inspections from the FSC itself. Also, in the implementation of ongoing monitoring activities, the management always takes into account the communication with the external auditors related to the internal control and the identified weaknesses and recommendations. IV . Information referred to in Article 10 (1) (c), (d), (e), (h) and (i) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on proposals for ingestion 1. Significant direct or indirect shareholdings (including indirect shares through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC; During the year there is no reaching, exceeding or falling below one of the following limits of 10%, 20%, 1/3, 50% and 2/3 of the share capital of the Parent Company. 2. Holders of all securities with special control rights and description of these rights; There are no securities with special rights for the Parent Company and for the other public companies in the Group. According to the Articles of Association of the companies in the Group, all shares issued by them are of one class, registered, dematerialized, ordinary and indivisible. Each share gives the right to one vote in the General Meeting of Shareholders, the right to dividend and liquidation share, proportional to the nominal value of the share. 3. Any restrictions on voting rights, such as restrictions on the voting rights of holders of a certain percentage or number of votes, deadlines for the exercise of voting rights or systems through which, in cooperation with the company, the financial rights granted to the securities, are separated from the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 17 possession of the securities; There are no restrictions on the voting rights in the Parent Company and for the other public companies in the Group. 4. The rules governing the appointment or replacement of members of the board and the amendment of the Articles of Association; For “Sopharma” AD the Board of Directors proposes to the General Meeting amendments and/or supplements to the Articles of Association, changes in the composition of the Board of Directors, dismissal and election of a new Board of Directors. Members of the Board of Directors may be natural and legal persons meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. When a member of the Board of Directors is a legal entity, he/she appoints a representative/s for the performance of his/her duties in the Board. The legal entity shall be jointly and severally liable with the other members of the Council for the obligations arising from the actions of its representative. The natural persons, who represent the legal entities - members of the Board of Directors, must meet the requirements of art. 234, para 2 of the CA. Persons who have been members of the management or supervisory body of a Company terminated due to insolvency during the last two years preceding the date of the decision to declare insolvency may not be members of the Board of Directors if unsatisfied creditors remain. A person who has been a manager, a member of a management or control body of a company for which a non-fulfillment of obligations to establish and maintain the levels of stocks determined by him by an effective penal decree has been established by an effective penal decree may not be a member of the Council stocks of oil and petroleum products. At least one third of the members of the Board of Directors must be independent. The independent member of the council may not be: • employee in the public company; • a shareholder who holds directly or through related parties at least 25 per cent of the votes at the general meeting or is a person related to the company; • a person who is in a lasting commercial relationship with the public company; • member of a management or control body, procurator or employee of a company or other legal entity; • a person related to another member of the management or control body of the public company. The members of the Board of Directors may be re-elected without restriction. In case of changes in the legislation, at the next General Meeting of Shareholders a decision is made to amend the Articles of Association in order to bring its provisions in line with those of the applicable regulations. Until this decision is made, the affected texts of the Articles of Association shall be interpreted in accordance with the Constitution and the laws of the country. The Articles of Association are amended and supplemented by a decision of the soph of Shareholders by a majority of 2/3 /two thirds/ of the capital presented to the General Meeting. The current Articles of Association are entered in the Commercial Register under number №20210412150242. 5. The powers of the members of the board, and in particular the right to issue or repurchase shares. The powers of the Board of Directors are regulated in the Articles of Association of the Company. The approval for the issuance of bonds is a decision that the Board of Directors may take by a qualified majority of 2/3 of its members. The Board of Directors is authorized to repurchase shares under certain conditions, with the decisions taken by the EGM, held on February 23, 2018. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 18 V. Composition and functioning of the administrative, management and supervisory bodies and their committees 1. Composition of the members of the Board of Directors: The Parent Company is managed and represented by a Board of Directors, which consists of five individuals meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. The composition of the Board of Directors may be changed by the General Meeting at any time. The composition of the Board of Directors is described in item I. General information about “Sopharma” AD in the Management Report. According to Article 116a, paragraph 2 of the Law on public offering of securities, at least one third of the members of the Board of Directors must be independent persons. In this case it is: • Alexandar Viktorov Tchaoushev The members of the Board of Directors are acquainted with the rights and obligations related to their position. 2. Procedure for work of the Board of Directors “Sopharma” AD has developed Rules for the work of the Board of Directors, which comply with and are a continuation of the principles set out in the Good Corporate Governance Program. The Articles of Association of the Company are in accordance with the requirements of the Law on public offering of securities and the shareholders have the right to timely notification on various issues. The Board of Directors meets at least once a month. 3. Minutes of meetings Minutes of the decisions of the Board of Directors shall be kept and signed by all members present at the meeting. The minutes shall be kept by the Investor Relations Director of the company in a special register according to the provision of art. 116d, para. 3, item 3 of the LPOS. The protocols are a trade secret. Facts and circumstances thereof may be published, disclosed or brought to the attention of third parties only by decision of the Board of Directors or when required by law. 4. Responsibility The members of the Board of Directors must provide a monetary guarantee for their management in the amount determined by the General Meeting, but not less than their 3-month gross remuneration. The members of the Board of Directors are jointly and severally liable for the damages they have caused to the Company. Each member of the Board of Directors may be released from liability if it is established that there is no fault for the damages. The General Meeting may release from liability a member of the Board of Directors of the Regular Annual General Meeting in the presence of certified by a registered auditor Annual Financial Statements for the previous year and interim financial statements for the period from the beginning of the current year to the General Meeting. The Board of Directors reports to the General Meeting of Shareholders. 5. Role of the Board of Directors for the application of the principles of good corporate governance The Board of Directors makes decisions on all issues related to the activities of the Parent Company, except for those which, according to the current legislation and the Articles of Association, are within the exclusive competence of the General Meeting. According to the structure and composition of This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 19 the management bodies of each of the companies in the Group, their functions are distributed according to the departments that exist in them. The way of functioning of the management and control bodies is aimed at bringing the management of each company in line with the set strategic goals, both of the company itself and those of the Group. The Board of Directors assigns the implementation of its decisions and the implementation of the operational management functions of the Company to one of its members /executive director/. The Executive Director may be replaced at any time. The members of the Board of Directors of the public companies in the Group submit a declaration to the Financial Supervision Commission /FSC/, to “BSE-Sofia” AD and to the Company itself under Art. 114b of LPOS and under Art. 247, item 4 of the Commercial Law. The change in these circumstances shall be declared in the respective terms after its occurrence. In carrying out its activities, the Board of Directors complies with the accepted principles of corporate governance of the Company. The Board of Directors makes the best efforts to ensure easy and timely access to public information in order to exercise the rights of shareholders in an informed manner, respectively to make an informed investment decision by investors. 6. Due care. Avoiding conflicts of interest. The members of the Board of Directors are obliged: • to perform their functions with the care of a good trader, to be loyal to the Company and to act in the best interest of its shareholders; • to perform their duties with the skills, diligence and responsibility inherent in the professional and in a way that they reasonably believe is in the interest of all shareholders of the Company, using only information that they reasonably believe to be reliable, complete and timely; • to prefer the interest of the Company and the investors in the Company to their own interest and not to use for the benefit of themselves or others at the expense of the Company and the shareholders facts and circumstances that they learned in the performance of their official and professional duties; • to avoid direct or indirect conflicts between their interest and the interest of the Company, and if such conflicts arise - to disclose them in a timely and complete manner and not to participate and not to influence other members of the board in making decisions in these cases; • not to disseminate information about the discussions and decisions of the meetings of the Board of Directors, as well as other non-public information about the Company, including after they cease to be members of the Board of Directors, until the public announcement of the relevant circumstances by the Company; • to provide and disclose information to shareholders and investors in accordance with the requirements of the regulations and internal acts of the Company. The Board of Directors is assisted by an Audit Committee, which according to the Independent Financial Audit Act and International Standards on Auditing performs the following functions: • monitors the financial reporting processes in the enterprise; • monitors