Sopharma AD

Annual Report • Mar 29, 2022

097900BGGW0000048796-31122021-EN-SEP ꢀ ꢀꢀꢀ ꢀꢀꢀꢀ ꢀ ꢀ ꢀ ꢀ ꢀ ꢀꢀꢀꢀꢀ ꢀ ꢀ ꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀꢀ Contents of the Annual financial statements of “Sopharma” AD as of 31 December 2021 1. Individual annual financial statements according to IFRS 2. Notes to the individual financial report 3. Management report 4. Corporate governance declaration 5. Non-financial declaraction 6. Report regardingꢀthe application of the remuneration policy 7. Declaration by responsible persons ꢀ ꢀ 7STLEVQEꢀ%(ꢀꢀꢀꢁꢂꢀ-PMIRWOSꢀ7LSWIꢀ7XVꢃꢀꢀꢀꢀꢁꢄꢄꢅꢀ7SJMEꢆꢀ&YPKEVMEꢀꢀXIPꢇꢀꢈꢉꢊꢋꢄꢌꢁꢉꢍꢄꢅꢅꢀꢀJE\ꢇꢀꢈꢉꢊꢋꢄꢋꢉꢂꢅꢄꢌꢂꢀꢀꢀꢀQEMP$WSTLEVQEꢃFKꢀ WSTLEVQEKVSYTꢀGSQ ꢁ SOPHARMA AD Company Name: Board of Directors: Ognian Donev, PhD Vessela Stoeva Alexander Chaushev Bisera Lazarova Ivan Badinski Executive Director: Procurator: Ognian Donev, PhD Simeon Donev Finance Director: Chief Accountant: Head of Legal Department: Registered Office: Boris Borisov Yordanka Petkova Alexander Yotov Sofia 16, Iliensko Shousse St. Lawyers: Ventsislav Stoev Stefan Vachev Servicing Banks: Raiffeisenbank (Bulgaria) EAD DSK Bank EAD Eurobank EFG Bulgaria AD ING Bank N.V. Unicredit Bulbank AD Citibank N.A. Auditor: Baker Tilly Klitou and Partners EOOD SOPHARMA AD SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 SEPARATE STATEMENT OF COMPREHENSIVE INCOME SEPARATE STATEMENT OF FINANCIAL POSITION SEPARATE STATEMENT OF CASH FLOWS 1 2 3 4 SEPARATE STATEMENT OF CHANGES IN EQUITY NOTES TO THE SEPARATE FINANCIAL STATEMENTS 1. BACKGROUND CORPORATE INFORMATION 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 3. REVENUE 5 7 53 4. OTHER OPERATING INCOME AND LOSSES 5. RAW MATERIALS AND CONSUMABLES USED 6. HIRED SERVICES EXPENSE 56 58 59 7. EMPLOYEE BENEFITS EXPENSE 8. OTHER OPERATING EXPENSES 60 61 9. IMPAIRMENT OF CURRENT ASSETS 10. IMPAIRMENT OF NON-CURRENT ASSETS, OUTSIDE THE SCOPE OF IFRS 9 11. FINANCE INCOME 61 62 62 12. FINANCE COSTS 63 13. INCOME TAX EXPENSE 63 14. OTHER COMPREHENSIVE INCOME 15. PROPERTY, PLANT AND EQUIPMENT 16. INTANGIBLE ASSETS 64 65 71 17. INVESTMENT PROPERTY 72 18. INVESTMENTS IN SUBSIDIARIES 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 20. OTHER LONG-TERM EQUITY INVESTMENTS 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES 22. OTHER LONG-TERM RECEIVABLES 23. INVENTORIES 75 78 81 84 85 86 24. RECEIVABLES FROM RELATED PARTIES 25. TRADE RECEIVABLES 89 94 26(A). LOANS GRANTED TO THIRD PARTIES 26(B). OTHER RECEIVABLES AND PREPAYMENTS 27. CASH AND CASH EQUIVALENTS 28. EQUITY 97 98 99 100 104 106 107 108 109 112 113 115 116 117 118 119 120 136 138 144 29. LONG-TERM BANK LOANS 30. DEFERRED TAX LIABILITIES 31. GOVERNMENT GRANTS 32. LEASE LIABILITIES TO THIRD PARTIES 33. RETIREMENT BENEFIT OBLIGATIONS 34. SHORT-TERM BANK LOANS 35. TRADE PAYABLES 36. PAYABLES TO RELATED PARTIES 37. TAX PAYABLES 38. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 39. OTHER CURRENT LIABILITIES 40. CONTINGENT LIABILITIES AND COMMITMENTS 41. FINANCIAL RISK MANAGEMENT 42. SEGMENT REPORTING 43. RELATED PARTY TRANSACTIONS 44. EVENTS AFTER THE REPORTING PERIOD SOPHARMA AD SEPARATE STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2021 Notes 2021 2020 BGN'000 BGN'000 3 4 200,154 4,131 206,737 4,188 Revenue Other operating income/(losses), net (792) (64,851) (35,001) (46,086) (17,545) (4,335) 5,376 (70,114) (36,438) (49,804) (18,230) (8,892) 32,823 Changes in inventories of finished goods and work in progress Raw materials and consumables used Hired services expense Employee benefits expense Depreciation and amortisation expense Other operating expenses 5 6 7 15,16 8 35,675 Profit from operations 18,19 10 (11,223) (4,719) 131 (7,373) Net gain/(loss) on sale of investments in subsidiaries and associates Impairment of non-current assets outside the scope of IFRS 9 11 12 8,765 (1,589) 7,176 13,269 (7,085) 6,184 Finance income Finance costs Finance income/(costs), net 26,909 31,765 Profit before income tax 13 (2,638) (3,101) Income tax expense 24,271 28,664 Net profit for the year Other comprehensive income: Items that will not be reclassified to profit or loss: Revaluation of property, plant and equipment Net change in the fair value of other long-term equity investments Remeasurement of defined benefit pension plans liabilities/assets Income tax relating to items of other comprehensive income that will not be reclassified 15 20 33 8,298 (355) (53) (41) (637) (158) 13 14 (830) 7,060 4 (832) Other comprehensive income for the year, net of tax 31,331 27,832 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 28 0.19 0.23 Basic net earnings per share The accompanying notes on pages 5 to 144 form an integral part of these separate financial statements. Executive Director: Finance Director: Chief Accountant: Digitally signed by OGNIAN IVANOV DONEV Date: 2022.03.28 12:23:01 +03'00' OGNIAN IVANOV DONEV Ognian Donev, PhD Boris Borisov Digitally signed by BORIS ANCHEV BORISOV Date: 2022.03.28 12:29:55 +03'00' Digitally signed by Yordanka Nikolova Petkova Date: 2022.03.28 12:30:48 +03'00' BORIS ANCHEV BORISOV Yordanka Nikolova Petkova Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2022.03.28 22:31:24 +03'00' IVAYLO YANCHEV YANCHEV Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2022.03.28 22:43:14 +03'00' Galina Dimitrova Lokmadjieva- Nedkova Ivaylo Yanchev Galina Lokmadjieva-Nedkova Managing director Registered auditor Baker Tilly Klitou and Partners EOOD 1 SOPHARMA AD SEPARATE STATEMENT OF FINANCIAL POSITION as at 31 December 2021 Notes 31 December 2021 31 December 2020 BGN'000 BGN'000 ASSETS Non-current assets 15 16 17 18 19 20 21 22 205,090 4,324 47,302 80,598 54,485 5,706 49,695 9,546 456,746 211,681 4,143 44,759 86,809 6,062 11,607 59,725 11,105 435,891 Property, plant and equipment Intangible assets Investment property Investments in subsidiaries Investments in associates and joint ventures Other long-term equity investments Long-term receivables from related parties Other long-term receivables Current assets 23 24 25 26 (a) 26 (b) 27 63,222 87,706 26,631 1,804 7,372 15,618 202,353 68,160 114,169 18,382 3,903 6,057 3,776 Inventories Receivables from related parties Trade receivables Loans granted to third parties Other receivables and prepayments Cash and cash equivalents 214,447 TOTAL ASSETS 659,099 650,338 EQUITY AND LIABILITIES EQUITY Share capital Treasury shares Reserves Other equity components (reserve for issued warrants) Retained earnings 134,798 (50,284) 439,040 12,512 28,137 564,203 134,798 (33,656) 408,807 - 27,039 536,988 28 LIABILITIES Non-current liabilities Long-term bank loans Deferred tax liabilities Government grants Lease liabilities to third parties Retirement benefit obligations 29 30 31 32 33 6,750 6,389 4,007 496 4,794 22,436 15 5,358 4,427 1,533 4,758 16,091 Current liabilities 34 29 35 36 37 46,663 - 12,671 1,609 700 73,335 2,404 7,218 1,273 2,092 Short-term bank loans Current portion of long-term bank loans Trade payables Payables to related parties Tax payables Payables to personnel and for social security Other current liabilities 38 39 8,034 2,783 7,507 3,430 72,460 97,259 TOTAL LIABILITIES 94,896 113,350 650,338 TOTAL EQUITY AND LIABILITIES 659,099 The accompanying notes on pages 5 to 144 form an integral part of these separate financial statements. The separate financial statements on pages 1 to 144 were approved for issue by the Board of Directors and signed on 28 March 2022 by: Digitally signed by OGNIAN IVANOV DONEV Date: 2022.03.28 OGNIAN IVANOV DONEV BORIS ANCHEV BORISOV Executive Director: Ognian Donev, PhD Finance Director: 12:23:36 +03'00' Boris Borisov Digitally signed by Digitally signed Yordanka Nikolova Petkova 12:32:34 +03'00' BORIS ANCHEV BORISOV Chief Accountant: Yordanka Petkova by Yordanka Nikolova Petkova Date: 2022.03.28 Date: 2022.03.28 12:31:43 +03'00' Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2022.03.28 IVAYLO YANCHEV YANCHEV Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2022.03.28 22:44:49 +03'00' Ivaylo Yanchev Registered auditor Galina Lokmadjieva-Nedkova Managing director Baker Tilly Klitou and Partners EOOD 22:32:46 +03'00' 2 SOPHARMA AD SEPARATE STATEMENT OF CASH FLOWS for the year ended 31 December 2021 Notes 2021 2020 BGN'000 BGN'000 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers Cash paid to employees and for social security Taxes paid (except income taxes) Taxes refunded (except income taxes) Income taxes paid, net Interest and bank charges paid on working capital loans Foreign currency exchange gains/(losses), net Other (payments)/proceeds, net 249,114 (104,150) (44,657) (9,201) 1,262 (4,055) (1,027) (136) 207,344 (118,969) (48,807) (8,803) 3,583 (4,268) (1,654) (235) (682) (923) Net cash flows from operating activities 86,468 27,268 Cash flows from investing activities Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Purchases of intangible assets Purchases of investment property Proceeds from sales of investment property Purchases of shares in associates (6,210) 125 (7,570) 1,257 (178) (5,417) - (1,128) (4,201) 1,952 (20,800) 354 (22,338) 2,040 (8,472) 1,382 594 - 1 Proceeds from sales of shares in associates Purchases of equity investments (2,708) 56 (3,485) 617 9,138 302 (5,290) 38,509 (978) 1,840 2,045 - Proceeds from sales of equity investments Purchases of stocks/shares in subsidiaries Proceeds from sales of stocks/shares in subsidiaries Dividends received from investments in subsidiaries Proceeds from dividends from other long-term equity investments Loans granted to related parties Loan repayments by related parties Loans granted to other companies Loan repayments by other companies Interest received on loans granted 268 (8,010) 11,806 (500) 4,098 2,658 147 Proceeds from charges on guarantor contracts Net cash flows from/ (used in) investing activities (46,235) 28,139 Cash flows from financing activities Proceeds from long-term bank loans Repayment of long-term bank loans (Repayment) / Proceeds from short-term bank loans (overdraft), net Interest and charges paid under investment purpose loans Proceeds from sales of treasury shares Treasury shares Dividends paid Lease payments to third parties Government grants received - (2,428) (19,925) (81) 28 (7,212) (27,001) (117) 805 (463) (19,944) (1,928) 242 - (16,628) (22) (1,900) 81 Proceeds/(payments), net, related to other equity components (warrants) Net cash flows (used in)/from financing activities 12,512 (28,391) - (55,590) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January 11,842 3,776 (183) 3,959 3,776 Cash and cash equivalents at 31 December 27 15,618 The accompanying notes on pages 5 to 144 form an integral part of these separate financial statements. Digitally signed by OGNIAN IVANOV DONEV Date: 2022.03.28 12:24:03 +03'00' Executive Director: Ognian Donev, PhD OGNIAN IVANOV DONEV Finance Director: Boris Borisov Digitally signed by BORIS ANCHEV BORISOV Date: 2022.03.28 12:33:34 +03'00' Digitally signed by Yordanka Nikolova Petkova Date: 2022.03.28 12:34:24 +03'00' BORIS ANCHEV BORISOV Yordanka Nikolova Petkova Chief Accountant: Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2022.03.28 22:34:05 +03'00' IVAYLO YANCHEV YANCHEV Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2022.03.28 22:46:14 +03'00' Galina Dimitrova Lokmadjieva- Nedkova Ivaylo Yanchev Registered auditor Galina Lokmadjieva-Nedkova Managing director Baker Tilly Klitou and Partners EOOD 3 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 1. BACKGROUND CORPORATE INFORMATION SOPHARMA AD is a business entity registered in Bulgaria with a seat and registered address of management: Sofia, 16, Iliensko Shousse St. The Company was entered in the Commercial Registry on 11 April 2008 with UIC 831902088. The Company was registered with court on 15 November 1991 by Decision No 1/1991 of Sofia City Court. 1.1. Ownership and management Sopharma AD is a public company under the Public Offering of Securities Act. As at 31 December 2021, the structure of Company's joint-stock capital is as follows: % Donev Investments Holding AD Telecomplect Invest AD 27.86 20.68 5.23 Mandatory Universal Pension Fund (MUPF) Allianz Bulgaria Sopharma AD (treasury shares) Other legal entities 9.69 26.00 10.54 Natural persons 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 2021 as follows: Ognian Donev, PhD Vessela Stoeva Chairperson Member Member Member Member Bisera Lazarova Alexander Chaushev Ivan Badinski The Company is represented and managed by its Executive Director Ognian Donev, PhD. 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 Chairperson Member Tsvetanka Zlateva Kristina Atanasova - Elliot Member Pursuant to a business management contract dated 9 June 2020, the Company’s Procurator is Simeon Donev. 5 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The average number of Company's personnel for 2021 is 1,860 workers and employees (2020: 1,991). 1.2. Principal activities The principal activities of the Company include the following types of transactions and deals: x x production and trade in medicinal substances and finished drug forms; research and development as well as engineering and implementation activities in the field of medicinal products. The Company holds manufacturing / import authorisation for medicinal products No BG / MIA -0242 dated 1 June 2021, issued by the Bulgarian Drug Agency (BDA). 1.3. Main indicators of the economic environment The main economic indicators of the business environment that have affected the Company's activities throughout the period 2018 – 2021 are presented in the table below: Indicator 2018 109,695 3.1% 2.3% 1.66 2019 118,669 3.7% 3.1% 1.75 2020 118,605 -4.4% 0.0% 1.72 2021 94,326 3.9% 6.6% 1.65 GDP in million levs* Actual growth of GDP* Year-end inflation (HICP) Average exchange rate of USD for the year Exchange rate of the USD at year-end Basic interest rate at year-end 1.71 1.74 1.59 1.73 0.00 0.00 0.00 0.00 Unemployment rate at year-end 6.1% 5.9% 6.7% 4.8% * Note: BNB data as at 30 September 2021, source: BNB 1.4. COVID-19 pandemic – impact, effects, actions and measures taken On 11 March 2020 the World Health Organisation declared a COVID-19 pandemic, and on 13 March 2020 the Bulgarian Parliament imposed a state of emergency in Bulgaria, as a result of which a number of restrictive measures were taken. On 24 March 2020, the State of Emergency Act was promulgated, imposing measures for the period of the pandemic state of emergency in various areas – employment relations and social security, taxation and annual financial closure, default and forced execution, terms and deadlines, etc. Decisions and orders of the Council of Ministers and the Ministry of Health were adopted for introducing anti-epidemic measures on the territory of the country aimed to protect and preserve the population’s life and health. On 10 April 2020 the Bulgarian National Bank approved a “Procedure for deferral and settlement of payables due to banks and their subsidiaries – financial institutions, in relation to the state of emergency. As a result of the restrictions imposed in Bulgaria and in most countries around the world, the normal operations of businesses in a number of economic sectors was disrupted. There were difficulties with the supplies of raw and other materials from suppliers, shipments to clients, and procuring workforce. 6 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Almost all entities, though to a different extent, had to impose certain actions and measures to reorganise business operations, work schedules, business communications and other aspects of their relations to counterparts, partners, and state institutions. Impact on the Company’s operations and financial position The Company operates in the pharmaceutical sector. It continues to perform its operations without encountering significant difficulties in procuring asset supplies and performing sales to customers. No contracts with key suppliers and/or customers have been terminated. The management did not dismiss personnel and did not take advantage of the measures introduced by the State of Emergency Act (“60:40”, etc.). The Company has sufficient financing to meet its liquidity needs. 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 2.1. Basis for preparation of the separate financial statements The separate annual financial statements of SOPHARMA AD 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), which are effectively in force on 1 January 2021 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 introduced by § 1, p. 8 of the Additional Provisions of the Accountancy Act "International Accounting Standards" (IASs). For the current financial year the Company 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, effective for annual periods commencing on 1 January 2021, has not resulted in changes to the Company’s accounting policy, 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: x Amendments to IFRS 16 “Leases” (in force for annual periods beginning on or after 1 June 2020, endorsed by EC). These amendments introduce a practical expedient which exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease 7 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 modifications. The practical expedient applies when all of the following conditions are met: а) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; b) any reduction in lease payments affects only payments due on or before 30 June 2021 (by means of a subsequent amendment to the standard dated 1 April 2021, the term was extended to 30 June 2022); and c) there is no substantial change to other terms and conditions of the lease. A lessee that uses the practical expedient accounts for any change in lease payments resulting from the rent concession in the same way that it would account for the change applying IFRS 16 if the change were not a lease modification. It does not affect lessors. Earlier application is permitted. The management has made an analysis and has determined that the amendments do not impact the accounting policy and the values, presentation and classification of the Company’s assets, liabilities, transactions and results. x Amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Disclosure”, IFRS 7 “Financial Instruments: Disclosure”, IFRS 4 “Insurance Contracts”, and IFRS 16 “Leases” related to Phase 2 of the Interest Rate Benchmark Reform (in force for annual periods beginning on or after 1 January 2021, endorsed by EC). The amendments to the standards related to Phase 2 of the Interest Rate Benchmark Reform constitute mainly two practical expedients: а) in identification and measurement of modification of contractual cash flows from financial assets, financial liabilities, and lease liabilities – the modifications to the interest rate benchmarks are accounted for by updating the effective interest rate; and in hedge accounting – by permitting an amendment (revision) in the identification of the hedging relationship and the measurement of the hedged item based on cash flows, due to and resulting from the substitution of the interest rate benchmarks applied with other alternatives. The amendments are applied retrospectively. Earlier application is permitted. The management has made an analysis and has determined that the amendments do not impact the accounting policy and the values, presentation and classification of the Company’s assets, liabilities, transactions and results. x Amendments to IFRS 16 (in force for annual periods beginning on or after 1 April 2021, endorsed by EC). These amendments: a) permit a lessee to apply the practical expedient regarding COVID-19 related rent concessions to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022 (rather than only payments originally due on or before 30 June 2021); b) require a lessee applying the amendment to do so retrospectively, recognizing the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment; and c) specify that, in the reporting period in which a 8 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 lessee first applies the amendment, the lessee is not required to disclose the information required by paragraph 28 (f) of IAS 8. Earlier application is permitted (including financial statements not yet authorized for issue at the date the amendment is issued). The management has made an analysis and has determined that the amendments do not impact the accounting policy and the values, presentation and classification of the Company’s assets, liabilities, transactions and results. As at the date of approval for issue of these financial statements, the following standards and interpretations have been issued, but are not yet effective (and/or have not been endorsed by EC): x 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 assets 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 Company’s assets and liabilities. x 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 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 9 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 Company’s assets and liabilities, transactions and results. x 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 Company’s assets and liabilities, transactions and results. x 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 in respect to a subsidiary that adopts IFRS for the first-time 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 10 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 amendments for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted; b) the amendment to IFRS 9 makes clarification in respect to the fees that are included in the ‘10 per cent’ test when 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 and agricultural produce using a present value technique. 