the effectiveness of the company's internal control systems; • monitors the effectiveness of risk management systems in the enterprise; • oversees the independent financial audit of the enterprise; • reviews the independence of the registered auditor of the company in accordance with the requirements of the law and the Code of Ethics for Professional Accountants, including monitors the provision of additional services by the registered auditor of the audited company. At the Extraordinary General Meeting of Shareholders of “Sopharma” AD, held on November 20, 2008, an Audit Committee was elected consisting of three people: Tsvetanka Zlateva, Vasil Piralkov and This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 20 Vasil Naidenov with a 3-year term , who was re-elected 3 consecutive times. With a decision of the GMS from June 2, 2017 Vasil Piralkov was replaced by Kristina Atanasova. VI. Description of the diversity policy applied to the issuer's administrative, management and supervisory bodies in relation to aspects such as age, gender or education and professional experience, the objectives of this diversity policy, the manner of its implementation and the results during the reporting period Sopharma Group makes every effort to ensure equal opportunities in appointment and to comply with the form and substance of the full range of laws relating to fair practices in the work environment and prevention of discrimination. Discrimination, whether based on race, sex, sex or gender, skin color, beliefs, religion, national origin, nationality, age, disability, genetic information, marital status (including unmarried and civil unions, defined and recognized by applicable law), sexual orientation, culture, pedigree, veteran status, socio- economic status or other legally protected personal characteristics are unacceptable and completely incompatible with the Society's tradition of providing honest, professional and a decent job. Repressive measures against people who complain of discrimination or harassment are also prohibited. The main goals of the Group in the implementation of diversity policies are: • Attracting, hiring and retaining people with a wide range of professional skills. The diverse abilities of managers and employees open new opportunities for innovative and creative solutions, increase creativity and innovation. This, in turn, would lead to a more effective adaptation to the impact of globalization and technological change. A more diverse workforce can increase a company's efficiency in achieving its goals. It can lift the spirits of employees, give access to new market segments and increase productivity. • Promoting a working atmosphere that embraces ethnocultural diversity and in which differences between people are valued and respected. • Solving one of the most important problems for the employer - that of labor shortages, as well as problems related to hiring and retaining highly qualified workers. • Improving the Group's reputation and overall performance to external stakeholders and society. • Creating opportunities for disadvantaged groups and building the unity of society. Sopharma Group strives to achieve the set goals by approving and applying in practice the types of diversity important for the company. Adopting good practices from other companies and institutions, the company's management wants to make diversity management a functioning part of the Group. The Group strives to inform employees, consumers, customers and investors about the importance of diversity for them and their work, aiming to build their trust and desire for support. The policy of diversity provides diversity of the members of the governing bodies, which guarantees a reliable system of management and control, and good corporate governance is a key element of the secure and stable operation of Sopharma Group. They meet the high standards applied by the Group in order to achieve its goals and strategies. The composition of the management bodies of the companies in the Group and the number of persons included in it is consistent with the size, complexity and scope of the Group's activities and ensures a sufficient level of general expertise. The members of management bodies of the companies in the Group have extensive professional experience, both theoretical, acquired through education, training and qualifications, and practical, acquired during previous positions. They are persons with good reputation and managerial abilities, with high professional and moral qualities. The principle of gender equality has been observed, as evidenced by the many women holding senior management positions in the Group. The male-female ratio in most companies in the Group is in favour of women and is dictated by the nature of the production process. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text prevailing. 21 The policy of diversity with regard to governing bodies does not allow for age restrictions. The companies of the Group have representatives from various minority ethnic groups. The Company also employs disadvantaged people. The aim is to provide young people with opportunities for professional and personal development. There are no cases of discrimination in the companies of the Group on any grounds. In Section V of the Rules of Procedure of “Sopharma” AD regulates the rights and protection of employees with regard to any discriminatory actions by the employer. On the grounds of Ordinance for employment /SG, issue 7/1987, amended and ext. No. 111 of 28.12.2001, amended, SG No. 78 of 30.09.2005, entered into force on 01.10.2005/, Ordinance №8 on determining the jobs suitable for employment of persons with reduced working capacity /SG, issue 52/1987, SG, issue 47/1990/ and Ordinance for amendment and supplement of Ordinance № 8 for determination of the jobs, suitable for employment of persons with reduced working capacity /SG, issue 44/1993/ and according to art. 27 of the Law on Integration of People with Permanent Disabilities, every year an Employment Commission is established in “Sopharma” AD. The Commission shall prepare a list of suitable places and positions for employment of persons with reduced working capacity and with permanent disabilities in accordance with the percentage determined for the branch by the order of art. 315 of the Labor Code and of pregnant and lactating workers. The Commission shall examine the specific employment cases and identify suitable places according to the approved list. 26.04.2023 Ognian Donev, PhD Sofia Executive Director OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:26:00 +03'00' SOPHARMA GROUP 26 April 2023 Consolidated non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 1 Contents I. About the Declaration .............................................................................................................................. 2 II. Scope of the Declaration .......................................................................................................................... 3 1. Vision, strategy and corporate governance ...................................................................................... 4 2. Imprint of the companys activity ...................................................................................................... 8 3. Organizational structure .................................................................................................................. 11 III. Strategy for corporate social responsibility ........................................................................................... 15 1. Definition .......................................................................................................................................... 15 • Markets ............................................................................................................................................. 15 • Stakeholders ...................................................................................................................................... 16 • Environment ...................................................................................................................................... 17 • Society ............................................................................................................................................... 17 2. CSR management ............................................................................................................................. 18 3. Membership ..................................................................................................................................... 19 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 2 I. About the Declaration The Consolidated non-financial declaration (“the Declaration”) describes the commitments that Sopharma Group, as a corporate citizen, fulfills for the shareholders and investors, state and local authorities, consumers, customers and partners, the environment and society. The Group maintains an active dialogue with all of them in defining important decisions and in carrying out its corporate communications at all levels. Group companies monitor and declare the economic, social and environmental footprint that results from their activities. The measures used are in line with the main activity of the companies and are used to minimize the negative and increase the positive impact on their stakeholders. The declaration complies with the reporting requirements of Art. 48 of the Accounting Law and is a description of the policies and enterprises regarding their activities in the fields of ecology, social affairs, employees, anti-corruption, human rights. All companies in the Group strive to introduce good practices followed by the parent company “Sopharma” AD. Our activities In connection with the requirements of Art. 8 Transparency of undertakings in non-financial statements, REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 18 June 2020 on the establishment of a framework to facilitate sustainable investments, and amending Regulation (EU) 2019/2088, the Group should disclose whether its activity is eligible under the current Taxonomy, as a qualification system for ecologically sustainable economic activities. The Taxonomy Regulation is a key component of the European Commission's action plan to redirect capital flows towards a more sustainable economy. We considered our activities as a pharmaceutical company in the context of all economic activities meeting the taxonomy criteria listed in the Climate Delegated Act. The Climate Delegated Act focuses on those economic activities and sectors that have the greatest potential to achieve the climate change mitigation objective – i.e. the need to avoid creating greenhouse gas (GHG) emissions, to reduce these emissions or to increase GHG sinks and long-term carbon storage. Sectors covered include energy, selected manufacturing activities, transport and buildings. After a thorough review involving all relevant divisions and functions, we have concluded that our activity as a pharmaceutical manufacturer is not covered by the Climate Delegated Act and is therefore taxonomically ineligible. Our assessment of taxonomy eligibility is focused on economic activities defined as the combination of resources to produce specific goods or services. In this context, we, as a pharmaceutical manufacturer, generate external revenue from our products through only one activity (production and sale of our pharmaceutical products), but we are active in