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 Company’s assets and liabilities, transactions and results. x Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 (in force for annual periods beginning on or after 1 January 2023, not endorsed by EC). These amendments a) require disclosing material accounting policies information instead of significant accounting policies; b) explain how the entities can identify material accounting policy information and 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 other material information in the financial statements; and e) clarify that if the entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy 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 Company’s assets and liabilities, transactions and results. 11 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 x Amendments to IAS 1 “Presentation of Financial Statements” (in force for annual periods beginning on or after 1 January 2023, 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 that are in existence at the end of the reporting period, and the classification is unaffected by expectations about whether it will exercise its right to defer settlement of the liabilities. 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 apply to 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 Company’s liabilities. x Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (in force for annual periods beginning on or after 1 January 2023, not endorsed by EC). These amendments focus entirely on accounting estimates and clarify the following: 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 the financial statements that are subject to measurement uncertainty”; b) the entity develops accounting estimates if the accounting policies require items in the financial statements to be measured in a way that involves measurement uncertainty; с) clarification that a change in accounting estimate that results from new information or new developments is not a correction of an 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 amounts and classification of the Company’s assets and liabilities, transactions and results. x IAS 12 Income Taxes (in force for annual periods beginning on or after 1 January 2023, not 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 upon the accrual of 12 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 liabilities for dismantling, removing or restoration 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 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 the 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 amounts and classification of the Company’s assets and liabilities, transactions and results. x 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 Company’s assets and liabilities. The separate financial statements of the Company have been prepared on a historical cost basis except for property, plant and equipment, investment property and financial assets constituting equity investments through other comprehensive income, which are measured at revalued amount and respectively, at fair value. 13 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company keeps its accounting books in Bulgarian Levs (BGN), which is accepted as being its presentation currency. The data in the separate financial statements and the notes thereto is presented in thousand Bulgarian Levs (BGN’000) except where it is explicitly stated otherwise. The presentation of 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 financial statements. These estimates, accruals and assumptions are based on the information, which is available at the date of the 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 separate financial statements, are disclosed in Note 2.32, Note 15, Note 17 and Note 20. 2.2. Consolidated financial statements of the Company The Company has started the process of preparation of its consolidated annual financial statements for year 2021 in accordance with IFRS effective for year 2021 whereas these separate annual financial statements will be included therein. In accordance with the planned dates, the management expects that the consolidated annual financial statements will be approved for issue by the Board of Directors of the Company not later than 30 April 2022 and after this date the financial statements will be made publicly available to third parties. 2.3. Comparatives The Company usually presents comparative information for one prior year in its separate financial statements. Where necessary, comparative data is reclassified (and restated) in order to achieve comparability in view of the current year presentation changes. 2.4. Functional currency and recognition of exchange differences The functional and reporting (presentation) currency of the Company is the Bulgarian Lev. Starting from 1 July 1997 the Bulgarian Lev was fixed under the Bulgarian National Bank Act to the German Mark at the ratio of BGN 1 : DEM 1, and with the introduction of the Euro as the official currency of the European Union, it has been fixed to the Euro at a ratio of 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 and cash equivalents, 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. 14 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The non-monetary items in the statement of financial position, which have been initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the transaction date and are not subsequently revalued at the closing exchange rate. Foreign exchange gains or losses arising on the settlement or recording of foreign currency transactions at rates different from those at which they were converted on initial recognition, are recognised in the statement of comprehensive income (within profit or loss for the year) in the period in which they arise and are treated as 'other operating income/(losses)' (within profit or loss for the year) and are presented net. 2.5. Revenue Revenue from contracts with customers The Company’s usual revenue is from the activities disclosed in Note 3.1. 2.5.1. Recognition of revenue from contracts with customers The Company’s revenue is recognised when control over the goods and/or services promised in the contract with the customer is 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 Company 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 and the d/ payment conditions can be identified; and e/ it is probable that the Company will collect the consideration to which it is entitled upon performing its performance obligations. In evaluating whether collectability of an amount of consideration is probable, the Company considers all relevant facts and circumstances of the transaction, including past experience, customary business practices, published rules and declarations made by the Company, 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 payable (contract liability) in the statement of financial position, until: а/ all criteria for recognizing a contract with a customer are met; b/ the Company meets its performance obligations and has received the whole or almost the whole remuneration (which is not recoverable); and/or c/ when the contract is terminated and the remuneration received is not refundable. Upon the initial measurement of its contracts with customers, the Company makes additional analysis and judgement whether two or more contracts should be combined and accounted for as a single contract, respectively whether the products promised in each separate and/or combined contract should be accounted for as a single and/or multiple performance obligation(s). 15 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 Company recognises revenue for each separate performance obligation at the level of individual contracts with customers, by analysing the type, term and conditions of each particular 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 (third) party is involved in the performance of obligations, the Company determines whether it acts in its capacity as principal or agent, by assessing the nature of its promise to the customer: to provide the finished goods or services on its own (principal) or to arrange for another party to provide them (agent). The Company is a principal and recognises as revenue the gross amount of remuneration if it controls the promised finished goods and/or services prior to their transfer to the customers. If however the Company does not obtain control over the promised goods and/or services and its obligation is only to organise for a third party to provide these finished goods and/or services, the Company is an agent and recognises as revenue the net amount it retains for the services granted in its capacity as agent. 2.5.2. 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 an entity expects to be entitled, excluding amounts collected on behalf of third parties. Upon determining the transaction price, the Company 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. Depending on that: а) the Company 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 Company 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 Company accounts for the contract modification as if it were a part of the existing contract (cumulative adjustment) if the remaining goods or services are not distinct from the goods and/or services transferred before the contract modification and, therefore, form part of a single performance obligation that is partially satisfied. 16 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.5.3. Performance obligations under contracts with customers Revenue from the sale of products Wholesales of medical substances and medical forms are made in the country and abroad, both based on the Company’s specification (technology) and based on the customer’s specification (technology). As a whole, the Company has concluded that it acts as principal in its contracts with customers, unless it has been explicitly stated otherwise for certain transactions, since usually the Company controls its goods and/or services prior to their transfer to the customer. Sales of products based on the Company’s specifications Upon sales of products based on the Company’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 their physical ownership to the customer, when the customer may dispose of the finished goods by directing their use and by obtaining substantially all remaining rewards. Upon export sales, the judgement on the point in which the customer obtains control over the finished products is made based on the INCOTERMS applicable for the contract. Sales of products based on the customer’s specifications Regarding products produced based on the customer’s specifications, the Company has a legal and contractual restriction on direction 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 level). For this purpose, it is determined if the Company 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 Company’s default (legally exercisable right to payment). If in the specific contract the Company has a legally exercisable right to payment, revenue is recognised over time, and the output method is used to measure progress (stage of completion) of the contract. This method has been determined as most suitable to measure progress, as the results achieved best describe the Company’s activity towards complete satisfaction of the performance obligations. 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 Company does not have a legally exercisable right to payment, revenue is recognised at a point in time, when control over the products sold is transferred to the customer: when the products are handed over to the customer and it has physical title thereon (for domestic sales) and in accordance with the contract’s applicable INCOTERMS (for export sales). 17 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Transportation of the products sold Usually, upon export sales, the Company is responsible for transporting the goods to the location agreed, and transport is organised by the Company, and the cost of transport is included (calculated) as part of the selling price. Depending on the conditions agreed with the customer, transportation 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 products 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 products sold with easily accessible resources), and the transportation service does not modify or amend the products sold in any way. In this case, the remuneration the Company expects to be entitled to (the transaction price) is allocated between the separate performance obligations based on their standalone selling prices. The standalone selling price of the products sold is determined based on the price list effective at the transaction’s date, and the standalone selling price of the transport service is determined in an approximate manner by using the cost plus margin approach. To render the transportation service, the Company uses transportation companies – subcontractors. The Company 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 bears the responsibility for rendering the services and that the services are acceptable to the customer (i.e. the Company 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 negotiates the service price independently, without interference by the customer. 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 receives and consumes rewards simultaneously with the service rendition. In order to measure the contract progress (stage of completion), the input method is used. This method has been determined as most appropriate to measure progress since it best describes the Company’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 Company’s efforts (costs incurred) are directly related to the transfer of the service to the customer. Progress is measured based on the costs incurred versus the total costs planned for contract performance. Transaction price and payment terms Selling prices are fixed based on a common or customer-specific price list and are individually determined for each product. The usual credit period is 30 to 270 days. In certain cases, the Company collects short-term advances from clients which do not have a significant financing component. The advances from clients are presented in the statement of financial position as contract liabilities. 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 include: 18 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 o o o 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 Company determines the customer’s estimated turnover by using the most probable value method. The discounts granted are offset against the amounts due by the customer. Price protection: With regards to domestic sales, the Company is obliged, upon price reduction imposed by a state regulatory body, to compensate the buyer and/or its customers for finished products 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 Company’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 compliant goods or by recovery of the amount paid by the customer. Upon determining the compensations for hidden flaws due at the end of the reporting period, the Company takes into consideration the quality assurance system implemented thereby and the accumulated experience. o o Compensations due to the customer: in case of inaccurate performance of contractual obligations by the Company, usually in relation to 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 Company’s experience shows that historically, contract terms are complied with, and the Company has not charged payables for payment of compensations. 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 Company’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) within the transaction price is determined for each individual contract and is subject to review 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 historical trade experience with customers and is recognised as adjustment for the purpose of the transaction price only and respectively the revenue (as an “increase” or a “decrease” component) 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 the 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 Company 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 Company uses the most likely value 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 obligations in the statement of financial position. 19 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.5.4. Contract costs The Company treats as contract costs the following: o the additional 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 o the expenses it incurs to fulfil a contract with a customer and which are directly related to the specific contract, support the generation of resource to be used in the contract fulfilment and the Company expects to recover them over a period longer than twelve months (costs to fulfil such contracts). In its usual activity, the Company does not incur direct and specific costs to enter contracts with customers or costs to fulfil contracts with customers which would not have occurred if the respective contracts had not been concluded. 2.5.5. Contract balances Trade receivables and contract assets A contract asset is the Company's right to consideration in exchange for goods or services that it has transferred to a customer but is not unconditional (receivable accrual). If by transferring the products and/or providing the services the Company performs its obligation to the customer before the customer has paid the respective consideration and/or before the payment is due, a contract asset is recognised for the consideration worked-out (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 A contract liability is 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. Contract assets and contract liabilities are stated within other receivables and payables in the statement of financial position. They are included within current assets when their maturity is within 12 months or are part of the Company’s usual operating cycle, and the others are stated as non-current. Assets and liabilities from a single contract are stated net in the statement of financial position, even if they result from different performance obligations under the contract. Following their initial recognition, trade receivables and contract assets are subject to review for impairment pursuant to the conditions of IFRS 9 Financial Instruments. 20 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.5.6. Refund obligations under contracts with customers The refund obligation includes the Company’s obligation to reimburse a portion or the whole consideration received (or subject to receipt) from the customer under contracts with a right of return – for the expected retrospective discounts, rebates and discount volumes. The obligation is initially measured at the amount which the Company does not expect to be entitled to and which it expects to return to the customer. At the end of each reporting period, the Company updates 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. Other revenue Other revenue comprises revenue from operating leases of investment property and non-current tangible assets, as well as revenue from the Company’s agricultural production. It is stated within the statement of comprehensive income (within profit or loss for the year) in the “revenue” item. 2.6. Expenses Company’s expenses are recognised upon occurrence and based on the accrual and comparability principles to the extent at which this would not result in the recognition of assets/liabilities that do not meet the definitions for such under IFRS. Deferred expenses are postponed for recognition as deferred expense in the period that contracts related thereto are performed. Losses from the remeasurement of investment property to fair value are stated in the statement of comprehensive income (within profit or loss for the year), within “other operating income/(losses)”. Losses from remeasurement of agricultural produce upon initial fair value measurement are stated in the statement of comprehensive income (within profit or loss for the year), within “other operating income/(losses)”. 2.7. 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 loans granted and term deposits, interest income from receivables under special contracts, dividends on equity investments, net gains from exchange differences under loans denominated in a foreign currency, revenue from guarantees, revenue from debt settlement transactions, gains from the fair value measurement of long-term equity investments which constitute part of stage-by-stage acquisition of a subsidiary. 21 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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). Finance income is stated separately from finance costs on the face of the statement of comprehensive income (within profit or loss for the year). 2.8. Finance costs Finance costs are included in the statement of comprehensive income (within profit or loss for the year) when incurred, and are stated separately from finance income and comprise: interest expenses on loans, interest expenses on leases, bank charges on loans and guarantees, net foreign exchange loss from loans in a foreign currency, impairment of charges on guarantor agreements, provisions under financial guarantee contracts, and impairment of commercial loans granted. Finance costs are stated separately from finance income on the face of the statement of comprehensive income (within profit or loss for the year). 2.9. Property, plant and equipment Property, plant and equipment, including biological assets (carriers) are presented at revalued amount less the accumulated depreciation and impairment losses. Initial acquisition Upon their initial acquisition, non-current tangible assets are valued at acquisition cost (cost), which comprises the purchase price, including customs duties and any direct costs attributable to bringing the asset to working condition for its intended use. The directly attributable costs include mainly 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. Upon acquisition of non-current tangible assets 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 Company credit resources with analogous maturity and purpose. The Company 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 approach chosen by the Company for subsequent measurement of non-current tangible assets is the revaluation model under IAS 16, i.e. measurement at revalued amount less any subsequent accumulated depreciation and subsequent accumulated impairment losses. 22 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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. 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 Company applies the straight-line depreciation method for property, plant and equipment. Depreciation of an asset begins when it is available for use. Land (with the exception of right of 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: x x x x x x x x x for buildings – from 20 to 70 years; for facilities and transmitter devices – from 5 to 30 years; for machinery and equipment – from 6 to 35 years; for computers and mobile devices – from 2 to 5 years; for servers and systems – from 4 to 18 years; for motor vehicles – from 5 to 13 years; for furniture and fixtures – from 3 to 13 years; for other tangible assets – from 3 to 12 years; for biological assets (carriers) – from 10 to 12 years. The term of use of right-of-use assets is as follows: x x x x for land – from 4 to 5 years; for buildings – from 2 to 8 years; for motor vehicles – from 2 to 5 years; for furniture and fixtures – from 2 to 3 years. The useful life set for any tangible fixed asset is reviewed at the end of each reporting period and in case of any material deviation from the future expectations on the period of use, the latter is adjusted prospectively. 23 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 statement of comprehensive income (within profit or loss for the year) unless a revaluation reserve has been set aside for the respective asset. Then the impairment is at the expense of this reserve and is presented in the statement of comprehensive income (within other comprehensive income) unless it exceeds the reserve amount and the surplus is included as expense in the statement of comprehensive income (within profit or loss for the year). Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the 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 'property, plant and equipment' group are determined as the difference between the consideration the Company expects to be entitled to (sales revenue) and the carrying amount of the assets on the date when the recipient obtains control therereon. They are stated under 'other operating income/(losses), net' on the face of the 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 statement of changes in equity. 2.10. Biological assets and agricultural produce Upon initial acquisition, biological assets (non-fruit-bearing) are valued at acquisition cost (cost), which includes the purchase price and all direct costs necessary to align the asset to a fruit-bearing condition. Direct costs are mainly: costs for land preparation and processing, costs for planting, fertilization, irrigation and other activities performed over a long period (4-5 years) in which biological assets (non-fruit-bearing) will be transferred into biological assets (carriers). Agricultural produce is measured at fair value as at the date of acquisition, less the sales costs. The fair value of agricultural produce is determined, as follows: x for milk thistle and yellow acacia crops – with support from a licensed appraiser; x for wheat crops – based on information obtained from Sofia Commodity Exchange AD regarding the market value thereof in the crop period. 24 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The agricultural produce – milk thistle seeds and yellow acacia seeds – is presented within the Company’s inventories, on line “herbs”, and wheat is presented within finished products, on line “agricultural produce”. Agricultural produce is subsequently measured according to the requirements of IAS 2 Inventories. Gains and losses on measurement of agricultural produce at fair value, less sales costs, are recognized in the statement of comprehensive income (within profit or loss for the year) when incurred and are stated within “other operating income/(losses), net”. 2.11. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition (the consideration given) over the fair value of the share of Sopharma AD in the net identifiable assets of the subsidiaries (Bulgarian Rose Sevtopolis AD, Medica AD and Unipharm AD) at the date of its acquisition (the business combination).This goodwill on the merger of the subsidiaries into the parent company is recognised in the separate statement of financial position of the parent. Goodwill is presented within the 'intangible assets' group. Goodwill is measured at acquisition cost (cost), determined at the date of the actual business combination, less the accumulated impairment losses. It is not amortised. It is subject to annual review for existence of impairment indicators. Impairment losses on goodwill are presented in the separate 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 financial statements at acquisition cost (cost) less accumulated amortisation and any impairment losses. The Company applies the straight-line amortisation method for the intangible assets. The useful life per group of assets is as follows: x x x x for software – from 2 to 12 years; for patents and licenses – from 2 to 10 years; for trademarks – from 5 to 13 years; for other intangible assets – from 5 to 7 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 expense in the statement of comprehensive income (within profit or loss for the year). Intangible assets are derecognised from the 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 the Company expects to be entitled to (sales revenue) and the carrying amount of the assets on the date when the recipient obtains control therereon. They are stated under 'other operating income/(losses), net' on the face of the statement of comprehensive income (within profit or loss for the year). 25 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.12. Investment property Investment property is property lastingly held by the Company to earn rentals and/or for capital appreciation. They are presented in the statement of financial position at fair value (Note 2.31). Gains or losses arising from a change in the fair value of investment property are recognised in the 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 revenue realized from investment property is presented in the statement of comprehensive income (within profit or loss for the year) within “income”. Investment property is derecognised from the 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. Gains or losses arising from the disposal of investment property are determined as the difference between the consideration the Company expects to be entitled to (sales revenue) and the carrying amount of the assets on the date when the recipient obtains control therereon. They are presented under 'other operating income/(losses), net' in the 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 function and purpose 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 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 subsidiaries, associates, and joint ventures Long-term investments, in the form of stocks and shares in subsidiaries, associates and joint ventures are presented in the financial statements at acquisition cost (cost) being the fair value of the consideration paid for the investment including any directly attributable costs incurred on the acquisition less accumulated impairment. Company's investments in subsidiaries, associates and joint ventures are subject to annual review for impairment. Where conditions for impairment are identified, the impairment is recognised in the statement of comprehensive income (within profit or loss for the year). In purchases and sales of investments in subsidiaries, associates and joint ventures the date of trading (conclusion of the deal) is applied. Dividend income The income from dividends related to long-trm investments in the form of stocks and shares in subsidiaries, associates and joint ventures is recognised as current income and presented in the statement of comprehensive income (within profit or loss for the year) within “finance income”. 26 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Investments 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 control over the economic benefits from the respective specific type of investments are being lost. Gain/(loss) on disposal is presented in the statement of comprehensive income (within profit or loss for the year). 2.14. Other long-term equity investments The other long-term equity investments constitute 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 acquisition cost, which is the fair value of consideration paid, including direct costs to acquire the investment (financial asset) (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 Company undertakes to purchase or sell the asset. Subsequent measurement The equity investments held by the Company 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 presented 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 equity investments constituting shares in other entities (non-controlling interest) is recognised as current income and stated in the statement of comprehensive income (within profit or loss for the year) in the “finance income” item. Upon derecognising shares at disposal or sale, the average weighted 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 financial statements as follows: x x raw materials, materials and goods – at the lower of acquisition cost (cost) and net realisable value; finished products, semi-finished products and work in progress – at the lower of production cost and net realisable value; x agricultural produce – at the lower of fair value at initial acquisition and net realisable value. 27 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Expenses incurred in bringing a certain item of inventories to its present condition and location, are included in the acquisition cost (cost) as follows: x 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; x 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. Fixed production overheads are included in the production cost of manufactured finished products, semi-finished products and work in progress based on the normal operating capacity determined on the grounds of commonly maintained average volume of production confirmed by the production plan. The base, chosen for their allocation at unit-of-production level, is the standard rate of man-hours of directly engaged staff in the production of the particular unit. The 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 1.5%, 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 financial statements (Note 2.32). 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 for completion of this asset and the estimated costs necessary to make the sale. 2.16. Trade receivables Trade receivables constitute the Company’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). 28 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 amount determined at a discount equal to the interest associated to the client - debtor. Subsequent measurement The Company 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 credit losses. (Note 2.25). Impairment The Company 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 2.25 and Note 2.32). Impairment of receivables is accrued through the respective corresponding allowance account for each type of receivable to the “other operating expenses” on the face of the statement of comprehensive income (within profit or loss for the year). 2.17. Interest-bearing loans and other financial resources granted All loans and other financial resources granted are initially presented at acquisition cost (nominal amount), which is accepted to be the fair value of the amount given in the transaction, net of the direct costs related to these loans and granted resources. Following their initial recognition, interest-bearing loans and other funding granted is subsequently measured and presented in the statement of financial position at amortised cost, determined by applying the effective interest method. They are classified in this group since the Company’s business model only aims 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 statement of comprehensive income (within profit or loss for the year) as finance income (interest) or costs throughout the amortisation period, or when the receivables are settled, derecognised or reduced. Interest income is recognised based on the effective interest method in accordance with the stage in which the respective loan or other receivables has been classified. Interest-bearing loans and other financial resources granted are classified as current ones unless (and for the relevant portion thereof) the company has unconditionally the right to settle its payable within a term of more than 12 months after the end of the reporting period (Note 2.25). 29 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.18. Cash and cash equivalents Cash includes cash in hand and cash in current accounts, and cash equivalents – bank deposits with original maturity of up to three months, and funds in deposits with longer maturity which are readily available to the Company under its agreements with the banks over the deposits’ terms. Subsequent measurement Cash and cash equivalents at banks are subsequently measured at amortised cost, less the impairment accumulated for expected credit losses (Note 2.25). For the purposes of the statement of cash flows: x cash proceeds from customers and cash paid to suppliers are presented at gross amount, including value added tax (20%); x interest on received investment purpose loans is reported as payments for financial activities while the interest on loans for current activities (for working capital) is included in the operating activities; x x interest received from bank deposits is included within cash flows from investing activities; VAT paid on fixed assets purchased from foreign suppliers is presented within the item 'taxes paid', while that paid on assets purchased from local suppliers is presented within the items ‘purchase of PPE’, ‘purchase of intangible assets’ and ‘purchase of investment property’ within cash flows from investing activities; x 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. x x proceeds under factoring agreements are stated within cash flows from financing activities. 2.19. Trade and other payables Trade and other current amounts payable in the statement of financial position are carried 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 Company, and subsequently – at amortised cost (Note 2.25). 30 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.20. Interest-bearing loans and other borrowings In the statement of financial position, all loans and other borrowings are initially presented at acquisition cost (nominal amount) which is designated as the fair value of the transaction’s deliverable, net of the direct costs related to these loans and borrowings. Following their initial recognition, interest-bearing loans and other borrowings are subsequently measured and presented in the statement of financial position at amortised cost, determined by means of the effective interest rate method. The amortised cost is calculated by considering all charges, commissions and other costs, including discounts and premiums associated with these loans. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) as finance income or finance expenses (interest) over the amortisation period or when the payables are written-off or reduced (Note № 2.25). Interest costs are recognised for the term of the financial instrument based on the effective interest rate method. Interest-bearing loans and other borrowings are classified as current, except for the portion thereof regarding which the Company has an unconditional right to settle its payable within over 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 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 of the Company 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 Lessee 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. 31 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company has elected to state all lease payments under short-term leases (up to 12 months) as current expenses over a straight-line basis for the lease term. Initial recognition The Company recognises right-of-use assets and lease liabilities in the statement of financial position at the commencement date of the lease (the date on which a lessor makes an underlying asset available for use by the lessee). The acquisition cost of the right-of-use asset includes: x x x x 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 lessee; provisions for expenses related to dismantling and removing the underlying asset. The Company 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. Right-of-use assets are presented in the statement of financial position, within ‘property, plant and equipment’, and depreciation thereof – in the statement of comprehensive income, within ‘depreciation and amortisation expenses’. The lease liabilities include the net present value of the following lease payments: x fixed lease payments less any lease inceptives receivable; x variable lease payments that depend on an index or rate; x the exercise price of the purchase options, if the lessee is reasonably certain to exercise this option; x payments of penalties for terminating the lease; x residual value guarantees. Lease payments are discounted using the interest rate implicit in the lease, if 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). Finance costs for the lease are recognized in the statement of comprehensive income 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. Subsequent measurement The Company has elected to apply the acquisition cost model for all of its right-of-use assets. They are presented at acquisition cost less the accumulated depreciation, accumulated impairment losses and adjustments due to reassessments and modifications of lease liability. 32 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company subsequently measures the lease liability by: x x x 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. Accounting for lease reassessments and modifications As a result of reassessment, the lessee recognises the amount of reassessment of the lease liability as an adjustment to the right-of-use asset. If the carrying amount of the asset is lower, the residual amount of reassessment is recognised within profit or loss. The Company accounts for a lease modification as a separate lease whenever: x the modification increases the scope of the lease by adding another right-of-use of one or more additional underlying assets; x the lease payment increases by an amount corresponding to the standalone price of the increase in the scope and potential adjustments reflecting circumstances of the respective lease. Payments related to short-term leases and leases in which the underlying asset is of a low value, as well as variable lease payments that are not included in the carrying amount of the lease liability are recognised directly as current expenses in the statement of comprehensive income on a straight-line basis over the lease term. Lessor Finance lease where a substantial portion of all risks and rewards incidental to the ownership of the leased asset is transferred outside the Company, is written-off from the assets of the lessor upon transfer of the asset to the lessee and is presented in the statement of financial position as a receivable at an amount equal to the net investment in the lease. The net investment in the lease agreement represents the difference between the total amount of minimum lease payments under the finance lease agreement and the non-guaranteed residual value, accrued for the lessor and the non-earned finance income. The difference between the carrying amount of the leased asset and the immediate (fair selling) value is recognised in the statement of comprehensive income (within profit or loss for the year) at the inception of the lease term (when the asset is delivered) as income from sale of assets. The recognition of the earned finance income as current interest income is based on the application of the effective interest rate method. In operating leases, the lessor continues to hold a significant part of all risks and rewards of ownership over the said asset. Therefore the asset is still included in its property, plant and equipment, while its depreciation for the period is included in the current expenses of the lessor. 33 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Rental income from operating leases is recognised on a straight-line basis over the lease term. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. 2.23. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with the workers and employees of the Company are based on the provisions of the Labour Code and the effective social security legislation in Bulgaria. Short-term benefits Short-term benefits 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 the end of each reporting period, the Company measures 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 and bonus schemes In accordance with Company's Articles of Association and upon a decision of the General Meeting of Shareholders, the Executive Director is entitled to one-off remuneration (tantieme) at the amount of up to 1% of Company's net profit and is empowered to determine the circle of employees among whom to distribute up to 2% of Company's profit for the year as a bonus for each calendar year. 