several sectors within the value chain of our products. Activities within the value chain of our products that do not generate revenue but result in assets or processes that are essential to our revenue-generating activities are not accounted as economic activities meeting the requirements of the taxonomy. For instance, transporting our pharmaceutical products to our customers does not count as a taxonomy-eligible activity and is not included in our turnover KPI, as we do not generate external turnover on a stand-alone basis with this activity. We considered our activities also based on the exceptions for the reporting period according to Art. 10 of Delegated Regulation (EU) 2021/2178. As we draw attention to, and in view of the active change and Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 3 updating of the understandings of the European Commission in this regard, it is possible that we re-evaluate both our income reporting and disclosures in our next reports. To the extent that for the reporting period 2022 our turnover is taxonomically ineligible, as our economic activities are not covered by the Climate Delegated Act, the capital and operating expenses related to these activities are also taxonomically ineligible, which is reflected in the following table: Ratio of taxonomy-compliant and taxonomy-unacceptable economic activities in total turnover, capital and operating costs Total (BGN’000) Share of taxonomically eligible economic activities (in %) Share of taxonomically- inadmissible economic activities (in %) Turnover 1 663 016 0% 100% Capital costs (CAPEX) 85 154 0% 100% Operating costs (OPEX) 8 965 0% 100% II. Scope of the Declaration The Declaration gives a broad overview of a various aspects of the activity of Sopharma Group as a corporate citizen. It focuses on the activities of the Group for the period 01.01.2022 - 31.12.2022. The declaration contains quantitative data used as impact indicators in the main areas. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 4 1. Vision, strategy and corporate governance 1.1 Mission, values, goals and strategy The mission of Sopharma Group is to play an active role in raising people's living standards by providing constant and easy access to the most important health-related products. To ensure the fulfillment of its mission, Sopharma Group constantly invests in production - new technologies, research and studies; in increasing the efficiency of distribution; in maintaining an active and effective dialogue with all participants in the healthcare system; in participation in significant projects and programs related to the development of society and in environmental protection. The vertically integrated model of companies operating mainly in the field of healthcare supports the application of global and European standards and practices. Synergies within the Group lead to better organization, centralization of core marketing and sales activities, cost optimization and better performance in all markets. The parent company, as a leading pharmaceutical manufacturer, follows the best practices in the field of corporate citizenship. The values that logically determine life in the company and the interaction with the stakeholders are related to the care of people's health not only in the physical aspect, but also in emotional and mental terms. The Sopharma Group's development strategy turns the companies into an attractive investment thanks to the following long-term goals: • Portfolio diversification, expansion of foreign markets, successful acquisition operations; • Sustainable development and strong performance in key markets; • Transparent and efficient management model. The results of the Group's work are always in favor of all stakeholders, making it a preferred “partner” in health and investment. The Group is represented in over 45 countries with key markets in Bulgaria, Russia, Ukraine, Kazakhstan and Poland and a strategic plan focused on further market expansion in the region. Corporate citizenship policies The corporate citizenship of the Group operates and develops in accordance with the constitutions, laws and regulations of the countries in which the Group is active. I In all their actions, the companies comply with the regulations of the state, local government and regulatory bodies, keeping an eye on the renewal and strict implementation of the legislation concerning their activities. The Group follows the 10 basic principles of the UN Global compact and works towards the achievement of the Global sustainable development goals SDG 2015 through the active participation of companies in various thematic projects. 1.2 Management systems Corporate governance systems Each of the companies operates following its basic internal rules, such as the regulations, and complies with its management systems in accordance with the imposed legislative and regulatory requirements. More specific management systems, related to pharmaceutical production and distribution are: Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 5 Corporate governance systems Description Adopti on date Last updat e Prospect The prospectus contains detailed information about the issuer of a financial instrument and about the issue itself. 2021 2021 Articles of Association The Articles of Association determine the basic rules according to which significant decisions are made concerning the existence of the Company. 2003 2021 Decisions taken at the General Meeting of Shareholders The decisions of the shareholders are fundamental for the activity of the Company. at least once a year 2022 Rules of operation of the Board of Directors Instructions and explanations for the duties and responsibilities of the members of the Board of Directors. 2007 Good corporate governance program A system of rules protecting the rights of shareholders and other stakeholders. 2009 2022 Good Manufacturing practice/GMP A system of principles and rules that ensure the proper course of each stage of the production process, providing a quality final product. 2003 2022 Good distribution practices /GDP The good distribution practices is a system of rules and procedures which serves to guarantee the high quality of the medicinal products at every stage of their distribution. The quality of medicinal products may be affected by a lack of adequate controls. 2003 2022 ICH “Q8 Pharmaceutical Development” Principles, governing the establishment of pharmaceutical products. 2004 2022 AXAPTA/SAP Integrated information system for the overall business management of production planning processes, supply chain management, sales management and planning, financial management and control, customer relationship management, business analysis and more. 2013 2022 ISO 9001: 2015 Quality Management System 2008 2018 ISO 13485: 2003 Quality management systems for medical devices 2003 2018 СЕ BRAND Conformity of Medical Device Directive 93/42 / EEC 2003 2016 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 6 Directive 93/42/ЕЕС Concentration Directive for hemodialysis 2003 2016 BDS INISI/ IEC 17025 Standard for laboratory tests of foods of different origins; water and beverages; feed; control of technological surfaces and carcasses; diagnosis of diseases in all species of domestic and wild animals; bees and a beehive 2006 2017 ISO 14001:2015 Environmental management systems 2015 2019 ISO 27001:2013 Information security management systems 2013 2017 OHSAS 18001:2007 Occupational health and safety management systems 2007 2017 WHO Good dissemination practices WHO Technical statements Series, № 937, 2006. 2006 Detailed description of the corporate governance systems: • The program for good corporate governance A system of rules protecting the rights of shareholders and other stakeholders concerning the timely and accurately disclose information on all material issues related to the Company and to support its strategic management. The program also provides control over the activities of the Board of Directors/Management and Supervisory Board and its accountability to the company and shareholders. The program is in accordance with current legislation, to the internationally recognized standards for good corporate governance and the Bulgarian National Code of Corporate Governance. • GMP Good manufacturing practice is a system of rules and procedures which guarantee the high quality of medicinal products at every stage of their manufacturing. Its major purpose is to protect the patient's health. The GMP deal with both the production process and the working conditions, the qualifications of the production personnel, the sales system in use and the method of product withdrawal from the respective market. • GDP GDP include an array of tools used in the activities of wholesale distribution, including preventing counterfelt medicinal products from entering the supply chain. Their implementation ensures control an efficient contor of the distribution chain and the maintenance of the high quality and integrity of the manufactured medicinal products. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 7 The GDP is applicable to any and all activities including the supply, storage, delivery or export of medicinal products, excluding the sale to the end users. This system also includes competency of the employees, working conditions and product retention, control at any point in time to the final delivery. • ICH Q8 Pharmaceutical Development The standard applies to the overall process of creating new products, from development to registration. It also includes risk assessment and quality assurance systems as part of product design. It concerns all components of the medicinal product, substances, excipients, active substances, development of the formulation and process of creation, knowledge accumulated during this process, physicochemical and biological properties, development of the manufacturing process and all information that may affect the final result. • ISO 9001:2015 The implementation of the Quality Management System to the requirements of ISO 9001: 2015 ensures the company's ability to continuously provide services that meet the customer's and applicable legal and regulatory requirements. Effective implementation of the system leads to increased customer satisfaction. • ISO 14001:2015 Through the implementation of the standard, the company is committed to the rational use of natural resources to ensure constant control over the identified aspects of the environment that it affects. Measures are implemented to manage the environmental aspects, those that can be controlled and those that are expected to have an impact on the part of the company. • OHSAS 18001:2013 Through the implementation of the standard, the company demonstrates its commitment to the health of its employees by providing a safe working environment, managing and minimizing the risks to the health of the personnel as well as to the staff of the stakeholders who work at the company's premises. • ISO 27001:2013 By applying the requirements of the standard, the company provides adequate and coherent security mechanisms, whose purpose is to protect the information assets of the company and to ensure the confidence of each interested party with special attention to the clients. • ISO 13485:2016 The standard specifies the requirements for a quality management system when an organization needs to demonstrate its ability to provide medical devices and related services that consistently meet customer requirements and applicable regulatory requirements. • БДС INISI / IEC 17025 Accredited laboratory according to BIS INISI / IEC 17025 by the Bulgarian Accreditation Service (BSA) and has the right to carry out tests which are recognized by all national and European food control authorities. The scope of accreditation includes tests of foods of different origins; water and beverages; feed; control of technological surfaces and carcasses; Diagnosis of diseases in all species of domestic and wild animals; bees and a beehive. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 8 Since 2014, the Lab Unit has been housed in new laboratory premises including Biosafety Level 3 for disease diagnosis as required by the OIE. • СЕ BRAND Conformity of Medical Device Directive 93/42 / EEC. • АXAPTA/SAP Integrated information system for business process management in the corporate activity of the high class company. It improves efficiency, helps to make more precise decisions, and improves interconnections with the supply chain. It supports sales management and planning, production to material planning and production capacity, supply chain management resoursec - stocks, warehouses and links between them, quality management. The system facilitates activities related to accounting, financial management and control, budget control and business analysis capabilities. • World Health Organization Good Distribution practices (WHO Technical Statement Series, No 937, 2006) By applying the requirements of the European Commission described in Directive 2001/83 / EC, the Management Manual of Good Practice of Distributing Practice of 5 November 2013 and the World Health Organization, the companies engaged in distribution declare their expertise and constant control over quality assurance, ensuring that products consistently stored, transported and handled under appropriate conditions as required by the marketing authorization or product specification. 2. Imprint of the companys activity Economic impact We create added value for our stakeholders Economic and Financial data 2022 2021 % change Stakeholders Decision for issuance, under the conditions of initial public offering, of warrants - 44 925 943 number of registered, demateriali zed warrants - Shareholders Decision for payment of dividends by the General Meeting in the amount of BGN per 1 share - - N/A Shareholders Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 9 Taxes paid in thousand BGN Incl: Taxes paid (other) in thousand BGN Corporate tax paid in thousand BGN 75 122 65 217 9 905 82 391 74 454 7 937 (8.82) (12.40) 20.00 State and local authorities Payments to suppliers in thousand BGN 1 603 177 1 504 805 6.13 Suppliers /including hired services/ Payments for wages and social insurance in thousand BGN 141 810 146 239 (3.02) Employees The economic impact is most clearly tracked through dividend decisions that show the relationship with stakeholders as shareholders; paid taxes, incl. paid corporate tax, which is a contribution to state and local authority; payments to suppliers showing relationships with companies in the supply chain; the cost of labor that shows employee relations as an interested party. Social impact Economic and financial data /expenses thousand BGN/ 2022 2021 Stakeholders Plants / Number of employees 9/1 696 8/1 768 Work places - employees Training courses /expenses BGN ‘000/ 225 247 Employees Economic and financial data Stakeholders Social benefits and payments /expenses BGN ‘000/ 4 918 4 192 Employees Medical services /expenses BGN ‘000/ 722 761 Employees Donations /expenses BGN ‘000/ 438 365 Local communities Social activities and events 239 214 Local communities Projects related to promoting health culture and investing in civil society. The companies of the Group works to increase the economic and social development of society, to promote a healthy lifestyle and to improve the health culture. Sopharma Group adheres to traditions that nurture fundamental values, such as health care in harmony with nature, strengthening the community and nurturing the competitive spirit. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 10 • We traditionally support initiatives related to sport and healthy lifestyles by supporting sports events and competitions; • Initiatives under the UN Global Compact Network: "I'm proud of my parents' work" - youth career guidance activity; • A digital platform was created for training and upskilling of the staff, incl. pharmacists; • Donations to hospitals, universities, community centers, Bulgarian Red Cross, nursing homes. Ecologic impact Indicators 2022 2021 % Cost of materials and energy (electricity, headenergy, fuels, water; without main materials and impairment) /expenses BGN ‘000/ 35 413 29 030 18.02 Costs for transport services 4 721 4 324 8.40 Separate waste collection 314 t. 442 t. (29) Exhaust emissions into the atmosphere 0* 0* 0 Emissions to wastewater Waste water is treated in WWTP ** Employees trainings and inclusion in environmental protection activities Instruction of employees; Instructions for recovery and separate collection of waste; Instructions on how to deal with waste substances in the units; * The plants of Sopharma AD are certified according to Good Manufacturing Practices (GMP), which also controls the degree of environmental pollution. Emissions of waste gases are less than 50 tons per year, which according to the standards tends to 0. ** For years in the production in the factories of the company no organic substances are used for filming the tablets, which guarantees zero pollution of the wastewater. The main part of the turnover, operating and capital costs of the Company are related to economic activities that qualify as environmentally sustainable, with the exception of some transport activities by third parties and domestic transport activities, which increase by BGN 4,721 thousand in 2021 or by 8.13% of BGN 4,324 thousand in 2021. Projects related to responsible use of resources and environmental protection • Separate waste collection, minimization, utilization and recycling of production and municipal waste; • Providing regular training of personnel on environmental issues and pollution prevention; • Responsible implementation of the mandatory requirements, defined in the Waste Management Act (WMA) and payment of a product fee, according to the Ordinance on Packaging and Packaging Waste (WAO); • Switching from plastic to paper sticks in the production of ear sticks; Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 11 • Separate collection of household waste (paper, plastic, batteries) at the workplace. Containers provided at all production sites; • Reduction of printed advertising materials by 50% per year by 2025, by switching to digital content; • Emissions of waste gases in the atmospheric air from the Plant for solid dosage forms are measured annually; • Investments in the creation of “smart” buildings, facilities for renewable energy sources. In 2022, the Company invests in the construction of photovoltaic plants, which will lead to a reduction of CO2 emissions by up to 1,400 tons per year; • Zero pollution of wastewater and the atmosphere, through the use of water film, instead of organic substances for filming the tablets in the production in the company's plants; • Measurement of the annual emissions of waste gases in the atmospheric air from the Phytochemical Plant and the Factory for Dosage Forms. • Emissions of waste gases are less than 50 tons per year, which according to the standards tends to 0. Employees The companies in Sopharma Group provide equal employment opportunities regardless of gender, age and education. All companies in the Group strictly follow basic principles such as: • Zero tolerance for any kind of discrimination in the workplace; • Ensuring healthy and safe working conditions; • Ensuring opportunities for development based on equality; • Ensuring the right of association and labor protection of employees. As at 31 December 2022, the average number of employees of Sopharma Group is 4 764 (compared to 5 507 in 2021). The average number of employees of “Sopharma” AD as at 31 December 2022 is 1 696 (at 1 860 in 2021) and of “Sopharma Trading” AD is 770 (compared to 826 in 2021). 3. Organizational structure Sopharma Group (the Group) is a leading Bulgarian manufacturer, exporter and distributor of pharmaceutical products with a strong presence in Eastern and Southeastern Europe. The group includes a parent company and its seventy-seven (31 December 2021: seventy-eight) subsidiaries. In addition, the Group has investments in two associate and one joint venture (31 December 2021: in two associate and in one joint). “Sopharma” AD, the parent company, is a commercial enterprise, registered in Bulgaria under the Provisions of the Commercial Law, with its registered office in Sofia, 16, Iliensko shose str., established in 1933. Today “Sopharma” AD is a public company and is among the most successful Bulgarian companies after privatization, with ten consecutive years being among the top 10 in revenues in pharmacy sector in Bulgaria. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 12 ! Bulgarian)based)mother) company,)pharmaceutical) producer) API$production$ $ Pharmaceuticals$ production$$ Wholesale$and$ distribution$ Non-pharma$activities$ $ "Sopharma" AD, Bulgaria Extraction of active ingredients "Sopharma" AD, Bulgaria Traditional products from herbal origin, Generic products Group “Sopharma Trading” AD, Bulgaria and Serbia Pre-wholesaling, wholesaling, retail “Biopharm Engineering” AD, Sliven, Bulgaria Veterinary products, sterile production “Biopharm Engineering” AD, Bulgaria/PAO “Vitamini”, Ukraine Generic products Subsidiaries in Ukraine, Kazakhstan, Poland and etc. Wholesaling, retail Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 13 4. Products and services The Group operates in the following areas: Production of pharmaceutical products including medicines, primarily generics, herbal-based substances (phytochemical production); food supplements; infusion solutions; hemodialysis concentrates. Production of medicinal products and medicinal cosmetics, as plasters, bandages and sanitary-hygene products focused on the production site in Sandanski city; Distribution of pharmaceuticals, medical supplies, sanitary materials, vitamins, food supplements and cosmetics; Production and distribution of non-pharmaceutical products, primarily medical supplies such as syringes and other disposables used in medicineand other complementary activities to the production of pharmaceutical products and distribution of pharmaceutical products. Production activity “Sopharma” AD and its manufacturing subsidiaries has nine manufacturing plants, conforming with EU Good Manufacturing Practices (GMP), which are located in Bulgaria, complied with EU Good Manufacturing Practices (GMP), a factory in the Ukraine, certified by local authorities and recognized in all CIS countries. The production activities of the Group are carried out and developed in the following areas: • production of pharmaceutical products; • substances and preparations based on plant raw materials (phytochemical production); • veterinary vaccines; • infusion solutions; • concentrates for hemodialysis; • medical disposable products for human and veterinary medicine; • injection molded products for the industry, agriculture and households. “Sopharma” АD The Company has more than 200 products in its portfolio: incl. nearly 190 medicinal products and 11 groups of medical devices. Medicinal products mainly include generics and 15 traditional products, 12 of which are plant-based. The traditional products of the Group (and in particular Tabex, Carsil and Tempalgin) have a major share to its export market income, while the company's generic products are of major importance for domestic sales, Analgin being the leader among these products. The product portfolio of “Sopharma” AD focuses on the following therapeutic areas: cardiology, gastroenterology, pain management, cough and cold, immunology and dermatology, respiratory tract and asthma, neurology and psychiatry, urology and gynecology, nephrology, surgery, orthopedics and traumatology . Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 14 “Biopharm Engineering” AD “Biopharm Engineering” AD has modern production facilities and is continuously expanding and modernizing its production capacities. The strategy of “Biopharm Engineering” AD is built upon the market and technological advantages of the company. The company’s production facilities are GMP (Good Manufacturing Practices) certified. It is successfully developing in the following areas: • Manufacturing of infusion solutions; • Manufacturing of injection solutions; • Manufacturing of veterinary medical products and immunological preparations; The produced infusion solutions are marketed through “Sopharma” AD on both the Bulgarian and the international markets. Veterinary medical products are offered in Bulgaria and other European countries. PAO “Vitamini”, Ukraine PAO “Vitamini” manufactures and sells medicines, tablets, powders, oil solutions, syrups and tinctures. Production of medicines by PAO “Vitamini” is highly effective, with excellent quality, affordable prices and is sold successfully not only in the Ukraine, but also in other CIS countries.The production takes place in the following production facilities: • for liquid dosage forms; • two production areas for solid dosage forms; • production site for extraction; • tincture production; • production of solutions; • production of powdered products. Distribution “Sopharma Trading” AD is the exclusive distributor on the Bulgarian market of particular pharmaceutical products of several leading international pharmaceutical and other companies in the field of healthcare such as Amgen, Astra Zeneca, GE Healthcare, Johnson and Johnson, Abbot Diagnostics, Hartmann, Novartis and Novo Nordisk. The company is a leading distributor of pharmaceutical products and cosmetics in Bulgaria with a market share in the pharmaceutical products segment of 21.79% (according to IQVIA). The Group has more than 15 000 products (particularly pharmaceutical products, medical equipment and devices, accessories, cosmetics, vitamins and food supplements) in its portfolio, including the brands of “Sopharma” AD, and holds exclusive rights for Bulgaria over brands of strategic partners such as “Aboca”, “Colief”, “Jamieson”, “Planter's”, “Premax”, “Skincode”, “SVR” Laboratories, “US Pharmacia” and “Wyeth”, specialized services (such as software solutions for pharmacies and advice and consulting services) and Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 15 national logistics services. “Sopharma Trading” AD cooperates with more than 400 partners and over 3 000 clients. In 2015, the company introduced its own SOpharmacy pharmacy retail concept to the Bulgarian market, introducing the best global practices to the local market and providing an innovative approach in serving the health needs of Bulgarian patients. SOpharmacy's mission is to become a trusted partner in health care for life. In the fourth quarter of 2017, the company acquired all 19 PharmaStore pharmacies and subsequently joined the SOpharmacy family. The company continues to implement its strategy of expanding its market presence on a national scale in the retail segment of the Pharmacy Market, as in March 2020 it announced its intention to acquire the "SCS Franchise" Pharmacy Group. By Decision No. 626/23.07.2020 The Commission for the Protection of Competition of the Republic of Bulgaria allowed the concentration in the sense of Chapter V of the Law on the Protection of Competition through the acquisition of sole control by "Sopharma Trading" AD over "SCS Franchise" AD and "Sanita Franchising" AD. A condition for the conclusion of the transaction was authorization from the General Meeting of Shareholders of Sopharma Trading AD, which took place on September 25, 2020. On October 1, 2020, the transaction was finalized, with the company acquiring over 150 pharmacies under the Ceiba brands , Sanita and SCS nationwide. The company's intentions envisage the inclusion of the new pharmacies under the SOpharmacy brand, with the integration process starting in 2021 with the unification of central teams and customer activities. It continued throughout 2022. III. Strategy for corporate social responsibility 1. Definition Sopharma Group has an active and crucial role in raising living standards and human health. The policy of Sopharma Group expresses the views and commitments for the future development and improvement of the business by maintaining high quality products and services, protecting the environment, ensuring healthy and safe working conditions, security of information and responsible corporate behavior of companies to stakeholders - investors, partners and end users. Economic and financial indicators are proof of the success of the business model, complemented by adequate CSR policies, confirming the Group's reputation. The companies in the Group are working to achieve the UN SDG 2015. CSR policies and initiatives are set up in accordance with important stakeholder topics, approved by the Key Management Personnel and reported to shareholders mainly through the Annual Reports and General Meetings. Sopharma Group actively communicates with all stakeholders through the appropriate channels. Policies and specific projects are targeted in four main areas: Markets The group is represented in more than 45 countries, with key markets being Bulgaria, Russia, Ukraine, Kazakhstan and Poland. The strategic plan focuses on expanding the presence in the region. The Group's sales revenues increased by BGN 59,7 million or 3.7%, reaching BGN 1 663 million in 2022 compared to BGN 1 603,3 million in 2021 . Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 16 Sales of goods increased by BGN 50,7 million or 3.8%, reaching BGN 1 379,1 million in 2022 compared to BGN 1 328,4 million in 2021. Sales of finished products increased by BGN 9 million or 3.3%, to BGN 283,9 million in 2022 compared to BGN 274,9 million in 2021. Stakeholders For the Sopharma Group, a stakeholder is any group that is directly or indirectly related to the Group's activities, has the potential to influence it and can influence the decision-making process for its business development. Stakeholder relationships are a indicator of the success rate of the Group, its place in the economic and social life of the country, and the correct direction of development. The Group maintains a continuous open dialogue with all interested parties through various communication channels depending on the target group: the official website of the group www.sopharmagroup.com, the corporate media of individual companies, official announcements, meetings with investors, social networks, conferences, formu and seminars. - Patients and end users: daily through product sites, official sites of group companies; group site www.sopharmagroup.com; company profiles and their social networking brands; - Shareholders: General Meetings of Shareholders; notifications; meetings; official corporate sites; the Group's site; annual reports; - Government and local authorities: participation in annual meetings of the business; Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 17 roundtables, discussion forums dedicated to the pharmaceutical sector; official sites of the state and local authorities, control bodies; official corporate media. - Partners in the chain: software solutions for pharmacies and consultancy services; free edition for „Sopharma Trading“ AD customers - "Pharma Premium", intended for owners and pharmacists of pharmacies; sites of the companies in the group. - Employees: intranet page; social networking company profiles; corporate sites; site of the Group. Sopharma Group companies value their employees as their most valuable asset and work towards employer branding. The group encourages employees to continuously learn by providing them with various opportunities for this: trainings, conferences and seminars to increase competence. In the process of implementation are new electronic platforms for training and improving the qualifications of employees in the companies of the Group, which can be accessed at any time from office devices. Investments in learning foreign languages during working hours. All mandatory training and refresher courses are conducted according to the legislation for a certain type of qualification for the high-quality and safe performance of official duties. Workers and employees are entitled to higher additional remuneration required by applicable law for overtime, night shifts and work on Saturdays, Sundays and holidays. Employees who work in specific, harmful or dangerous conditions receive personal protective equipment and allowances. Companies in the Sopharma Group implement different policies aimed at employees, depending on the topics that are relevant to the employees of the particular company, which differ due to the specifics of the country in which they operate, as well as the activities of the companies. Environment Sopharma Group upholds and complies with commitments in accordance with national and European legislation in the field of environmental protection. “Sopharma Trading” AD maintains a certified Environmental Management System according to the requirements of ISO 14001: 2015. In parallel with the statutory and certified environmental protection measures, employees from different Group companies are involved in environmental projects. The offices of companies are located in "smart" buildings, such as Sopharma Warsaw, which is housed in a business center with The Leadership in Energy & Environmental Design, with energy saving systems, rainwater use, roofing of bees and Sopharma's office at Sopharma Business Towers, Sofia, whose lifts produce electricity, and the façade is designed to allow a maximum amount of daylight. Employees in the Towers also enjoy the green roof, the "smart" heating/cooling control and the light in the buildings. Society The companies in Sopharma Group are committed to society, and in order to achieve maximum impact, various projects are implemented together with partner organizations and other companies. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 18 Core areas of corporate responsibility and strategic management Market Employees Environment Society Corporate Citizenship Transparent corporate governance Zero discrimination regarding the right to work, sex Environmental management systems Contribution to economic development Anticorruption Guaranteed quality and safety of products and services Guaranteeing the right of association Reducing the environmental imprint Development of the healthcare system Work on SDG 2015 Resistance Employee development: hierarchically and as a qualification and education Responsible use of resources Disease prevention and maintaining good health Participation in the development and implementation of international standards related to pharmacy Responsible Marketing Ensuring health and safety at work Reducing indirect impacts Investments in education Joint projects of organizations where members of the Group are members Responsible supply Social benefits for employees Participation in environmental projects Investments in public communications Development of the generics industry in the country Development of the field of pharmacy Internal communication Training of employees Responsible business and Transparency Transparent and responsible business is the only way to build a sustainable reputation and to empower the society. In the business strategy of “Sopharma” AD there is zero tolerance for any kind of corruption, employees are expected and required not only to act in a ethical manner, but also to combat corruption. We actively interact with all levels of government in our stakeholders and therefore have a responsibility to openly express our position of a corporate citizen. 