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'. Long-term retirement benefits Defined contribution plans A major duty of the Company as an employer 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, the Guaranteed Receivables of Workers and Employees (GRWE) Fund and for health insurance. The rates of the social security and health insurance contributions are determined annually 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 Social Security Code (SSC). 34 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 These pension plans applied by the Company 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. There is no established and functioning private voluntary social security fund at the Company. The contributions payable by the Company 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. Defined benefit plans In accordance with the Labour Code, the Company in its capacity as an employer in Bulgaria is obliged to pay an indemnity to its personnel when coming of age for retirement, at an amount which, depending on the length of service with the entity, varies between two and six gross monthly salaries at the employment termination date. 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 shall be presented in the statement of financial position, and respectively, the change in their value – in the 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 they occur and are presented within other comprehensive income in the item 'remeasurements of defined benefit pension plans'. Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. At the end of each reporting period, the Company assigns certified actuaries who issue a report with their calculations about the long-term retirement benefit obligations to personnel. 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 Bulgaria where the Company itself operates. Share-based payments Share-based payments to employees and other persons rendering similar services are measured at the fair value of the equity instruments at the date of provision. For conditional share-based payments the fair value at the date of share-based payment is measured so as to reflect these conditions without actual differences between the expected and actual results. 35 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Termination benefits In accordance with the local provisions of the employment and social security regulations in Bulgaria, the Company as an employer is obliged, upon termination of the employment contracts prior to retirement, to pay certain types of indemnities. The Company recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, based on a publicly announced plan, including for restructuring, to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents for voluntary redundancy. Termination benefits due in more than 12 months are discounted and presented in the statement of financial position at their present value. 2.24. Share capital and reserves The Company is a joint-stock one and is obliged to register with the Commercial Register a specified share capital, which should serve as a security for the creditors of the Company for execution of their receivables. Shareholders are liable for the obligations of the Company up to the amount of the share capital held by each of them and may claim return of this share only in liquidation or bankruptcy proceedings. The 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 Company is obliged to set aside a Reserve Fund by using the following resources: x 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; x x 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. Treasury shares are presented in the statement of financial position at cost (acquisition price) and their gross amount is deducted from Company's equity. Gains or losses on sales of treasury shares are at the account of retained earnings and are carried directly to Company's equity in the 'retained earnings' component. Revaluation reserve – property, plant and equipment is set aside from: x the revaluation surplus between the carrying amount of property, plant and equipment and their fair values at the date of each revaluation; and x gain from the difference between the carrying amount of property, stated within the group 'owner occupied property', and their fair value at the date on which they are transferred to the group 'investment property'. 36 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Deferred tax effect on the revaluation reserve is directly carried at the account of this reserve. Revaluation reserve is transferred to the retained earnings' component when the assets are derecognised from the statement of financial position or are fully depreciated. The revaluation reserve covers the impairment of the assets with which it relates. It may be used in the implementation of Company'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 formed is transferred to ‘retained earnings’. The other equity components constitute a reserve on warrants issued, which is formed as 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 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. Financial assets Initial recognition, classification and measurement Upon initial recognition, the Company’s financial assets are classified in three groups, based on which they are subsequently measured: at amortised cost; at fair value through other comprehensive income, and at fair value through profit or loss. The Company 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 (Note 2.5.1.). The purchases and sales of financial assets whose conditions require asset delivery within a certain period, usually pursuant to legislation or the effective practice of the respective market (regular way purchases), are recognised using trade date accounting, i.e. on the date when the Company committed to purchase or sell the asset. The classification of financial assets upon their initial recognition depends on the characteristics of the contractual cash flows of the respective financial asset and on the Company’s business model for management thereof. In order for a financial asset to be classified and measured at amortised value or at fair value through other comprehensive income, its conditions should give rise to cash flows that are “solely payments of principal and interest (SPPI)” on the principal amount outstanding. For this purpose, analysis is performed by means of SPPI test at instrument level. 37 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company’s business model for the management of financial assets reflects the way the Company manages its financial assets to generate cash flows. The business model determines if cash flows are generated by the collection of contractual cash flows, the sale of financial assets, or both. Subsequent measurement For the purpose of subsequent measurement, the Company’s financial assets are classified in the following categories: x x 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 Company measures a financial asset at amortised cost if both of the following conditions are met: x the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and x 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. Financial assets at amortised cost are subsequently measured using the effective interest rate 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 Company’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 (а) and Note 27). Financial instruments at fair value through other comprehensive income (equity instruments) Upon their initial recognition, the Company may make an irrevocable choice 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. The classification is determined at the level of individual instruments. Upon derecognition of these assets, gains and losses from measurement to fair value, recognised in other comprehensive income, are not stated (recycles) through profit or loss. Dividends are recognised as “finance income” in the statement of comprehensive income (within profit or loss for the year) when the right to payment is established, with the exception of cases when the Company obtains rewards from these proceeds as compensation of a portion of the financial asset’s acquisition price – in this case, gains are stated in other comprehensive income. Equity instruments designated as financial instruments at fair value through other comprehensive income are not subject to impairment test. 38 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company has made an irrevocable commitment 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. Some of these instruments are traded on stock exchanges, and some not. They are stated in the statement of financial position within the „other long-term equity investments” item. Derecognition A financial asset (or, when applicable, a portion of a financial asset or a group of similar financial assets) is derecognised from the Company’s statement of financial position, when: x x the rights to cash flows from the asset have expired, or the rights to cash flows from the asset have been transferred or the Company has assumed an obligation to pay in full the cash flows received, without undue delay, to a third party under a transfer agreement, in which: a) the Company has transferred substantially all risks and rewards from ownership of the asset; or b) the Company has neither transferred nor retained substantially all risks and rewards from ownership of the asset, but has transferred control thereon. When the Company has transferred its right to obtain cash flows from the asset or has concluded a transfer agreement, it assesses the extent to which it has retained the risks and rewards of ownership. When the Company has neither transferred, not retained substantially all risks and rewards from ownership of the financial assets, it continues to recognise the asset transferred to the extent of its continuing interest therein. In this case, the Company also recognises the respective liability. The transferred asset and the related liability are measured on a basis reflecting the rights and obligations that the Company has retained. Continuing involvement in the form of a guarantee on the transferred asset is measured at the lower of the two values: the initial carrying amount of the asset and the maximum amount of consideration that the Company may be required to pay. Impairment of financial assets The Company recognises an allowance (impairment provision) for expected credit losses for all debt instruments which are not carried at fair value through profit or loss. Expected credit losses are calculated as the difference between the contractual cash flows due under the contractual conditions, and all cash flows the Company expects to receive, discounted at the initial effective interest rate. Expected cash flows also include cash flows from the sale of collateral held or other credit enhancements that constitute an integral part of the contractual conditions. To calculate the expected credit losses for loans to related and third parties, incl. cash and cash equivalents at banks, the Company applies the general impairment approach defined by IFRS 9. Under this approach, the Company applies a 3-stage impairment model based on changes in the credit quality of the financial instrument (asset) compared to that at the initial recognition. 39 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Expected credit losses are recognised at two stages: a. A financial asset which is not credit impaired upon its initial recognition/acquisition is classified in Stage 1. These are loans granted: to debtors with a low risk of default with stable key indicator (financial and non-financial) trends, regularly serviced and without any outstanding past due amounts. 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, which could occur over 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 transferred to 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 Company’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 aspects related thereto are disclosed in Note 2.32. In the cases when the credit risk of a financial instrument increases to a level that indicates an event of 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 Company’s management has performed the respective analyses, based on which it has determined a set of criteria for default events, in accordance with the specifics of the respective financial instrument. 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 contract amounts due, including taking into consideration all credit reliefs granted by the Company. The main aspects of the policy and the set of criteria are disclosed in Note 2.32. The Company adjusts the expected credit losses determined based on historical data, with forecast macroeconomic indicators for which it has been established that correlation exists and which are expected to impact the amount of future credit losses. In order to calculate expected credit losses for trade receivables and contract assets the Company 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 Company 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 41). 40 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Derecognition Impaired financial assets are derecognised when there is no reasonable expectation for collection of the contractual cash flows. Financial liabilities Initial recognition, classification and measurement The Company’s financial liabilities include trade and other payables, loans and borrowings, including bank overdrafts. Upon their initial recognition, financial liabilities are usually classified as liabilities at amortised cost. All financial liabilities are initially recognised at fair value, and in the case of loans and borrowings and trade and other payables, net of direct transaction costs. Subsequent measurement The subsequent measurement of financial liabilities depends on their classification. They are usually classified and measured at amortised cost. Classification groups Loans and borrowing Following their initial recognition, the Company measures interest-bearing loans and borrowings at amortised cost, applying the effective interest rate 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 stated 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 specified in the contract is discharged or cancelled or expires. An exchange between an existing borrower and lender of debt instruments with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the respective carrying amounts is recognised in the statement of comprehensive income (within profit or loss for the year). Offsetting (netting) of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position, if a legally enforceable right exists to offset the recognised amounts and if there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. 41 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 This requirement results from the concept of the actual economic nature of the Company’s relations with a given counterpart stating that in the simultaneous presence of these two requirements the expected actual future cash flow and rewards for the Company is the net flow, i.e. the net amount reflects the Company’s actual right or 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 Company’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: x lack of dependence on a future event, i.e. it should not only be applicable upon the occurrence of a certain future event; x the offsetting should be enforceable and legally defendable during (cumulatively): - the Company’s usual business operations; - in case of default/delay, and - in case of insolvency. The applicability of the 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 intention to settle these instruments on a net basis”. 2.26. Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make certain payments to recover the holder’s loss incurred when a debtor failed to make payment when due, in accordance with the initial or amended conditions of a debt instrument. Financial guarantee contracts are recognised as financial liabilities at guarantee issuance. The liability is initially measured at fair value, and subsequently – at the higher of the following: x x the amount determined in accordance with the expected credit losses model, and the initially recognised amount, less the cumulative amount of the revenue (where applicable) recognised under the principles of IFRS 15 Revenue from Contracts with Customers. The fair value of financial guarantees is 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 at the amount of expected losses under financial guarantee contracts is included in the statement of financial position, within “other current liabilities”. 42 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.27. Income taxes Company's current income taxes are determined in accordance with the requirements of the Bulgarian tax legislation – the Corporate Income Taxation Act. The nominal income tax rate in Bulgaria for 2021 is 10% (2020: 10%). Deferred income taxes are determined using the liability method on all of Company's temporary differences between the carrying amounts of the assets and liabilities and their tax bases, existing at the date of the financial statements. 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 that are accounted for as other components of comprehensive income or an equity item in the 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 and on the bases 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 (Bulgaria) under the jurisdiction of which the respective deferred asset or liability is expected to be recovered or settled. The deferred tax assets of the Company are presented net against its deferred tax liabilities when and as much as it is the tax payer for them in the respective jurisdiction (Bulgaria), 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. The deferred income taxes of the Company as at 31 December 2021 are assessed at a rate valid for 2022, at the amount of 10% (31 December 2020: 10%). 2.28. Government grants Government grants represent various forms of providing gratuitous resources by a government (local and central bodies and institutions) and/or intergovernmental agreements and organisations. 43 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Government grants (municipal, government and international, 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 Company and that the latter has complied and complies with the associated thereto requirements. A government grant that compensates the Company 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 proportionately to the amount of the recognised depreciation charge. 2.29. Net earnings or loss per share The basic net earnings or loss per share are calculated by dividing net profit or loss attributable to ordinary equity holders 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 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 split, 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. The diluted net earnings or loss per share are not calculated because no dilutive potential ordinary shares have been issued. 2.30. Segment reporting The Company identifies its reporting segments and discloses segment information in accordance with the organisational and reporting structure used by the management. 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 Company's resources. Company's operating segments are currently monitored and directed separately as each of them represents a separate business area that offers different products and bears different business risks and rewards. Company's operating segments include the business fields by individual lines of medicinal forms production – tablets, ampoules, medical products, other forms and other revenue. Information by operating segments The Company uses one basic measuring unit – gross margin (profit) for measuring the results in the operating segments and allocation of resources between them. The gross margin is defined as the difference between segment revenue and segment expenses directly attributable to the respective segment. 44 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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; (c) for assets - property, plant and equipment, investment property and inventories; (d) for liabilities – government grants, payables to personnel and for social security. Capital expenditures (investments) by business segments are differentiated expenses incurred in the period for acquisition or construction of segment non-current assets, which are expected to be used for more than one period. The Company manages its investments in securities, trade accounts and financial resources granted/received as well as taxes at entity's 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 Company as well as revenue, expenses, liabilities and assets that are not subject to allocation are stated separately in the item 'total at Company 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. The applied accounting policy for segment reporting is based on that used by the Company for the preparation of its statutory financial statements for public purposes. 2.31. Fair value measurement Some of Company's assets and liabilities are measured and presented and/or disclosed at fair value for financial reporting purposes. Such are: (a) on a recurring (annual) basis – other long-term equity investments, investment property, bank loans to/from third parties, certain trade and other receivables and payables; and other (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 Company 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 Company 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 maximize the use of the publicly observable information, and respectively, to minimize the use of unobservable information. 45 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 It uses the three acceptable approaches – the market approach, the income approach and the cost approach – whereas the most frequently applied valuation techniques include directly quoted and/or adjusted quoted market prices, market comparables (analogues) and discounted cash flows, including based on capitalised rental income. All assets and liabilities that are measured and/or disclosed in the financial statements at fair value, are categorised within the following fair value hierarchy, namely: x x 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 x 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 financial statements on a recurring basis, the Company determines at the end of each reporting period 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. The Company has developed internal rules and procedures for measuring the fair value of various types of assets and liabilities. For the purpose, a specifically designated individual, subordinated to the Company’s Finance Director, organises the performance of the overall valuation process and also coordinates and observes the work of the external valuators. The Company uses the expertise of external certified appraisers to determine the fair value of the following assets and liabilities: financial assets at fair value through other comprehensive income Level 1 and Level 2, investment property – Level 2, property, plant and equipment – Level 2 and Level 3. The choice of licensed 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 Company's Finance Director and/or Chief Accountant, Executive Director and the Board of Directors. In accordance with Company's 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 the Company’s assets and liabilities 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. 46 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The results from the process of fair value measurement are presented to the audit committee and to Company's independent auditors. For the purposes of fair value disclosures, the Company has determined 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 in applying the Company's accounting policies. Key estimates and assumptions of high uncertainty. Fair value measurement of equity investments When the fair value of equity investments carried in the statement of financial position 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 the input data, 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 the financial instruments. The main key assumptions and components of the model are disclosed in Note 20. Calculation of expected credit losses for loans and guarantees granted, trade receivables, incl. 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). In order to apply these requirements, the Company’s management makes a number of material judgements, such as: а) 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 41). Regarding trade receivables, including from related parties The Company uses provisioning matrixes to 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 Company’s 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 47 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 Company’s historical credit losses and the forecast economic conditions may deviate from actual collection rates in the future. Information about accumulated expected credit losses on trade receivables, including from related parties is disclosed in Note 22, Note 24 and Note 25. In 2021, there is a net reversal of impairment on trade receivables, incl. from related parties, at the amount of BGN 562 thousand (2020: a net accrual of impairment om trade receivables, including from related parties, at the amount of BGN 873 thousand) (Note 8, Note 9, Note 22, Note 24 and Note 25). Regarding loans and guarantees granted: The Company has adopted the general approach for calculating expected credit losses on the loans granted, pursuant to IFRS 9. For this purpose, the Company 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 for the respective entity. Second, by using statistical models including historical probability of default data (PD), transfer between ratings, macro-economic data and forecasts, the relevant marginal PDs are calculated by year for each rating. Third, based on this analysis and the determined rating, and based on a set of indicators for the instrument’s characteristics at each reporting period end, the following parameters are determined: instrument stage (Stage 1, Stage 2 or Stage 3), applicable PD 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. 48 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 deterioration of key indicators (financial and non-financial), and without amounts past due. The expected credit loss for such loans is calculated based on the probability of default for the next 12 months and the Company’s expectation for the loss amount upon exposure at default over the next 12 months. Stage 2 includes loans granted classified as “renegotiated”. These are loans with respect to which (based on a set of indicators) a significant deterioration of the credit risk related to the debtor has been established as compared to the exposure’s initial recognition. The expected credit loss for these loans is calculated based on the probability of default for the lifetime of the loan which is considered to be credit-unimpaired, and the Company’s expectations for the loss amount upon exposure at default over its lifetime. Stage 3 includes loans granted 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 Company’s expectations for the loss amount of the non-performing credit-impaired exposure throughout its lifetime. A loan granted, respectively a financial asset, is credit-impaired when one or more events have occurred which have an adverse effect on the expected future cash flows from this instrument. The Company applies the same model with respect to expected credit losses from guarantees granted and certain individual receivables. The main points from the policy and set of criteria to assess the Company’s exposure to credit risk related to loans granted are disclosed in Note 41. Information about expected credit losses on loans granted, guarantee agreement charges and financial guarantee contracts are disclosed in Note 21, Note 22, Note 24, and Note 39. In 2021, there is a net reversal of the impairment for expected credit losses on loans granted at the amount of BGN 5,733 thousand (in 2020 there is a net accrual of impairment for expected credit losses on loans granted in the amount of BGN 3,551 thousand) (Note 11, Note 12, Note 21, Note 22 and Note 24). In 2021, there is a net reversal of the impairment for expected credit losses on dividend receivables in the amount of BGN 1,293 thousand (in 2020 there is a net accrual of impairment for expected credit losses on dividend receivables in the amount of BGN 1,293 thousand) (Note 11, Note 12 and Note 24). In 2021 there is a net accrual of impairment for expected credit losses on financial guarantee contracts in the amount of BGN 239 thousand (2020: BGN 46 thousand, net accrual) (Note 12 and Note 39). 49 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 In 2021, expected credit losses were accrued on guarantor contract charges at the amount of BGN 59 thousand (2020: none) (Note 12 and Note 39). Cash To calculate expected credit losses for cash and cash equivalents at banks, the Company 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 amounts in the respective bank accounts is taken into consideration. Leases The application of IFRS 16 requires the management to perform various assessments, estimates and assumptions that impact the accounting for right-of-use assets and lease liabilities. The main key judgments concern determining an appropriate discount rate and determining the term of each lease, including whether it is reasonably certain that the extension/termination options will be exercised. As a result of the uncertainty regarding these assumptions and estimates, significant adjustments may be made to the respective assets and liabilities in the future, respectively the recognized revenue and expenses (Note 32, Note 36 and Note 39). Revenue from contracts with customers Upon revenue recognition and preparation of the annual financial statements, the management performs various judgements, estimates and assumptions that impact the revenue, costs, contract 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 recognized revenue and expenses. The key judgements and assumptions that materially impact the amount and term for recognition of revenue from contracts with customers are related to determining the point in time when control over the goods and/or services promised in the contract is transferred to the customer and assessment of the variable consideration for returned goods and volume rebates (Note 2.5.1). Inventories Normal capacity Company'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 Company. When the actually achieved volume for individual articles is below the volume at the normal production capacity, set by the Company, the relevant recalculation are made for the fixed overheads, included in the cost of stocks of finished products and work in progress. 50 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Allowance for impairment At the end of each financial year, the Company reviews 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 Company impairs these inventories to net realisable value. As a result of the reviews and analyses made in 2021 an impairment of inventories was recognized at the amount of BGN 2,227 thousand (2020: BGN 2,813 thousand) (Note 5 and Note 8). 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 Company’s non-current tangible assets, as well as of the physical and technical condition thereof, operation means and residual useful lives. Respectively, revaluation was carried out, since at this date the five-year period for revaluation adopted in accordance with the policy expires. The review and revaluation were performed with the professional support of independent licensed appraisers. The licensed appraisers also developed a sensitivity test for the fair value measurements proposed thereby, determined by means of the different valuation methods, in accordance with the reasonably possible changes to the main assumptions, and comments on the deviations found. The management has performed detailed analysis of the licensed appraisers’ reports, incl. the sensitivity tests. As a result, it has accounted for the revaluation, and has recognized new revaluation reserve at the amount of BGN 8,298 thousand, net of impairment (Note 15) and has recognized current impairment expense at the amount of BGN 4,615 thousand (Note 10). The Company has determined 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 is close to their fair value; c/ right-of-use assets where the right of control over the use of assets for a certain period of time is obtained against consideration under contract, 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 caused 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 Company’s Audit Committee and independent auditors. Goodwill impairment At each reporting date, the management determines whether indicators exist for goodwill impairment. The calculations are made by the management with support from independent licensed appraisers. As a result of the calculations performed in 2021 it was determined that no goodwill impairment need to be recognized (2020: BGN 3,389 thousand) (Note 10 and Note 16). 51 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Impairment of investments in subsidiaries At each reporting date, the management makes an assessment about whether indicators for impairment exist in respect of its investments in subsidiaries. The calculations are made by the management with the assistance of independent certified appraisers. As a result of the calculations performed in 2021, the Company found it necessary to recognise impairment of particular investments in subsidiaries at the amount of BGN 104 thousand (2020: BGN 2,912 thousand) (Note 10 and Note 18). Actuarial calculations The work of certified actuaries has been utilized when determining the present value of long-term retirement benefit obligations to personnel on the basis of assumptions for mortality rate, staff turnover rate, future salaries level and discount factor. They are disclosed in Note 33. Long-term retirement benefit obligations to personnel at the amount of BGN 4,532 thousand (31 December 2020: BGN 4,478 thousand) have been recognized as a result of these estimations (Note 33). Deferred tax assets There are unrecognised deferred tax assets at the amount of BGN 3,582 thousand (31 December 2020: BGN 4,837 thousand), related to impairment of investments in subsidiaries because the management is not planning to dispose of these investments and has concluded that it is unlikely the temporary difference to be manifested in a foreseeable future. The temporary difference on which no tax asset is recognised amounts to BGN 35,823 thousand (31 December 2020: BGN 48,366 thousand). Litigation provisions With regard to the pending litigations against the Company, the management, jointly with Company's lawyers, has determined that at this stage the probability and risks of a negative outcome therefrom is still below 50% and therefore, it has not included provisions for litigation payables in the statement of financial position as at 31 December 2021. 52 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 3. REVENUE Company’s revenue includes: 2021 2020 BGN '000 BGN '000 Revenue from contracts with customers 197,836 2,318 204,546 2,191 Other revenue Total 200,154 206,737 3.1. The revenue from contracts with customers is from sales of medication produced and includes: 2021 2020 BGN '000 BGN '000 Export 118,739 79,097 135,178 69,368 Domestic market Total 197,836 204,546 Revenue from export sales by product includes: 2021 2020 BGN '000 BGN '000 Tablet dosage forms Ampoule dosage forms Ointments 93,354 13,615 4,859 4,738 563 105,919 10,126 7,382 7,376 780 Syrup dosage forms Suppositories Sachets 380 - Medical cosmetics Wound dressings Plasters 366 1,261 274 316 270 251 Drops 164 527 Lyophilic products Sanitary and hygienic products Substances 108 1,245 3 6 - 34 Total 118,739 135,178 53 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Revenue from domestic sales by product: 2021 2020 BGN '000 BGN '000 Tablet dosage forms Ampoule dosage forms Lyophilic products Wound dressings Plasters 40,521 13,410 7,822 6,008 2,950 2,374 1,667 945 36,167 13,540 5,260 5,899 2,730 1,056 675 Ointments Syrup dosage forms Haemodialysis concentrates Sachets 1,367 444 888 Drops 809 701 Inhalers 645 640 Sanitary and hygienic products Suppositories 473 567 453 201 Medical cosmetics Substances 132 120 - 1 Total 79,097 69,368 The breakdown of sales by geographic region is as follows: 2021 BGN ‘000 2020 BGN ‘000 Relative share Relative share Europe 100,786 79,097 17,953 197,836 51% 40% 114,554 69,368 20,624 204,546 56% 34% Bulgaria Other countries Total 9% 10% 100% 100% The total revenue from transaction with the largest clients of the Company is as follows: % of 2021 BGN ‘000 2020 BGN ‘000 % of revenue revenue Client 1 Client 2 Client 3 78,822 55,419 23,179 40% 28% 12% 69,192 60,453 32,908 34% 30% 16% 54 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Contract balances are as follows: 31.12.2021 31.12.2020 BGN ‘000 BGN ‘000 Receivables under contracts with customers – related parties, net of impairment (Note 24) 68,101 100,126 Receivables under contracts with customers – third parties, net of impairment (Note 25) 20,326 17,843 88,427 117,969 The increase/decrease in trade receivables under contracts with customers, including receivables from related parties, is the result of an increase/decrease in operating volumes. Reimbursement obligations as at 31 December 2021 are in the amount of BGN 630 thousand (31 December 2020: none). These include liabilities under retrospective trade volume discounts payable under contracts with customers which will be reimbursed over the next reporting period. (Note 39). 3.2. The Company’s other revenue is as follows: 2021 2020 BGN '000 BGN '000 Revenue from leased assets Revenue from sales of agricultural produce Total 2,318 - 1,897 294 2,318 2,191 55 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4. OTHER OPERATING INCOME AND LOSSES The Company’s other operating income and losses include: 2021 2020 BGN '000 BGN '000 Services rendered 2,422 624 2,262 130 Payables written-off Income from government grants under European projects Sales of goods 430 540 1,698 (1,391) 307 1,642 (1,379) 263 Carrying amount of goods sold Gain on sale of goods Sales of materials 967 1,310 (1,173) 137 Cost of materials sold (873) 94 Gain on sale of materials Gains/ (losses) on revaluation of investment property to fair value (Note 17) 90 81 (92) 242 166 293 1,257 (877) 380 82 Revenue from grants on agricultural produce Awarded amounts 36 Income from fines and penalties Revenue from sale of non-current assets Carrying amount of non-current assets sold Gain /(loss) on sale of non-current assets Lease liabilities written-off 4 1,731 (1,741) (10) 38 Carrying amount of right of use assets written-off Losses on leases (51) (13) (86) (4) Net loss on exchange differences under trade receivables and payables and current accounts (Losses)/Gains on revaluation of agricultural produce to fair value (Note 23) (13) (390) (33) 83 68 Income from liquidation of non-current assets Costs for liquidation of non-current assets (Losses)/Gains on liquidation of non-current assets Other income - - (191) (108) 220 - 193 4,188 Total 4,131 The sales of materials comprise mainly: sales of substances, chemicals and packaging materials. 56 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Services rendered include: 2021 2020 BGN '000 BGN '000 Manufacturing services Social activities Gamma irradiation Laboratory analyses Regulatory services Transport services Other 1,761 214 228 92 1,565 219 177 148 52 70 22 17 35 84 Total 2,422 2,262 Sales of goods include: 2021 2020 BGN '000 BGN '000 Foodstuffs 1,575 103 1,464 171 7 Medical products Goods with technical designation Total 20 1,698 1,642 The carrying amount of goods sold by types of goods is as follows: 2021 2020 BGN '000 BGN '000 Foodstuffs 1,279 88 1,241 132 6 Medical products Goods with technical designation Total 24 1,391 1,379 The payables written-off are as follows: 2021 2020 BGN '000 BGN '000 Tantieme Awarded amounts Other 254 308 62 99 - 31 130 Total 624 57 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 5. RAW MATERIALS AND CONSUMABLES USED The raw materials and consumables used include: 2021 2020 BGN '000 BGN '000 Basic materials 46,948 6,299 3,730 2,299 990 52,417 5,429 2,714 3,020 756 Electric energy Heating Laboratory materials Technical materials Working clothes and personal protective equipment for labour 967 937 Spare parts 920 1,211 643 Water 637 Auxiliary materials Fuels and lubricating materials Scrapped materials Impairment of materials (Note 9) Total 582 1,218 377 435 102 84 942 1,308 70,114 64,851 Expenses on basic materials include: 2021 2020 BGN '000 BGN '000 Substances 20,104 9,738 7,649 2,398 2,073 1,940 1,491 942 20,870 11,530 8,905 2,638 2,235 1,943 1,372 1,410 1,452 62 Packaging materials Liquid and solid chemicals Sanitary-hygienic and dressing material Herbs Ampoules Aluminium and PVC foil Vials Tubes 613 Materials for agricultural production - Total 46,948 52,417 58 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 6. HIRED SERVICES EXPENSE Hired services expenses include: 2021 2020 BGN '000 BGN '000 Advertising and marketing services Manufacturing of medical products Consulting services 7,256 5,044 4,975 3,181 1,942 1,919 1,902 1,295 1,194 955 6,463 6,849 2,898 3,570 2,046 2,867 1,106 1,427 1,441 1,170 830 Transportation and forwarding services Logistic services – domestic market Building and equipment maintenance Subscription fees Local taxes and charges Security State and regulatory charges Medical services 747 License fees 495 522 Services under civil contracts Insurance 492 668 435 588 Logistic services (export) Translation of documentation Vehicle repair and maintenance Taxes on expenses 432 294 393 388 377 402 351 378 Communications 343 335 Registration services Courier services 336 632 129 127 Fees and charges on current bank accounts Clinical trial services Destruction of pharmaceuticals Patent fees 114 116 110 179 105 106 84 102 Agricultural land processing services Rentals 33 168 18 147 Commissions 6 18 Other 338 601 Total 35,001 36,438 The Company has concluded long-term rental agreements for agricultural land (for 10 and 15 years), which have variable payment over the years and are therefore not included within the scope of IFRS 16. The payments due under these agreements are currently stated in the statement of comprehensive income as “rentals”. 59 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 In 2021 the Company concluded contracts to sub-lease the above contracts by transferring all its rental obligations to the sub-lessees. Rental costs comprise: 2021 2020 BGN '000 BGN '000 Rentals related to short-term leases Rentals related to leases of low-value assets Rentals related to variable consideration under long-term leases Total 12 6 26 7 - 114 147 18 The expenses recognized in the current year for statutory audit of the separate annual financial statements amount to BGN 81 thousand (2020: BGN 73 thousand). During the year, the statutory auditors have also provided services related to an engagement for agreed upon procedures for verification of historical financial information included in the prospectus for public offering of warrants. The remuneration accrued under this contract is BGN 7 thousand (2020: none). 