2. CSR management Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 19 Corporate Responsibility is embedded in the Group's mission, vision, and strategy for development and corporate governance documents for the companies. Organizational CSR is the subject of the corporate responsibility, investor relations, marketing, human resources, ecology. 3. Membership For the adequate creation and implementation of sustainable development policies, Sopharma Group works with partner organizations such as CEIBG, BMGD, BCAUSE Foundation, Bulgarian Public Relations Association, European Association of Communication Directors, Association of Investor Relations Directors and others. The companies in Sopharma Group are members of various organizations and associations: Confederation of Employers and Industrialists in Bulgaria (CEIB). http://krib.bg/ The German-Bulgarian Chamber of Commerce and Industry (GBITC), which connects the German and Bulgarian economies with more than 450 German, Bulgarian and international companies. http://bulgarien.ahk.de/bg/ The Bulgarian Generic Pharmaceutical Association (BGFARMA) whose priorities are to harmonize the interests with regard to the common national and international mechanisms regulating the production and use of medicines, to improve the application of the principles of Good Manufacturing Practice and to observe the principles of fair competition. http://www.bgpharma.bg The Bulgarian National Committee of the International Chamber of Commerce, accepted as a full member of the International Chamber of Commerce (ICC). ICC is the most prestigious organization in the field of international trade and international economic relations that promotes cross-border trade and investment. http://www.icc-bulgaria.bg The National Commission on Corporate Governance, established for the purpose of promoting the implementation of good corporate governance practices and the development of the Bulgarian National Code of Corporate Governance (the Code). The Commission is a permanent independent body set up under the auspices of the Bulgarian Stock Exchange (BSE) and the Financial Supervision Commission (FSC), with the support of the World Bank and the International Financial Corporation (IFC) www.nkku.bg The Bulgarian UN Global Compact Network http://www.unglobalcompact.bg o As an active member of BMGD, Sopharma is working towards the achievement of the UN sustainable development goals adopted in 2015. Bulgarian Association of Drug Wholesalers (“Sopharma Trading” AD) – The mission of the Association is to ensure fair and transparent drug delivery and provision of services in the pharmaceutical sector in Bulgaria. It protects the branch interests and rights of its members before state authorities, institutions and producers - www.batel.bg Genezis (“Sopharma Trading” Serbia) – The Genezis Association brings together generic manufacturers of generic medicines and holders of a marketing authorization in the Republic of Serbia - www.genezis.rs The Serbian Association of Drug Wholesalers - The mission of the association is to ensure fair and transparent drug delivery and service provision in the pharmaceutical sector. It protects the branch interests and rights of its members before state authorities, institutions and producers. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2022 20 Member of the National Alliance for Local Economic Development NALED Serbia Independent, non- financial and non-party organization of companies, municipalities and civil organizations working together to create better working and living conditions in Serbia. MediReg Pharmaceutical Consulting – supports the efficient launch of new products in the Polish market and ensures regulatory compatibility and pharmacovigilance. The "FARMACJA POLSKA" " Chamber of Commerce. 26 April 2023 Ognian Donev, PhD Sofia Executive Director OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:26:25 +03'00' DECLARATION under art. 100о, par. 4, item. 3 of the Law on Public Offering of Securities We, the undersigned Ognian Ivanov Donev, in the capacity of Executive Director, Boris Anchev Borisov, in the capacity of Financial Director, and Lyudmila Krumova Bondzhova in the capacity as Preparer of the Annual Consolidated Financial statements of Sopharma AD, UIC 831902088, entered in the Commercial Register of Sofia City Court under company case № 9359/1991, with seat and address of management: Sofia, Nadezhda district, 16 Iliensko shose Str., DECLARE that to our knowledge: 1. The Annual Consolidated Financial statements for 2022, prepared in accordance with the applicable accounting standards, reflect a true and fair view of the assets and liabilities, financial position and profit of Sopharma AD and the companies, included in the consolidation. 2. The Annual Consolidated Management report for 2022 contains a fair presentation of the development and operating results of Sopharma AD, as well as the state of the companies, included in the consolidation, as well as a description of the main risks and uncertainties, which they are facing. 26 April 2023 DECLARANTS: Sofia ......................................... /Ognian Donev/ ......................................... /Boris Borisov/ ......................................... / Lyudmila Bondzhova / OGNIAN IVANOV DONEV Digitally signed by OGNIAN IVANOV DONEV Date: 2023.04.26 19:26:50 +03'00' BORIS ANCHEV BORISOV Digitally signed by BORIS ANCHEV BORISOV Date: 2023.04.26 19:28:13 +03'00' LYUDMILA KRUMOVA BONDZHOVA Digitally signed by LYUDMILA KRUMOVA BONDZHOVA Date: 2023.04.26 19:34:50 +03'00' Baker Tilly Klitou and Partners EOOD 5, Stara planina street 5th Floor Sofia 1000 Bulgaria T: +359 2 9580980 F: +359 2 8592139 [email protected] www.bakertilly.bg ADVISORY ASSURANCE TAX Baker Tilly Klitou and Partners EOOD trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. INDEPENDENT AUDITORS’ REPORT To the Shareholders of Sopharma AD REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Opinion We have audited the accompanying consolidated financial statements of Sopharma AD (“the Group”), which comprise the consolidated statement of financial position as at December 31, 2022, and the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2022, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union (“EU”). 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 Auditors’ Responsibilities for the Audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements of the Independent Financial Audit Act (IFAA) that are relevant to our audit of the consolidated financial statements in Bulgaria, and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the requirements of IFAA. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a consolidated opinion on these matters. Key audit matter How our audit addressed the key audit matter 1) Recoverable amount of goodwill and specific intangible assets recognized in business combinations As at 31 December 2022 the Group reports in the consolidated statement of financial position intangible assets, including goodwill, to the amount of BGN 51,673 thousand (Note 17). The total amount includes goodwill of BGN 3,522 thousand and specific intangible assets of BGN 23,044 thousand, related to the acquired subsidiaries. For these subsidiary companies some of the following characteristics are observed: start-up stage in business, change in business strategy or incurred losses. These circumstances presume that certain risk exists as to the correct valuation of goodwill and specific intangible assets recognized in business combinations of these subsidiaries as at the end of the reporting period. The review of the Groups management tests of impairment of the goodwill and the specific intangible assets of these subsidiaries is a complex process, through which are considered Groups forecasts regarding future estimated benefits and profitability, expected to be received by the Group. In its calculations the Group Management needs to apply significant assumptions, various judgements and estimates, and for the purpose of measuring their recoverable amount it uses the discounted future cash flows’ method. Due to the circumstances that (a) the process of estimating and testing of possible impairment losses of goodwill and specific intangible assets of In this area our audit procedures performed are: • Analyses and assessment of the relevance of Group’s budget and projections as at 31 December 2022; • Examination of the calculations and the results from the test for impairment of the respective goodwill and specific intangible assets made by the Group’s management with the assistance of independent external appraisers; • Assessment of the objectivity, independence and competency of the external appraisers; • Analysis and assessment of the appropriateness of the key judgments and assumptions, used by the Group’s management, including the discount rate used in the application of the discounted cash flows model; • Assessment and testing the completeness, appropriateness and adequacy of the disclosures in the Group’s consolidated financial statements with regard to the valuation of goodwill and the specific intangible assets of subsidiaries. Key audit matter How our audit addressed the key audit matter these subsidiaries assumes a number of judgments, higher degree of subjectivity and uncertainty related to the projection assumptions, including revenue projections, cash flow projections and growth rate, the level of uncertainty, including the fact that these subsidiaries are in the start-up and development stage of their business; there was a change in business strategy or they have incurred losses; (b) the significance of the reporting item itself for the consolidated financial statements, as disclosed above, we have determined this matter as a key audit matter. 