7. EMPLOYEE BENEFITS EXPENSE Employee benefits expenses include: 2021 2020 BGN '000 BGN '000 Current wages and salaries 34,658 6,481 37,525 7,090 Social security/health insurance contributions Social benefits and payments 2,024 1,343 857 2,037 1,211 1,211 519 Accruals for unused paid leaves Tantieme Accruals for long-term retirement benefit obligations (Note 33) Social security/health insurance contributions on unused paid leaves Total 487 236 211 46,086 49,804 60 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER OPERATING EXPENSES Other expenses include: 2021 BGN '000 1,695 1,285 560 2020 BGN '000 1,556 1,505 86 Entertainment allowances Impairment of finished products and work in progress (Note 9) Scrapped finished products and work in progress Receivables written-off 394 - Unrecognised input tax under VATA Business trips 232 787 223 253 Donations 206 465 Trainings 111 123 Scrapped non-current assets Other taxes and payments to the state budget 71 3,135 44 28 Scrapped goods 12 - Charged/(reversed) impairment for expected credit losses on receivables, including from related parties, net (Note 9) (562) 80 873 65 Other Total 4,335 8,892 The receivables written-off at the amount of BGN 394 thousand are the result of receivables sold under a cession agreement (2020: none) (Note 25). In 2020 the Company generated a loss at the amount of BGN 2,878 thousand from the liquidation of 749,987 yellow acacia trees and BGN 575 thousand unrecognized VAT upon liquidation thereof. 9. IMPAIRMENT OF CURRENT ASSETS Impairments of current assets comprise: 2021 2020 BGN '000 BGN '000 Impairment of finished products and work in progress (Note 8) Impairment of materials (Note 5) 1,285 942 1,505 1,308 4,370 (3,497) 873 Impairment for expected credit losses on receivables Reversed impairment for expected credit losses on receivables Net change in the impairments for expected credit losses (Note 8) Total 3,845 (4,407) (562) 1,665 3,686 61 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 10. IMPAIRMENT OF NON-CURRENT ASSETS, OUTSIDE THE SCOPE OF IFRS 9 Impairment losses on non-current assets include: 2021 2020 BGN '000 BGN '000 Impairment of property, plant and equipment (Note 15) Impairment of investments in subsidiaries (Note 18) Impairment of goodwill (Note 16) 4,615 104 - 1,072 2,912 3,389 7,373 4,719 11. FINANCE INCOME Finance income includes: 2021 2020 BGN'000 BGN'000 Impairment for expected credit losses on receivables under commercial loans granted Reversed impairment for expected credit losses on commercial loans granted (6) - - 3,433 Reversed impairment for expected credit losses on commercial loans granted, net Interest income on loans granted 3,427 2,505 1,293 682 442 266 150 - - 3,189 - Reversed impairment for expected credit losses on dividend receivable Dividend income 9,661 368 - Income from charges on guarantor contracts Net foreign exchange gain on receivable from sale of subsidiary Net gain on operations with investments in securities Net gain on foreign exchange differences on lease agreements Reversed impairment for expected credit losses on cash Total 1 38 - 12 8,765 13,269 62 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 12. FINANCE COSTS Finance costs include: 2021 2020 BGN'000 BGN'000 Interest expenses on loans payable 755 410 312 (73) 239 116 1,467 317 249 (203) 46 Bank charges on loans and guarantees Accrued provision on financial guarantees Reversed provision on financial guarantees Net provision on financial guarantees Interest expenses on lease agreements 91 Impairment for expected credit losses on charges per guarantor contracts Net foreign exchange losses on lease agreements 59 10 - - Impairment for expected credit losses on receivables under commercial loans granted - 3,793 Reversed impairment for expected credit losses on commercial loans granted - (242) Net change in the impairment on loans granted - 3,551 Net foreign exchange loss on receivable from sale of subsidiary Impairment for expected credit losses on dividend receivables - - 294 1,293 Deregistered company capital from the scope of long-term equity investments - 26 Total 1,589 7,085 13. INCOME TAX EXPENSE Statement of comprehensive income (profit or loss for the year) 2021 2020 BGN '000 BGN '000 Taxable profit for the year per tax return 23,886 (439) 42,564 (474) Revaluation reserve included as an increase in the annual tax return Taxable profit for the year 23,447 2,345 42,090 4,209 Current income tax expense for the year - 10% (2020: 10%) Deferred income taxes related to: Origination and reversal of temporary differences Tax expense for past periods 245 48 (799) (309) Total income tax expense carried to the statement of comprehensive income (within profit or loss for the year) 2,638 3,101 63 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2021 2020 Reconciliation of income tax expense applicable to the accounting profit or loss BGN '000 BGN '000 Accounting profit for the year 26,909 31,765 Income tax – 10% (2020: 10%) 2,691 3,177 From unrecognised amounts as per tax returns related to: increases – BGN 1,475 thousand (2020: BGN 11,242 thousand) decreases – BGN 2,881 thousand (2020: BGN 9,507 thousand) Recognised deferred taxes originated in prior years Tax expense for past periods 147 (288) 40 1,124 (951) 60 48 (309) Total income tax expense carried to the statement of comprehensive income (within profit or loss for the year) 2,638 3,101 The tax effects related to other components of comprehensive income are as follows: 2021 2020 BGN '000 BGN '000 Tax effects recognised in equity Pre-tax amount Tax effects recognised in equity Amount net of tax Pre-tax amount Amount net of tax Items that will not be reclassified to profit or loss Gains/(losses) on revaluation of property, plant and equipment Remeasurements of liabilities under defined benefit pension plans Net change in the fair value of equity investments at FVOCI 8,298 (830) 7,468 (53) (41) 4 - (37) (53) (355) 7,890 - - (158) (637) (836) (158) (637) (832) (355) 7,060 - Total other comprehensive income for the year (830) 4 14. OTHER COMPREHENSIVE INCOME Other comprehensive income includes: 2021 2020 BGN '000 BGN '000 Subsequent revaluation of property, plant and equipment 8,298 (53) (41) (158) (637) (836) 4 Remeasurement of liabilities under defined benefit pension plans Net change in the fair value of equity investments measured at FVOCI (355) 7,890 (830) 7,060 Income tax relating to items of other comprehensive income Total comprehensive income for the year (832) 64 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 15. PROPERTY, PLANT AND EQUIPMENT The Company’s property, plant and equipment is as follows: Land and buildings Plant and equipment Other Assets in progress Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 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 Additions 169,345 171,672 199,521 194,600 22,029 22,771 2,580 4,848 393,475 393,891 34 165 451 646 544 1,457 5,657 7,262 6,686 9,530 Transfer to property, plant and equipment 975 516 2,562 5,883 528 26 (4,065) (6,425) - - Effect from revaluation to fair value 5,266 (3,883) (333) (30) (1,072) (1,906) 169,345 1,956 (732) - - 443 - - - - - - - 7,665 (4,615) (3,719) 399,492 (30) (1,072) (8,844) 393,475 Impairment Disposals (1,890) 201,868 (1,608) 199,521 (1,494) 22,050 (2,225) 22,029 (2) (3,105) 2,580 Balance at 31 December 171,404 4,170 Accumulated depreciation Balance at 1 January Depreciation charge for the year 42,492 37,695 121,941 113,972 17,361 17,570 - - 181,794 169,237 5,724 5,804 9,306 9,565 1,734 1,930 - - 16,764 17,299 Effect from revaluation to fair value (343) (240) 11 (1,018) 42,492 (288) (1,828) 129,131 - (1,596) 121,941 (2) (1,455) 17,638 - (2,139) 17,361 - - - - - - (633) (3,523) 194,402 11 (4,753) 181,794 Depreciation written-off Balance at 31 December 47,633 Carrying amount at 31 December 123,771 126,853 126,853 133,977 72,737 77,580 77,580 80,628 4,412 4,668 4,668 5,201 4,170 2,580 2,580 4,848 205,090 211,681 211,681 224,654 Carrying amount at 1 January The Company’s land and buildings as at 31 December include: x x buildings with carrying amount BGN 75,383 thousand (31 December 2020: BGN 83,270 thousand); land amounting to BGN 48,388 thousand (31 December 2020: BGN 43,583 thousand). The Company’s other PPE as at 31 December includes: x x x Motor vehicles with carrying amount BGN 2,489 thousand (31 December 2020: BGN 2,467 thousand); Fixtures and fittings with carrying amount BGN 1,462 thousand (31 December 2020: BGN 1,886 thousand); Biological assets (carriers) with carrying amount BGN 461 thousand (31 December 2020: BGN 315 thousand). 65 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Tangible fixed assets in progress as at 31 December include: x advances for the purchase of machines and equipment – BGN 1,978 thousand (31 December 2020: BGN 840 thousand); x x buildings reconstruction – BGN 1,001 thousand (31 December 2020: BGN 545 thousand); expenditures for construction of new buildings - BGN 909 thousand (31 December 2020: BGN 816 thousand); x x biological assets (non-fruit-bearing) - BGN 138 thousand (31 December 2020: BGN 318 thousand); other – BGN 144 thousand (31 December 2020: BGN 61 thousand). As at 31 December, the carrying amount of property, plant and equipment includes machinery and equipment, purchased using Grant Agreements under Operational Programme “Development of the Competitiveness of the Bulgarian Economy” 2007 – 2013 and Operational Programme “Energy Efficiency” (Note 31) as follows: x x x x for a tablet production facility at the amount of BGN 6,798 thousand (31 December 2020: BGN 6,513 thousand); for ampoule production at the amount of BGN 3,436 thousand (31 December 2020: BGN 3,840 thousand). combined exchange ventilation and air conditioning installation for the production of medical products at the amount of BGN 534 thousand (31 December 2020: BGN 595 thousand). for the production of innovative eye drops, “artificial tears” type, at the amount of BGN 159 thousand (31 December 2020: BGN 186 thousand). Leases The Company’s right-of-use assets are as follows: Land Buildings Motor vehicles Furniture and fixtures Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 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 38 - 29 9 4,017 34 3,910 156 2,771 265 1,763 1,056 (48) 131 - 174 2 6,957 299 5,876 1,223 (142) Additions Disposals (29) - (174) (49) (371) (15) (45) (589) Balance at 31 December 9 38 3,877 4,017 2,665 2,771 116 131 6,667 6,957 Accumulated depreciation Balance at 1 January 8 1 2,191 1,053 1,269 511 50 29 3,518 1,594 Depreciation charge for the year Depreciation written-off Balance at 31 December 5 (10) 3 7 - 1,125 (174) 3,142 1,150 (12) 763 (347) 1,685 762 (4) 54 (7) 97 61 (40) 50 1,947 (538) 4,927 1,980 (56) 8 2,191 1,269 3,518 Carrying amount on 31 December 6 30 28 735 1,826 2,857 980 1,502 1,252 19 81 81 1,740 3,439 3,439 4,282 Carrying amount on 1 January 30 1,826 1,502 145 66 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company has included the right-of-use assets within the same position in which the assets would have been included if they were the Company’s own assets. The Company has leased property, plant and equipment to related parties with zero carrying amount as at 31 December 2021 (31 December 2020: BGN 15 thousand). It has also leased to third parties property, plant and equipment with carrying amount as at 31 December 2021 of BGN 1,212 thousand (31 December 2020: BGN 1,278 thousand). Other data The book value of fully depreciated tangible fixed assets, used in the Company's activities by group of assets, is as follows: x x x Buildings – BGN 3,282 thousand (31 December 2020: BGN 885 thousand); Plant and equipment – BGN 56,723 thousand (31 December 2020: BGN 61,420 thousand); Other – BGN 8,600 thousand (31 December 2020: BGN 12,164 thousand). The following encumbrances are constituted on Company's tangible fixed assets as at 31 December 2021: x Land and buildings with a carrying amount of BGN 21,024 thousand and BGN 43,100 thousand, respectively (31 December 2020: respectively, BGN 27,268 thousand and BGN 48,433 thousand) (Note 29, Note 34 and Note 40); x Pledges on equipment – BGN 23,025 thousand (31 December 2020: BGN 47,455 thousand) (Note 29, Note 34 and Note 40). Periodic revaluation to fair value As at 31 December 2021 the Company revalued its property, plant and equipment with the assistance of independent certified appraisers for the purpose of determining the fair value of the assets in accordance with the requirements of IFRS 13 and IAS 16. The recognized effects of the revaluation are as follows: Land and buildings Plant and Other Total equipment BGN '000 BGN '000 BGN '000 BGN'000 Measurement to fair value at 31 December, recognized in the statement of comprehensive income (within profit or loss for the year) (Note 10) (3,883) (732) - (4,615) Measurement to fair value, recognized in the statement of comprehensive income (within other comprehensive income) (Note 14) 5,609 2,244 445 8,298 Total 1,726 1,512 445 3,683 67 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 (а) Fair value hierarchy The fair value measurements of regulated land, for which the term for executing the transaction is up to 12 months, have been assessed as inputs classified within Level 2 of the fair value hierarchy. The fair value measurements of the remaining property, machinery, equipment and facilities have been hierarchically categorized as Level 3 fair values. The revaluation of property, plant and equipment is on non-recurrent (periodic, five-year) basis and is due to the application of the revaluation model under IAS 16. The table below provides information regarding the fair value of the property, plant and equipment as at 31 December 2021 and the respective fair value hierarchies: Groups of assets Carrying amount Fair value Level 2 Level 3 BGN'000 BGN'000 BGN'000 BGN'000 Agricultural land 15,736 101,877 117,613 70,627 15,803 107,228 123,031 72,736 - 32,580 32,580 - 15,803 74,648 90,451 72,736 Land (regulated) and buildings Total land and buildings Plant and equipment Biological assets Motor vehicles Furniture and fixtures Total other assets Total 462 1,166 1,340 462 1,507 1,444 - - - - 462 1,507 1,444 2,968 3,413 3,413 191,208 199,180 32,580 166,600 (b) Measurement methods and techniques and significant unobservable inputs The tables below provide a description of the measurement methods and techniques used to determine the fair values of the separate groups of assets within property, plant and equipment for year 2021, as well as the significant unobservable inputs used, separately for Level 2 and Level 3: Group of assets (Level 2) Valuation approaches and techniques Significant unobservable inputs ꢀ Market approach/ Valuation technique: x x Discount rate for deferred transaction term for land within ZLP (built or unbuilt-on): 10.25%; Period for execution of the transaction: 9 – 18 months Land (regulated/ZLP) Market comparison method using analogies - market prices of comparable land – vacant land within ZLP in the valuation areas. 68 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Group of assets (Level 3) Valuation approaches and techniques Significant unobservable inputs ꢀ Market approach/ Valuation technique: Market comparison method using analogies - market prices of comparable land – agricultural land in the valuation areas. x Data regarding average actual prices and lease payments for agricultural land in specialized webpages, per areas and land groups (incl. zemi.bg, nivi.bg, etc.); x x x x Average prices of agricultural land and lease payments per areas according to NSI data; Price change index for agricultural land according to NSI data: 4.62% Lease payments change index for agricultural land according to NSI data: 0.95% Periods for execution of transactions with agricultural land (lease and/or sale), average period adopted – 6 months. ꢀ Income approach/ Valuation technique: Capitalized income from agricultural land lease. Agricultural land The weight of the approaches applied is 40% for the method of market comparables and 60% for capitalized income from agricultural land lease, due to the higher reliability and low change dynamics in lease data. ꢀ Cost approach / Valuation technique: Amortised recoverable amount method based on current expenses for creating or replacement with analogues. x x Price change index for the Construction sector according to NSI data: 17.17% Market price change index for production and warehouse facilities: 2.38% Buildings ꢀ Income approach / Valuation technique: Capitalised rental income (upon valuation of assets within independent sites within residential buildings for which sufficient data exists to apply this approach and valuation technique). ꢀ Cost approach / Valuation technique: x x x x Economic forecasts and trends for the “machinery, equipment and vehicles” group; Harmonised consumer price change indices based on NSI data: 1.06%; Consolidated industrial production indices based on NSI data: -1.6% Data regarding actual wholesale purchase price of products – yellow acacia seeds, average price adopted 18.40 BGN/kg; Data regarding actual wholesale purchase price of products – honey, average price adopted 5.00 BGN/kg; Data regarding rate of return on agricultural produce and replacement investment forms. Amortised recoverable amount method based on current expenses for creating or replacement with analogues. Machinery, facilities, equipment, motor vehicles and other ꢀ Income approach / Valuation technique: Capitalised income from utilization/produce from biological assets – yellow acacia permanent crops in fruit-bearing cycle (incl. seed collection and honey production). x x Biological assets (c) Sensitivity analysis The sensitivity analysis is manifested with respect to: x potential deviations of the comparatives applied from the active market data; x changes resulting from restructuring, reconstruction and/or other actions over the assets valued that have not been planned at the point of valuation. The valuation methods and techniques applied make use of a validation test to ensure that the assumptions on which the valuation forecasts are based correspond to actual past results (in the past 12 months) and/or are normally attainable in the current market conditions (based on surveyed change trends), by also considering the current condition of assets at the point of valuation, and the impact of the changes above resulting from restructuring, reconstruction and/or other actions over the assets valued that have not been planned at the point of valuation do not impact the valuation outcomes. 69 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 In case of changes in the key factors, the changes in the valuation results would be as follows: Equity – Component Fair value of property, Revaluation reserve - Significant unobservable inputs plant and equipment (Level 3) Current profit for the year property, plant and equipment Effect in BGN’000 Increase Decrease Increase Decrease Increase Decrease 31 December 2021 Index of building prices +/-0.50% Index of market prices of production and warehouse buildings and service sites +/-0.50% 381 (381) - (381) 381 - 1,332 2,563 (363) 402 (1,332) (2,563) 363 - - - - - (1,332) (2,563) (363) (402) (82) 1,332 2,563 363 - - - - - Change in prices in the construction sector +/-0.50 Change in prices of massive equipment and machinery +/-0.50% Harmonized consumer price change indices +/-0.50% (402) (82) 402 Change in export prices of machinery, equipment and vehicles +/-0.50% Change in import prices of machinery, equipment and vehicles +/-0.50% 82 82 82 376 78 (82) (376) (78) - - - (82) (376) (78) 82 376 78 - - Agricultural land price change index +/-2.79% Agricultural land lease payments change index +/-2.79% Change in the average period to execute transactions with agricultural land (lease and/or sale), average period adopted – 6 months Prices and indices of prices of agricultural produce (item 28 – other technical crops) Prices and indices of prices of agricultural produce (item 29 – medical plants) 69 6 (69) (6) - - - (69) (6) 69 6 - - - 10 (10) (10) 10 Prices and indices of prices of agricultural produce (item 30 – multi- annual essential oil plants used in medicine) 3 3 - (3) 3 - 70 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 16. INTANGIBLE ASSETS The Company’s intangible assets are as follows: Goodwill Intellectual property rights Software Assets in progress Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 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 6,698 6,698 11,176 11,538 4,437 4,429 278 163 22,589 22,828 Additions - - 16 1 1 8 1,052 131 1,069 140 Transfer to intangible assets - - - - 537 5 22 4 (559) - (9) (7) - - Written-off Balance at 31 December (2,522) (368) (2) (4) (2,524) (379) 6,698 6,698 9,207 8,861 11,176 8,429 4,458 3,655 4,437 3,334 771 278 21,134 18,446 22,589 Accumulated amortisation and impairment Balance at 1 January 5,930 2,541 - - 14,304 Amortisation charge for the year - - - - 3,389 - 577 - 778 - 309 - 325 - - - - - - - 886 - 1,103 3,389 (350) Impairment Amortisation written-off Balance at 31 (2,520) (346) (2) (4) (2,522) December 5,930 5,930 6,918 8,861 3,962 3,655 - - 16,810 18,446 Carrying amount at 31 December 768 768 768 2,289 2,315 2,315 3,109 496 782 782 771 278 278 163 4,324 4,143 4,143 8,524 Carrying amount at 1 January 4,157 1,095 Goodwill impairment The goodwill which results from the merger of subsidiaries (Bulgarian Rose – Sevtopolis AD, Medica AD and Unipharm AD) into the parent company is recognised in the Company’s separate statement of financial position (Note 2.11). At each date of the statement of financial position, the management assesses if indicators exist for impairment of the existing goodwill, with the support of independent licensed appraisers. The key assumptions used in the calculation of the recoverable amount at 31 December 2021 are: x x x growth rate – 1.34%; growth in the post-forecast period at terminal value calculation – 2.02%; discount rate (CAPM-based) – 8.73%. 