2. Valuation of trade receivables, receivables from related parties and loans granted to third parties As disclosed in Notes № 21, 22, 24, 25 and 26 to the consolidated financial statements, as of 31.12.2022 the Group has gross trade receivables, receivables from related parties and loans granted to third parties amounting to BGN 316,800 thousand and impairment loss allowances amounting to BGN 9,517 thousand. The Group has applied IFRS 9 “Financial instruments”, according to which credit losses are determined based on expected credit losses. The application of the model for determination of the allowance for credit losses for trade receivables, receivables from related parties and loans granted to third parties, result in significant complexity and the necessity of key estimates and judgements for the Managements final calculations related to identification of doubtful exposures as well as determination of the amount of credit losses. To determine the amount of impairment loss allowance for credit losses, the Group applies model based on significant estimates and judgements in: In this area our audit procedures performed are: • We have obtained understanding of the process for the application of IFRS 9, with focus on implemented methodology in Groups model for determination of impairment allowance for credit losses, including the use of key assumptions and estimates. • Inquiries, walkthroughs and obtaining of understanding of the process, related to determination of credit losses for trade receivables, receivables from related parties, and loans granted to third parties. • Assessment and test of design and operating effectiveness of key controls in the process of monitoring and determination of the amount of impairment allowance for credit losses. • Review and assessment of the adequacy of the methodology used by the Group for the purposes of identification of credit losses and calculation of impairment loss allowance in accordance with the concept Key audit matter How our audit addressed the key audit matter • Interpretation of the requirements for determination of impairment loss allowance in accordance with IFRS 9, which is based on the Groups model for determination and calculation of the expected credit losses; • Calculation and interpretation of key indicators as “probability of default”, “loss given default” and “exposure at default”; • Assumptions and estimates in a number of scenarios for estimated future cash flows, based on past events, current conditions and future economic forecasts; • Assumptions, used by Management in the review of individually significant exposures, related to recent losses, number of probable scenarios for future cash flows and the results of these scenarios and future collectability. Because of the significance of the above stated circumstances: a) material amount of trade receivables, receivables from related parties and loans granted to third parties as captions in the consolidated financial statements of the Group and, b) inherent level of uncertainty in the use of multiple estimates and judgements by the management of the Group for the specific calculation of the amount of credit losses, related to trade receivables, receivables from related parties and loans granted to third parties in accordance with the implemented model, resulting from the application of IFRS 9, we have determined this matter as key audit matter. and the requirements of IFRS 9. • Analysis and assessment of the justification and appropriateness of calculations for the indicators of “probability of default” and “loss given default” through inspection of the assumptions used and the output data, as well as the approach for inclusion of prospective information in the models. • Assessment of the completeness, appropriateness and adequacy of the disclosures in the Group’s consolidated financial statements with regard to credit risk and impairment allowance for credit losses for trade receivables, receivables from related parties and loan granted to third parties. Information Other than the consolidated financial statements and Auditors’ Report Thereon The Management Board of the Group (“the Management”) is responsible for the other information. The other information comprises of the annual consolidated report on activities, incl. corporate governance statement and the consolidated non-financial declaration, prepared by the management in accordance with Chapter Seven of the Accountancy Act, but does not include the consolidated financial statements and our auditors’ report thereon, which we received prior to the date of our auditor’s report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, unless it is not specifically stated in our auditors’ report and to the extent it is specifically stated. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Audit Committee (“Those charged with governance”) are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ 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 consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated 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 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 ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated 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 auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Receive adequate and relevant audit evidence regarding the financial information of the companies part of the Group in order to express an opinion on the consolidated financial statements. We bear responsibility for the instruction, supervision and execution of the audit of the consolidated financial statements. We bear the ultimate responsibility 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 will communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated 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 Additional matters, required to be reported by the Accountancy Act and Public Offering of Securities Act In addition to our reporting responsibilities according to ISAs described in section “Information Other than the consolidated financial statements and Auditors’ Report Thereon”, with respect to the annual consolidated report on activities, the corporate governance statement and the consolidated non- financial declaration, we have also performed the procedures required by the Guidelines related to new extended audit reports and communication from the auditors of the Professional Organization of Registered Auditors in Bulgaria - Institute of Certified Public Accountants. These procedures include tests over the existence, form and content of the other information in order to assist us in forming an opinion as to whether the other information includes the disclosures and reporting as required by Chapter Seven of the Accountancy Act and the Public Offering of Securities Act (art. 100m, para 10 of POSA in relation to art. 100m, para 8, p. 3 and 4 of POSA), applicable in Bulgaria. Opinion under Article 37, paragraph 6 of the Accountancy Act Based on the procedures performed, in our opinion: • The information included in the annual consolidated report on the activities for the financial year for which the consolidated financial statements have been prepared, is consistent with the consolidated financial statements. • The consolidated report on the activities has been prepared in accordance with the requirements of Chapter Seven of the Accountancy Act and of Art. 100m, paragraph 7 of the Public Offering of Securities Act. • The information required by Chapter Seven of the Accountancy Act and Art. 100m, para 8 of the Public Offering of Securities Act is presented in the corporate governance statement covering the financial year for which the consolidated financial statements have been prepared. • The consolidated non-financial Declaration, covering the financial year for which the consolidated financial statements have been prepared, has been provided and prepared in accordance with the requirements of Chapter Seven of the Accountancy Act. Opinion under Art. 100m, para 10 in relation to art. 100m, para 8, p. 3 and 4 of the Public Offering of Securities Act Based on the procedures performed and as a result of the acquired knowledge and understanding of the entity and the environment in which it operates, acquired during our audit, in our opinion, the description of the main features of the entity’s internal control and risk management systems in relation to the financial reporting process as part of the annual report on activities (as element of the content of the corporate governance statement) and the information under Article 10, paragraph 1, letter "c", "d", "f", "h" and "i" of the Directive 2004/25/EC of the European Parliament and of the EU Council of April 21, 2004 related to takeover bids, included in the corporate governance statement do not contain cases of material misrepresentations. Additional Reporting on the audit of the consolidated financial statements under Art. 100m, para 4, p.3 of the Public Offering of Securities Act Reporting under Art. 100m, para 4, p.3 b) “b” of the Public Offering of Securities Act The information on transactions with related parties is disclosed in Note 48 to the consolidated financial statements. Based on the audit procedures performed on the transactions with related parties, we have not identified any facts or other information, based on which we could conclude that the transactions with related parties are not disclosed in the attached financial statements, in all material aspects, in accordance with the requirements of IAS 24 Disclosure of related parties. The results of our audit procedures regarding transactions with related parties are considered in the context of forming our audit report on the consolidated financial statements taken as a whole, and not with the purpose of expressing the audit opinion on transactions with related parties. Reporting under Art. 100m, para 4, p.3 b) “c” of the Public Offering of Securities Act Our responsibilities for the audit of the consolidated financial statements as a whole, described in the section Auditors’ Responsibilities for the Audit of the consolidated financial statements include assessment whether the consolidated financial statements presents true and fair view of material transactions and events. Based on the audit procedures performed on the material transactions, underlying the consolidated financial statements for the year ended 31 December 2022, no facts circumstances or other information have come to our attention, based on which we can conclude that there are cases of material misstatements and disclosures in the consolidated financial statements in accordance with the requirements of IFRS, adopted by EU. The results of our audit procedures on the material transactions and events related to the Group are considered in the context of forming our audit report on the consolidated financial statements taken as a whole, and not with the purpose of expressing the audit opinion on these material transactions. Reporting on compliance of the electronic format of the consolidated financial statements, included in the annual consolidated financial statements according to art. 100m, para 4 of the Public Offering of Securities Act with the requirements of the ESEF Regulation We have conducted engagement to express reasonable assurance regarding the compliance of the electronic format of the consolidated financial statements of Sopharma AD for the year ended 31 December 2022, in the attached electronic file “097900BGGW0000048796-20221231-EN-CON.zip", with the requirements of Commission Delegated Regulation (EU) 2018/815 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 (“Regulation ESEF”). Our conclusion is only regarding the electronic format of the consolidated financial statements and does not cover the other information included in the annual consolidated financial statements for the activity under Art. 100m, para. 5 of the POSA. Description of a subject matter and applicable criteria The management has prepared the electronic format of the consolidated financial statements of the Group for the year ended 31 December 2022 under the ESEF Regulation in order to comply with the requirements of the POSA. The requirements for the preparation of consolidated financial statements in this electronic format are contained in the ESEF Regulation and, in our view, have the characteristics of appropriate criteria for forming a reasonable