71 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 For 2021, it was assessed that there is no need to recognise impairment of the goodwill (2020: BGN 3,389 thousand) (Note 10). The intellectual property rights include mainly products of development activities and trademarks. Intangible assets in progress as at 31 December include: x expenses on software implementation, at the amount of BGN 210 thousand (31 December 2020: BGN 149 thousand); x expenses on licenses and permits for use of medicinal products – BGN 561 thousand (31 December 2020: BGN 129 thousand). The book value of the fully amortised intangible assets, used in the Company's activities per asset groups, is as follows: x x intellectual property rights – BGN 4,526 thousand (31 December 2020: BGN 6,598 thousand); software – BGN 1,964 thousand (31 December 2020: BGN 1,853 thousand). 17. INVESTMENT PROPERTY The investment properties represent buildings and related land, differentiated parts of buildings for independent use, intended for long-term lease to subsidiaries and third parties. 31.12.2021 BGN '000 31.12.2020 BGN '000 Balance at 1 January 44,759 4,201 39,329 5,522 - Additions Disposals (1,748) Net gain/(loss) on remeasurement to fair value included in profit or loss (Note 4) 90 (92) Balance at 31 December 47,302 44,759 The investment properties per groups of assets is as follows: Group of assets 31.12.2021 BGN '000 31.12.2020 BGN '000 Warehouse premises Offices 44,354 1,457 1,036 455 34,627 3,189 1,003 441 Production buildings Social sites Investment property in progress Total - 5,499 44,759 47,302 72 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 As at 31 December 2021 there are established encumbrances on the investment properties as follows: x mortgage of warehouse premises – BGN 13,397 thousand (31 December 2020: BGN 13,214 thousand) (Note 34 and Note 40); x pledges on attached equipment – BGN 4,471 thousand (31 December 2020: BGN 4,517 thousand) (Note 34). 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 (annual) 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 the investment properties measured at Level 2: Warehouse premises Offices Production buildings Social sites Assets in progress Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 29,259 3,049 1,066 416 5,539 39,329 Balance at 1 January 2020 Additions - - - - - - - 5,522 5,522 - Transfer 5,562 (5,562) Remeasurement to fair value through profit or loss – unrealised (194) 140 (63) 25 - (92) Balance at 31 December 2020 34,627 3,189 1,003 441 5,499 44,759 Additions Transfer - 9,700 (14) - - - - - - - - 4,201 (9,700) - 4,201 - Disposals (1,734) (1,748) Remeasurement to fair value through profit or loss – unrealised 41 2 33 14 - 90 Balance at 31 December 2021 44,354 1,457 1,036 455 - 47,302 73 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The expenses for acquisition of investment property as at 31 December include: x advances granted for logistics system building – none (31 December 2020: BGN 5,453 thousand); advances granted for purchases of machinery and equipment – none (31 December 2020: BGN 46 x thousand). At the date of each statement of financial position, the management analyses and assesses the fair value of the group of assets in the scope of investment property. The calculations are made by the management with the support of independent licensed appraisers. Valuation techniques and significant unobservable inputs The table below shows a description of the valuation techniques used in assessing the fair value of all groups of Level 2 investment properties as well as the significant unobservable inputs used: Groups of assets (Level 2) Valuation approaches and techniques Significant unobservable inputs Warehouse premises 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. Cost approach * Adjusted prices for construction of identical properties and purchase prices of analogues of the respective type of machinery and equipment Valuation technique: Method based on the costs of construction or replacement – depreciated replacement cost (supportive valuation technique) Income approach Offices, production buildings and social sites a. Weighted rate of return Valuation technique: b. Term to entrance into rental deals Method of capitalised rental income as application of discounted cash flows (main valuation technique) Key assumptions used in the calculation of the fair value of investment properties as at 31 December 2021: x rate of return – from 7% to 8.50%; x term to entrance into rental deals – from 9 to 12 months. As a result of the calculations made in 2021, it was necessary to recognise gains on remeasurement to fair value, at the amount of BGN 90 thousand (2020: net loss of BGN 92 thousand) (Note 4). 74 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 18. INVESTMENTS IN SUBSIDIARIES The carrying amount of the investments by company is as follows: Interest 31.12.2020 Interest 31.12.2021 BGN '000 % BGN '000 % Sopharma Trading AD Sopharma Ukraine EOOD Biopharm Engineering AD Veta Pharma AD Bulgaria Ukraine Bulgaria Bulgaria Ukraine 81.34 76.17 100.00 97.15 52,428 9,669 7,111 6,754 1,283 1,183 961 502 384 323 - 43,974 9,669 7,111 6,754 1,283 1,183 961 100.00 97.15 99.98 99.98 Vitamina AD 100.00 80.00 100.00 80.00 Rap Pharma International OOD Moldova Pharmalogistica AD Sopharma Kazakhstan EOOD Electroncommerce EOOD Sopharma Warsaw EOOD Phyto Palauzovo AD Briz SIA Bulgaria Kazakhstan Bulgaria Poland 89.39 89.39 100.00 100.00 100.00 95.00 100.00 100.00 100.00 95.00 502 384 323 Bulgaria Latvia 104 100.00 - - - - 11,347 459 Sopharma Buildings REIT Momina Krepost AD Total Bulgaria Bulgaria - 40.38 60.93 - 2,755 86,809 80,598 In 2021 there are no newly established companies (in 2020, the company Pharmachim EOOD, Serbia was established). As at 31 December 2021, the composition of investments in the subsidiaries includes the investment in Sopharma Poland OOD – in liquidation, Poland, which is fully impaired (31 December 2020: fully impaired investment in Sopharma Poland OOD – in liquidation, Poland). Sopharma AD exercises direct control on the above-mentioned companies. The scope of activities of the subsidiaries and the dates of their acquisition are as follows: x x x Pharmalogistica AD – Scope of activities: secondary packaging and real estate leases. Date of acquisition – 15 August 2002. Sopharma Poland OOD – in liquidation – Scope of activities: market and public opinion research. Date of acquisition – 16 October 2003. The company is in liquidation procedures. Electroncommerce EOOD – Scope of activities: trade, transportation and packaging of radioactive materials and nuclear equipment, household electronics and electrical equipment. Date of acquisition – 9 August 2005. x x Biopharm Engineering AD – Scope of activities: manufacture and trade in solutions for infusion. Date of acquisition – 10 March 2006. Sopharma Trading AD – Scope of activities: trade in pharmaceuticals. Date of acquisition – 8 June 2006. 75 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 x Momina Krepost AD – Scope of activities: development, implementation and production of medical goods for human and veterinary medicine. Date of acquisition – 1 January 2008. In 2021 the Company sold 396,600 shares from the capital of Momina Krepost AD. The share owned by Sopharma AD as at 10 March 2021 became 37,46%. On 15 March 2021, an agreement was concluded between Sopharma AD and Medical Consumables OOD for a common policy in the management of the company by means of joint exercise of voting rights. As a result Momina Krepost AD is a joint venture investment for Sopharma AD (Note 19). Vitamina AD – Scope of activities: production and trade in pharmaceuticals. Date of acquisition – 18 January 2008. x x Sopharma Buildings REIT – Scope of activities: investment of funds, accumulated by issuance of securities, in real estate (securitisation of real estate) through purchase of title and other real rights over real estate, rent-out, lease, and/or sale. Date of acquisition – 4 August 2008. As a result of share sale in June 2021, the investment of Sopharma AD was gradually transferred into associates and other long-term equity investments (Notes 19 and Note 20). SIA Briz – Scope of activities: trade in pharmaceuticals; Date of acquisition – 10 November 2009. On 30 December 2021 Sopharma AD sold all of its interest in SIA Briz. Sopharma Warsaw EOOD – Scope of activities: market and public opinion research. Date of acquisition – 23 November 2010. x x x x x x x x Sopharma Ukraine EOOD – Scope of activities: trade in pharmaceuticals; Date of acquisition – 7 August 2012. Phyto Palauzovo AD – Scope of activities: production, collection of crops and trade in herbs and medicinal plants. Date of acquisition (as from the merger of a subsidiary) – 1 January 2014. TOO Sopharma Kazakhstan – Scope of activities: trade in pharmaceuticals. Date of acquisition – 30 September 2014. Veta Pharma AD – Scope of activities: production of medicinal, non-medicinal and other products. Date of acquisition – 11 November 2016. Rap Pharma International OOD – Scope of activities: trade in pharmaceutical products. Date of acquisition – 14 April 2017. Pharmachim EOOD – Scope of activities: consulting services. Date of incorporation: 14 April 2020. The shares of Sopharma Trading AD are traded on the stock exchange, the average monthly price of realised transactions for December 2021 being BGN 4,75 per share (December 2020: BGN 5,65). The book value per share based on accounting net assets for 2021 is BGN 3.42 (2020: BGN 3.27). 76 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The movement of investments in subsidiaries is presented below: Investments in subsidiaries 31.12.2021 BGN '000 31.12.2020 BGN '000 Acquisition cost Balance at 1 January 137,624 (12,520) (2,041) 8,472 135,049 (800) - Interest sold with loss of control Transfer to associates and joint ventures Additional interest acquired Interest sold without loss of control Balance at 31 December 3,474 (99) (18) 131,517 137,624 Impairment charged Balance at 1 January 50,815 104 47,903 2,912 Impairment charged (Note 10) Balance at 31 December Carrying amount at 31 December 50,919 80,598 50,815 86,809 Carrying amount at 1 January 86,809 87,146 Impairment of investments in subsidiaries At each reporting date, the management makes an analysis and assessment about whether indicators for impairment exist in respect of its investments in subsidiaries. The following are accepted as main indicators for impairment: significant volume reduction (over 25%) and/or termination of activities of the investee; loss of markets, clients or technological problems, reporting of losses for a longer period of time (over three years), reporting of negative net assets or assets below the registered share capital, trends of deterioration of main financial ratios as well as a decrease in market capitalisation. The calculations were made by the management with the assistance of independent certified appraisers. As a base for projected pre-tax cash flows, the Company uses financial budgets developed by the respective companies that cover a 3- to 5-year period, as well as other average-term and long-term plans and intents for their development, including projections for basic economic indicators at national level and at the level of EU/the Balkans. The key assumptions used in the calculations of recoverable amount as at 31 December 2021 are as follows: x x x x x growth rate – from 1.34% to 13.38%; growth after the projected period upon calculation of terminal value – 2.02% to 5%; interest rate (cost of debt) – from 2.88% to 10.80%; discount rate (based on WACC) – from 7.30% to 18.70%; discount rate (based on CAPM) – from 7.27% to 22.46%. 77 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The key assumptions used in the calculations have been determined specifically for each 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 assumptions of the management for impairment of investments are made through the prism of its projections and intents on the future economic benefits, which are expected from the subsidiaries, including trade and industrial experience, ensuring positions at the Bulgarian and in foreign markets, expectations for future sales, etc. The calculations are performed with the assistance of an independent certified appraiser. As a result of the assessments made in 2021, the Company found necessity to recognise impairment of particular investments in subsidiaries at the amount of BGN 104 thousand (2020: BGN 2,912 thousand) (Note 10). Net gain/(loss) on sale of investments in subsidiaries During the year the company has recognized the following results from sales of investments in subsidiaries: 2021 BGN '000 220 (11,383) (11,163) 2020 BGN '000 Gain on sale of investments in subsidiaries Loss on sale of investments in subsidiaries Net gain/(loss) on sale of investments in subsidiaries 131 - 131 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES The investments in associates are and joint ventures are as follows: Interest Interest 31.12.2021 31.12.2020 BGN '000 % % BGN '000 Sopharma Properties REIT Doverie Obedinen Holding AD Momina Krepost AD Total 43,548 9,243 1,694 32.77 24.998 37.46 - 6,062 - - 24.98 - 54,485 6,062 Doverie Obedinen Holding AD is an associate whose principal activities include acquisition, management, assessment and sale of shares in Bulgarian and foreign companies – legal entities. Sopharma Buildings REIT was an associate in the period from 7 June 2021 to 10 June 2021. Its principal activities include investment of cash raised by issue of securities in real estate (real estate securitization) by means of purchasing right of ownership and other rights over real estate, lease and/or sale. The transfer from associates to other long-term equity investments was made on 10 June 2021. 78 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 over real estate, undertaking construction and enhancements of the real estate with the goal of providing them for management, lease and/or sale. The transfer from other long-term equity investments was made on 8 December 2021. The movement in investments in associates is presented below: 31.12.2021 BGN '000 31.12.2020 BGN '000 Balance at 1 January 6,062 25,989 17,920 2,880 347 6,062 Transfer from other long-term equity investments Acquired shares in associates - - Issue of shares in associates - Transfer from investments in subsidiaries Sold shares in associates - (263) - - Transfer to other long-term equity investments Balance at 31 December (144) 52,791 6,062 The shares of Doverie Obedinen Holding are traded on the stock exchange, the average monthly price of realised transactions for December 2021 being BGN 10.36 per share (December 2020: BGN 3.24). The accounting value per share based on accounting net assets in 2021 is BGN 2.27 (2020: BGN 1.93). The shares of Sopharma Properties REIT are traded on the stock exchange, the average monthly price of realised transactions for December 2021 being BGN 6.20 per share. The accounting value per share based on accounting net assets in 2021 is BGN 3.35. Momina Krepost AD is a joint venture whose principal activities include development, implementation and production of medicinal products for human and veterinary medicine. The transfer from subsidiaries to joint ventures was made on 10 March 2021. The movement of investments in joint ventures is presented below: 31.12.2021 BGN '000 31.12.2020 BGN '000 Balance at 1 January - 1,694 1,694 - - - Transfer from investments in subsidiaries Balance at 31 December 79 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The shares of Momina Krepost AD were not traded on the stock exchange in December 2021 (December 2020: no trade). The accounting value per share based on accounting net assets in 2021 is BGN 1,97 (2020: BGN 1.99). Impairment of investments in associates and joint ventures At each reporting date, the management makes an assessment about whether indicators for impairment exist in respect of its investments in associates and joint ventures. The assessments of the management for impairment of investments are made through the prism of its projections and intents on the future economic benefits, which are expected from the associates and joint ventures, including trade and industrial experience, ensuring positions at the Bulgarian and foreign markets, expectations for future sales, etc. The calculations have been made by the management with the support of independent licensed appraisers. The key assumptions used in the calculation of the recoverable amount of associates at 31 December 2021 are: x x x growth rate – 2,39%; growth in the post-forecast period at terminal value calculation – 2.02% ; discount rate (CAMP-based) – 6.61%. The key assumptions used in the calculation of the recoverable amount of joint ventures at 31 December 2021 are: x x x x growth rate – 9,49 %; growth in the post-forecast period at terminal value calculation - 2,02 % ; interest rate /cost of debt/ - 3,80 %; discount rate (WACC-based) – 7,80 %. In 2021, there was no need identified to recognise impairment of the investments in associates and joint ventures. Loss on sale of investments in associates During the year the company has recognized a loss from sale of investments in associates, as follows: 2021 BGN '000 (60) 2020 BGN '000 Loss on sale of investments in associates - - (60) 80 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 20. OTHER LONG-TERM EQUITY INVESTMENTS The other long-term equity investments include the interest (shares) in the following companies: Interest Interest 31.12.2021 BGN '000 31.12.2020 BGN '000 % % Lavena AD 4,919 13.23 5,024 12.84 Chimimport AD 548 0.27 10.25 0.06 1.36 0.02 0.74 0.001 0.05 - 310 0.14 - Sopharma Buildings REIT Central Cooperative Bank AD Imventure 1 KDS 85 - 70 - - 50 50 1.36 0.03 0.74 0.001 0.05 3.78 0.77 0.01 0.02 0.001 Achieve Life Science Inc. – USA Ecobulpack AD 23 23 7 7 UniCredit Bulbank AD Expo Group AD 3 3 1 1 4,648 1,533 3 Sopharma Properties REIT AD Olainpharm AD - Latvia BTF Expat Bulgaria Aroma AD - - - - - - - - 4 Industrial Holding Bulgaria AD Total - 1 5,706 11,607 All of the above companies except for Olainfarm AD, Latvia, and Achieve Life Science Inc. – USA, have their seat and operations in Bulgaria. The fair value per share at 31 December is as follows: 31.12.2021 Number of Fair value peFr air value as per 31.12.2020 Number of Fair value per Equity investments Fair value as per the shares sharethe statement of financial shares share statement of financial position position BGN BGN '000 4,919 1,273,646 BGN BGN '000 Lavena AD 1,312,102 3.75 0.84 1.28 3.94 0.94 - 5,024 310 Chimimport AD 651,045 548 329,000 - Sopharma Buildings REIT Central Cooperative Bank AD Achieve Life Science Inc. – USA Sopharma Properties REIT Olainpharm AD - Latvia BTF Expat Bulgaria Aroma AD 66,627 69,934 1,796 85 - 1.01 12.64 70 23 - - - - - - - - 23 4,648 1,533 3 1,796 829,822 108,500 4,565 2,371 1,482 12.91 5.60 14.13 0.72 1.84 0.83 - - - - - - - - - - 4 1 Industrial Holding Bulgaria AD Total 5,645 11,546 81 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below presents Company's other equity investments, which are measured at fair value on a recurring basis in the separate statement of financial position: Equity investments Fair Level 1 Level 2 value 31.12.2021 BGN'000 BGN'000 BGN'000 Lavena AD 4,919 548 85 - 548 - 4,919 Chimimport AD - Sopharma Buildings REIT Central Cooperative Bank AD Achieve Life Science Inc. – USA 85 70 70 - - 23 23 Total 5,645 641 5,004 Equity investments Fair Level 1 Level 2 value 31.12.2020 BGN'000 BGN'000 BGN'000 Lavena AD 5,024 4,648 1,533 23 - 4,648 1,533 23 5,024 Sopharma Properties REIT Olainfarm AD – Latvia - - Achieve Life Science Inc. – USA - Chimimport AD Aroma AD 310 4 310 - - 4 BTF Expat Bulgaria 3 3 - - Industrial Holding Bulgaria AD 1 1 Total 11,546 6,518 5,028 82 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below shows reconciliation between the opening and closing balances of the fair values at Level 1 and Level 2: Level 1 Level 2 Total Equity investments BGN '000 BGN '000 BGN '000 Balance at 1 January 2020 Purchases 4,575 2,119 501 4,985 9,560 2,207 501 88 Issue of shares Sales - (44) - (15) (59) Deregistered capital (26) (26) Unrealised gain/(loss), net, included in other comprehensive income (Note 14) (636) (1) (637) Balance at 31 December 2020 6,518 5,028 11,546 Purchases 22,189 (25,989) - 149 - 22,338 (25,989) 144 Transfer to investments in associates Transfer from investments in associates Sales 144 (35) (2,004) (2,039) Unrealised gain/(loss), net, included in other comprehensive income (Note 14) (73) (282) (355) Balance at 31 December 2021 641 5,004 5,645 Valuation techniques and approaches The market comparables approach was applied in the Level 2 fair value measurements. The valuation technique was based on the trading multiples method. Upon preparing the fair value measurements, the Company has used the services of certified valuators. For investments not traded on equity markets, the Company has used internal assessments prepared by Company’s specialists. Upon the analysis of the companies subject to these internal assessments it has been determined that the fair value of these equity investments do not materially deviate from their carrying amounts. 