assurance conclusion. Responsibilities of the management and those charged with governance The Group's management is responsible for applying the requirements of the ESEF Regulation when preparing the electronic format of the consolidated financial statements in XHTML. These responsibilities include the selection and application of appropriate iXBRL markups using the taxonomy of the ESEF Regulation, as well as the design and implementation of such internal control system that management determines necessary to prepare the electronic format of the Group's annual consolidated financial statements that does not contain material non-compliance with the requirements of the ESEF Regulation. Those charged with governance are responsible for overseeing the process for preparation the Group's annual consolidated financial statements, including the application of the ESEF Regulation. Auditor's responsibilities Our responsibility is to express a reasonable assurance conclusion as to whether the electronic format of the consolidated financial statements is in compliance with the requirements of the ESEF Regulation. For this purpose, we have complied with the „Guidelines related to issuing of audit opinion in relation to the application of the European single electronic format (ESEF) for the financial statements of entities, which shares are traded on a regulated market in the European union (EU)” of the Professional Organization of Registered Auditors in Bulgaria - Institute of Certified Public Accountants and we have conducted an engagement to express reasonable assurance in accordance with ISAE 3000 (revised) “Assurance Engagements Other than Audits or Reviews of Historical Financial Information" (ISAE 3000 (revised)). This standard requires us to comply with ethical requirements, plan and perform appropriate procedures to obtain reasonable assurance whether the electronic format of the Group's consolidated financial statements has been prepared, in all material respects, in accordance with the applicable criteria mentioned above. The nature, timing and scope of the selected procedures depend on our professional judgment, including the assessment of the risk of material non-compliance with the requirements of the ESEF Regulation, whether due to fraud or error. A reasonable assurance is a high level of assurance, but it does not guarantee that an engagement performed in accordance with ISAE 3000 (revised) will always detect material non-compliance, when such exist. Quality management requirements We apply the requirements of the International Standard on Quality Management (ISQM) 1, which requires development, implementation and maintenance of system for quality management, including policies or procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements for registered auditors in Bulgaria. We comply with the ethical and independence requirements of the International Code of Ethics for Professional Accountants (including International Standards of Independence) of the International Ethics Standards Board for Accountants (IESBA Code), adopted by ICPA through the IFAA. Summary of the work performed The purpose of the procedures planned and performed by us was to obtain a reasonable assurance that the electronic format of the consolidated financial statements has been prepared, in all material respects in accordance with the requirements of the ESEF Regulation. As part of our assessment of compliance with the ESEF Regulation's electronic (XHTML) format for reporting on the Group's consolidated accounts, we maintained professional skepticism and used professional judgment. We also: - obtained understanding of the internal control and the processes related to the application of the ESEF Regulation regarding the consolidated financial statements of the Group and including the preparation of the consolidated financial statements of the Group in XHTML format and its marking up in machine readable language (iXBRL); - checked if the applied XHTML format is valid; - checked whether the human readable part of the electronic format of the consolidated financial statements corresponds to the audited consolidated financial statements; - assessed the completeness of the marking up in the consolidated financial statements of the Group using the machine-readable language (iXBRL) in accordance with the requirements of the ESEF Regulation; - assessed the appropriateness of the iXBRL markups selected from the main taxonomy used, as well as the creation of an extended taxonomy element in accordance with the ESEF Regulation where an appropriate element in the main taxonomy is missing; - assessed the appropriateness of anchoring of the elements of the extended taxonomy in accordance with the ESEF Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion on the compliance of the electronic format of the consolidated financial statements with the requirements of the ESEF Regulation In our opinion, based on the procedures performed, the electronic format of the consolidated financial statements of the Group for the year ended 31 December 2022, contained in the attached electronic file “097900BGGW0000048796-20221231-EN-CON.zip", has been prepared in all material respects in accordance with the requirements of the ESEF Regulation. Reporting in accordance with Art. 10 of Regulation (EU) No 537/2014 in connection with the requirements of Art. 59 of the Independent Financial Audit Act In accordance with the requirements of the Independent Financial Audit Act in connection with Art. 10 of Regulation (EU) No 537/2014, we hereby additionally report the information stated below. • Baker Tilly Klitou and Partners EOOD were appointed as statutory auditors of the consolidated financial statements of the Group for the year ended December 31, 2022 by the general meeting of shareholders held on June 3 rd , 2022 for a period of one year. • The audit of the consolidated financial statements of the Group for the year ended December 31, 2022 represents sixth statutory uninterrupted audit engagement for that entity carried out by Baker Tilly Klitou and Partners EOOD. • We hereby confirm that the audit opinion expressed by us is consistent with the additional report provided to the Audit committee, in compliance with the requirements of Art. 60 of the Independent Financial Audit Act. • No prohibited non-audit services referred to in Art. 64 of the Independent Financial Audit Act were provided. • We hereby confirm that in conducting the audit we have remained independent of the Group. • We hereby confirm that we have not provided services to the Group, other than the audit services, for the period related to consolidated financial statements for 2022. Audit company №129 Baker Tilly Klitou and Partners EOOD Ivaylo Yanchev Galina Lokmadjieva - Nedkova Registered auditor, responsible for the audit Managing Director April 28, 2023 Baker Tilly Klitou and Partners EOOD 5, Stara Planina Str., 5th floor 1000 Sofia, Bulgaria IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2023.04.28 11:23:27 +03'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2023.04.28 11:26:02 +03'00' 1 TO SHAREHOLDERS OF SOPHARMA AD DECLARATION Art. 100m, para 4, item 3 from Public Offering of Securities Act The undersigned: Ivaylo Yanchev Yanchev, in the capacity of Registered auditor of Baker Tilly Klitou and Partners EOOD, with UIC 131349346, with headquarters and management address: 5, Stara Planina Str.,5, floor 5, Sofia, 1000 and address for correspondence: Sofia, 1000, 5, Stara Planina Str., 5, floor 5, declare that: Baker Tilly Klitou and Partners EOOD was committed to carry out a mandatory financial audit of the consolidated financial statements of Sopharma AD for the year 2022, compiled in accordance with the International Financial Reporting Standard adopted by the EU, a generally accepted name of the accounting base defined in paragraph 8 of the Supplementary part of the Accounting Act under the name "International Accounting Standards". As a result of our audit, we issued an audit report on April 28, 2023. We hereby certify that as reported in our audit report on the annual consolidated financial statement of Sopharma AD for 2022 issued on April 28, 2023: 1. Art. 100m, para. 4, item 3, letter "a" Audit opinion: In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2022 and of its financial performance and its cash flows for the year, ending on that date in accordance with the International Financial Reporting Standard (IFRS) adopted by the European Union (EU). 2. Art. 100m, para. 4, item 3, letter "b" Information related to the transactions of SOPHARMA AD with related parties. Information about related party transactions is duly disclosed in Note 48 to the consolidated financial statements. Based on the audit procedures we performed on related party transactions as part of our audit of the consolidated financial statements as a whole, we have not become aware of the fact, circumstances or other information on the basis of which we may conclude that related party transactions are not disclosed in the accompanying consolidated financial statements for the year ended 31 December 2022 in all material respects in accordance with IAS 24 Related Party Disclosures. The results of our audit procedures on related party transactions have been reviewed by us in the context of forming our opinion on the consolidated financial statements as a whole, rather than in order to express a separate opinion on related party transactions. 3. Art. 100m, para. 4, item 3, letter "c" Information relating to material transactions. Our audit responsibilities for the financial statements as a whole described in the section of our report "Auditor's Responsibilities for the Audit of the Consolidated Financial Statements" include assessing whether the consolidated financial statements present the material transactions and events in a manner that delivers credible performance. Based on the audit procedures we performed on the material transactions underlying the consolidated financial statements for the year ended 31 December 2022, no facts, circumstances or other information have been disclosed to us in order to conclude that there are cases of material misrepresentation and disclosure in accordance with the applicable IFRS requirements adopted by the European Union. 2 The results of our audit procedures on the Group's transactions and events that are material to the Group's financial statements are reviewed by us in the context of our opinion on the consolidated financial statements as a whole and not for the purpose of obtaining a separate opinion on these material transactions. The representations made by this declaration should be considered only in the context of our audit report as a result of the independent financial audit of the consolidated annual financial statements of SOPHARMA AD for the reporting period ending 31 December 2022, dated 28 April 2023. This declaration is intended solely for the above-mentioned addressee and has been prepared solely and solely in compliance with the requirements set forth in Art. 100m, para. 4 (3) of the Public Offering of Securities Act (POSA) and should not be accepted as a substitute for our opinion expressed in the audit report issued by us on 28 April 2023 regarding the issues covered by Art. 100m, para. 4, item 3 of POSA. Baker Tilly Klitou and Partners EOOD: ____ Ivaylo Yanchev Registered auditor 28 April 2023 Sofia IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2023.04.28 11:26:58 +03'00'
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