83 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES The long-term receivables from related parties include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Long-term loans granted Impairment for expected credit losses Total 49,792 (97) 59,843 (118) 49,695 59,725 The long-term loans are granted to the following related parties: 31.12.2021 BGN '000 31.12.2020 BGN '000 Companies controlled by an associate 49,695 59,725 Total 49,695 59,725 The terms and conditions of the long-term loans granted to related parties are as follows: Interest % Currency Contracted amount Maturity 31.12.2021 31.12.2020 '000 BGN '000 BGN '000 BGN '000 BGN '000 including interest including interest to companies controlled by an associate BGN EUR 81,900 708 31.12.2025 3.00% 31.12.2022 3.33% 49,695 - 95 - 58,321 1,404 852 20 49,695 95 59,725 872 The movement in the allowance for impairment of receivables from related parties under long-term loans granted is as follows: 2021 2020 BGN '000 BGN '000 Balance on 1 January 118 118 Decrease in the credit loss allowance recognised in profit or loss for the year (21) - Balance at 31 December 97 118 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. 84 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 22. OTHER LONG-TERM RECEIVABLES Company's other long-term receivables include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Long-term loans granted 6,314 (6) 7,620 (12) Impairment for expected credit losses Long-term loans granted, net 6,308 3,454 (216) 3,238 - 7,608 3,605 (297) 3,308 189 Receivables under transactions in securities Impairment for expected credit losses Receivables under transactions in securities, net Receivables under a long-term rental deposit Total 9,546 11,105 The terms and conditions of the long-term loans granted to third persons are as follows: Currency Contracted Maturity Interest % 31.12.2021 31.12.2020 amount '000 BGN'000 BGN'000 BGN'000 BGN'000 Incl. Incl. interest interest EUR EUR 3,000 695 29.06.2023 12.10.2022 3.05% 3.05% 6,308 - 440 - 6,135 1,473 7,608 267 114 381 6,308 440 The movement in the allowance for impairment of receivables from third parties under long-term loans granted is as follows: 2021 BGN '000 12 2020 BGN '000 149 Balance at 1 January Decrease in the credit loss allowance recognised within profit or loss for the year (6) (137) Balance at 31 December 6 12 The long-term loans granted to third parties aim to support the financing of these companies’ operations under general strategic objectives. They are secured with pledges on securities (shares), pledged on machinery and real estate mortgage. 85 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The receivables under transactions in securities comprise receivables from sale of investments in subsidiaries and are as follows: Currency Receivables '000 Maturity 31.12.2021 BGN'000 31.12.2020 BGN'000 2,000 417 31.03.2024 22.06.2022 USD BGN 3,238 - 2,891 417 3,238 3,308 The receivable maturing on 31 March 2024 is related to the completion of certain legal actions for registration of medical product permits. The receivable maturing on 22 June 2022 at the amount of BGN 417 thousand has been reclassified as a current receivable (Note 25). The movement in the allowance for impairment of receivables under transactions in securities is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 297 268 Increase in the allowance for credit losses recognized in profit or loss for the year - 29 Decrease in the allowance for credit losses recognized in profit or loss for the year (81) - Balance at 31 December 216 297 23. INVENTORIES Company's inventories include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Materials 31,226 17,552 8,281 6,024 139 32,934 20,874 7,598 6,600 154 Finished products Work in progress Semi-finished products Goods Total 63,222 68,160 86 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Materials by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Basic materials Materials in transit Technical materials Auxiliary materials Spare parts 27,185 3,041 495 31,159 742 499 279 311 187 189 Other 39 34 Total 31,226 32,934 Basic materials by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Substances 16,296 3,859 2,327 1,640 1,202 1,059 401 17,118 4,572 3,950 1,317 1,339 1,427 948 Chemicals Ampoules Packaging materials Sanitary hygienic and dressing materials PVC and aluminium foil Herbs Incl. own production 26 2 Vials Tubes Total 288 271 113 217 27,185 31,159 The movement in herbs – own production (agricultural produce including milk whistle and yellow acacia seeds) is as follows: 2021 2020 BGN '000 BGN '000 Agricultural produce at 1 January Cost of produce yield in the year Loss on fair value measurement Used in production 2 59 (33) (2) 33 - - (31) Agricultural produce at 31 December 26 2 87 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Finished products include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Tablet dosage forms Ampoule dosage forms Ointments 10,807 2,832 1,116 906 393 314 303 295 227 187 121 51 10,634 3,642 2,147 1,167 856 Dressing products Syrups Suppositories Plasters 99 449 Sachets 406 Drops 433 Sanitary-hygienic products Haemodialysis concentrates Medical cosmetics Inhalers 266 305 76 - 352 Lyophilic products Total - 42 17,552 20,874 In 2021, the Company did not produce agricultural produce (2020: 529,270 kg of wheat and 174,920 kg of sunflower). Goods by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Foodstuffs Medicinal products Total 72 67 68 86 139 154 As at 31 December 2021 there are pledges established on Company's inventories with carrying amount of BGN 23,552 thousand as collateral under bank loans received (31 December 2020: BGN 26,874 thousand) (Note 34 and Note 40). 88 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 24. RECEIVABLES FROM RELATED PARTIES Receivables from related parties include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Receivables from subsidiaries 75,737 (1,858) 73,879 12,330 (46) 117,668 Impairment for expected credit losses (9,558) 108,110 Receivables from companies controlled by an associate 6,135 Impairment for expected credit losses (76) 12,284 1,355 (1) 6,059 Receivables from joint ventures - Impairment for expected credit losses - 1,354 189 - - Receivables from associates Total 87,706 114,169 The receivables from related parties by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Receivables under contracts with customers Impairment for expected credit losses Receivables under contracts with customers, net Commercial loans granted 69,946 (1,845) 68,101 19,205 (1) 102,760 (2,634) 100,126 19,114 (5,707) 13,407 368 Impairment for expected credit losses Commercial loans granted, net 19,204 271 Receivables under guarantor contracts and guarantees Impairment for expected credit losses Receivables under guarantor contracts and guarantees, net Receivables under a rental deposit Advances granted (59) 212 - 368 189 - - 268 Dividend receivables - 1,293 (1,293) - Impairment for expected credit losses Dividend receivables, net - - Total 87,706 114,169 The receivables under contracts with customers – related parties are interest-free and BGN 54,461 thousand of them are denominated in BGN (31 December 2020: BGN 72,972 thousand) and in EUR – BGN 13,640 thousand (31 December 2020: BGN 27,154 thousand). 89 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The receivables from a subsidiary with principal activities in the field of trade in pharmaceuticals take the most significant part and amount to BGN 54,371 thousand as at 31 December 2021 or 79,84 % of all receivables under contracts with customers - related parties (31 December 2020: BGN 72,792 thousand – 72,70%). The Company usually negotiates with its subsidiaries payment terms ranging from 45 to 270 days for receivables on sales of finished products and up to 90 days for receivables on sales of materials (incl. substances). The movement in the allowance for impairment of trade receivables from related parties is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 2,634 2,001 Increase in the credit loss allowance recognised within profit or loss for the year 1,845 2,634 Decrease in the credit loss allowance recognised within profit or loss for the year (2,634) (2,001) Balance at 31 December 1,845 2,634 The age structure of non-matured (regular) trade receivables from related parties is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 up to 30 days 11,863 23,822 25,042 1,971 19,150 25,169 22,839 5,651 from 31 to 90 days from 91 to 180 days from 181 to 365 days over 365 days 4,877 4,092 Gross amount of non-matured (regular) receivables from related parties 67,575 (1,083) 66,492 76,901 (1,156) 75,745 Impairment for expected credit losses Non-matured (regular) receivables from related parties, net 90 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The impairment for expected credit losses of non-matured (regular) trade receivables from related parties is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 up to 30 days 188 382 403 32 281 383 344 86 from 31 to 90 days from 91 to 180 days from 181 to 365 days over 365 days 78 62 Total 1,083 1,156 The age structure based on the invoice date of past due trade receivables from related parties is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 from 31 to 90 days from 91 to 180 days from 181 to 365 days over 365 days 14 365 1,669 1,935 21,441 814 1,493 499 Gross amount of past due receivables from related parties Impairment for expected credit losses 2,371 (762) 1,609 25,859 (1,478) 24,381 Past due receivables from related parties, net The Company applies the simplified approach under IFRS 9 to measure expected credit losses for trade receivables from related parties by recognizing expected lifetime losses for all trade receivables from related parties (Note 2.16). Based on that, the credit loss allowance as at 31 December is determined as follows: 31 December 2021 Regular Up to 90 days past due Over 90 days past due Over 180 days past due Over 365 days past due Total Expected average percentage of credit losses 2% 2% 12% 25% 100% Trade receivables from related parties (gross carrying amount) 67,575 (1,083) 375 (9) 859 646 491 69,946 (1,845) BGN '000 BGN '000 Expected credit loss (Impairment allowance) (100) (163) (490) 91 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 31 December 2020 Regular Up to 90 days past due Over 90 days past due Over 180 days past due Over 365 days past due Total Expected average percentage of credit losses 2% 3% 6% 39% 98% Trade receivables from related parties (gross carrying amount) BGN '000 BGN '000 76,901 (1,156) 17,936 (513) 6,846 (426) 876 201 102,760 (2,634) Expected credit loss (Impairment allowance) (343) (196) Special pledges have been established as at 31 December 2021 on receivables from related parties at the amount of BGN 60,871 thousand as collateral under bank loans received (31 December 2020: BGN 79,292 thousand) (Note 34). Loans granted to related parties by type of related party are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Subsidiaries 5,584 (1) 13,037 (5,688) 7,349 6,077 (19) Impairment for expected credit losses 5,583 12,274 - Companies controlled by an associate Impairment for expected credit losses 12,274 1,347 19,204 6,058 - Receivables from joint ventures Total 13,407 The terms and conditions of the loans granted to related parties are as follows: Currency Contracted amount '000 Maturity Interest % 31.12.2021 31.12.2020 BGN '000 BGN '000 BGN '000 BGN '000 including interest including interest to subsidiaries BGN EUR EUR BGN 14,109 390 31.12.2022 31.12.2021 31.05.2021 31.12.2021 4.10% 5,583 273 5,355 839 45 76 7 3.95% 5.00% 3.50% - - - - - - 132 266 3,050 889 10 to companies controlled by an associate BGN 10,997 4,000 190 31.12.2022 3.10% 3.33% 3.50% 8,263 4,011 - 215 11 - 6,010 - - - BGN BGN 31.12.2022 31.12.2021 - 48 to joint ventures BGN 3,500 31.12.2022 3.50% 1,347 27 - - 19,204 526 13,407 138 92 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The short-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 corporate shares and securities (shares), and pledges on receivables. The movement in the allowance for impairment of loans granted to related parties is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 5,707 2,011 Increase in the credit loss allowance recognised within profit or loss for the year - 3,793 Decrease in the credit loss allowance recognised within profit or loss for the year (5,706) (97) Balance at 31 December 1 5,707 Receivables under guarantor contracts by type of related parties are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Subsidiaries 262 (58) 204 9 368 Impairment for expected credit losses - 368 - Joint ventures Impairment for expected credit losses (1) 8 - - Total 212 368 Receivables under guarantor contracts are interest-free, of which BGN 73 thousand are denominated in BGN (31 December 2020: BGN 283 thousand), and BGN 139 thousand – in EUR (31 December 2020: BGN 85 thousand). The movement in the allowance for impairment of receivables under guarantor contracts from related parties is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January - - Increase in the credit loss allowance recognized within profit or loss for the year 59 - Balance at 31 December 59 - 93 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The movement in the allowance for impairment of dividend receivables from related parties is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 1,293 - Increase in the credit loss allowance recognized within profit or loss for the year - 1,293 Decrease in the credit loss allowance recognized within profit or loss for the year (1,293) - Balance at 31 December - 1,293 25. TRADE RECEIVABLES Trade receivables include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Receivables under contracts with customers Impairment for expected credit losses Receivables under contracts with customers, net Receivables under cession agreement Receivables under transactions in securities Advances granted 22,199 (1,873) 20,326 4,890 417 19,535 (1,692) 17,843 - - 998 539 Total 26,631 18,382 The receivables under contracts with customers are interest-free and BGN 448 thousand of them are denominated in BGN (31 December 2020: BGN 895 thousand), in EUR – BGN 16,126 thousand (31 December 2020: BGN 14,753 thousand), in USD – BGN 3,752 thousand (31 December 2020: BGN 2,193 thousand), and in other currencies – none (31 December 2020: BGN 2 thousand). One main counterpart of the Company is accountable for about 57,19% of the receivables from clients (2020: one main counterpart accountable for 66,59%). The Company usually agrees with its clients payment terms from 30 to 180 days for receivables under sales except for the cases when new markets and products are being developed and new trade counterparts are being attracted. 94 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The movement in the allowance for impairment of trade receivables from third parties is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 1,692 1,487 Increase in the credit loss allowance recognised within profit or loss for the year 1,873 1,692 Decrease in the credit loss allowance recognised within profit or loss for the year (1,692) - (1,496) 9 Transfer from other long-term receivables Balance at 31 December 1,873 1,692 The age structure of non-matured (regular) trade receivables is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 up to 30 days from 31 to 90 days from 91 to 180 days 6,943 12,160 657 5,582 10,919 515 from 181 to 365 days 110 - over 365 days - 394 Gross amount of non-matured (regular) trade receivables Impairment for expected credit losses 19,870 (180) 17,410 (194) Non-matured (regular) trade receivables, net 19,690 17,216 The impairment for expected credit losses of non-matured (regular) trade receivables is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 up to 30 days 63 110 6 57 126 6 from 31 to 90 days from 91 to 180 days from 181 to 365 days over 365 days 1 - - 5 Total 180 194 95 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The age structure based on the invoice date of past due trade receivables is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 from 31 to 90 days from 91 to 180 days 153 108 267 157 from 181 to 365 days 360 313 over 365 days 1,708 2,329 (1,693) 636 1,388 2,125 (1,498) 627 Gross amount of past due trade receivables Impairment for expected credit losses Past due trade receivables, net The Company applies the simplified approach under IFRS 9 to measure expected credit losses for trade receivables by recognizing expected lifetime losses for all trade receivables (Note 2.16). Based on this, the loss allowance as at 31 December is determined as follows: Over 90 days past due Over 180 days past due Over 365 days past due 31 December 2021 Up to 90 Regular days past due Total Expected average percentage of credit losses 1% 3% 34% 94 85% 518 100% 1,211 Trade receivables (gross carrying amount) 19,870 506 22,199 (1,873) BGN '000 BGN '000 Expected credit loss (Impairment allowance) (180) (14) (32) (442) (1,205) Over 90 days past due Over 180 days past due Over 365 days past due 31 December 2020 Up to 90 Regular days past due Total Expected average percentage of credit losses 1% 5% 51% 278 75% 173 98% Trade receivables (gross carrying amount) 17,410 451 1,223 19,535 (1,692) BGN '000 BGN '000 Expected credit loss (Impairment allowance) (194) (21) (143) (130) (1,204) As at 31 December 2021, special pledges have been established as collateral of bank loans received on trade receivables at the amount of BGN 11,735 thousand (31 December 2020: BGN 11,735 thousand) (Note 34 and Note 40). 96 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The receivables under cession agreements are denominated in EUR, interest-free, with maturity on 31 December 2022. The receivables under transactions in securities are denominated in BGN, interest-free, and constitute receivable for an investment in subsidiary sold, with maturity 22 June 2022. They are secured by means of a pledge on two trademarks and pledge on packaging design. The advances granted to suppliers as at 31 December are for the purchase of: 31.12.2021 BGN '000 31.12.2020 BGN '000 Inventories Services Total 824 174 998 403 136 539 The advances granted are regular. They include: in BGN – BGN 504 thousand (31 December 2020: BGN 298 thousand), in EUR – BGN 54 thousand (31 December 2020: BGN 57 thousand), in USD: BGN 399 thousand (31 December 2020: BGN 161 thousand), and in other currencies – BGN 41 thousand (31 December 2020: BGN 23 thousand). 26(A). LOANS GRANTED TO THIRD PARTIES The loans granted to third parties are as follows: 31.12.2021 BGN '000 1,804 31.12.2020 BGN '000 3,903 Commercial loans granted Total 1,804 3,903 The loans granted to third parties are intended to provide support for financing of activities, performed by these entities under common strategic objectives. They are secured through pledges on securities (shares) and pledges on receivables. The terms and conditions under which loans are granted to third parties are as follows: Currency Contracted amount '000 Maturity Interest % 31.12.2021 31.12.2020 BGN '000 BGN '000 BGN’000 BGN'000 including interest including interest EUR BGN BGN BGN BGN 695 4,184 949 12.10.2022 31.12.2022 31.12.2022 31.12.2021 31.12.2021 3.05% 4.30% 4.70% 4.50% 2.55% 1,527 168 - 199 - - 187 - 90 - 103 1 - 832 - - - - 443 4,511 3,158 3,903 2 3 1,804 168 97 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 26(B). OTHER RECEIVABLES AND PREPAYMENTS Other receivables and prepayments include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Taxes refundable 5,938 1,054 200 117 148 (148) - 4,910 747 3 Prepayments Funds provided to an investment intermediary Receivables under deposits granted as guarantees Awarded receivables 131 20 Impairment for expected credit losses on awarded receivables Awarded receivables, net Funds provided for dividend payment Dividend receivables (20) - - 40 - 180 46 Other 63 Total 7,372 6,057 Taxes refundable include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Excise duties Corporate tax VAT 4,433 1,222 283 4,910 - - Total 5,938 4,910 Prepayments include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Subscriptions Insurances Licence and patent fees Rentals 631 258 123 16 394 258 66 16 Vouchers 15 2 Other 11 11 Total 1,054 747 98 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Deposits placed as guarantees include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Guarantees under contracts for fuel supply Guarantees under supply of medicinal products Guarantees under contracts for rental Guarantees under construction contracts Guarantees under contracts for electricity supply Guarantees under insurance contracts Other 80 14 14 4 81 15 13 4 3 3 1 1 1 14 131 Total 117 The movement in the allowance for impairment of court and awarded receivables is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 20 5 Increase in the credit loss allowance recognised within profit or loss for the year 128 15 Balance at 31 December 148 20 27. CASH AND CASH EQUIVALENTS Cash includes: 31.12.2021 BGN '000 31.12.2020 BGN '000 Cash at current bank accounts Cash in hand 15,510 81 3,668 84 Blocked cash under issued bank guarantees Cash and cash equivalents 27 24 15,618 3,776 Cash structure at current bank accounts is as follows: in BGN: BGN 13,746 thousand (31 December 2020: BGN 1,819 thousand), in EUR – BGN 1,377 thousand (31 December 2020: BGN 1,541 thousand), in USD – BGN 324 thousand (31 December 2020: BGN 281 thousand) and in other currency – BGN 63 thousand (31 December 2020: BGN 27 thousand). Cash in hand is denominated in: BGN - BGN 81 thousand (31 December 2020: BGN 83 thousand), and other currencies: none (31 December 2020: BGN 1 thousand). The cash blocked under bank guarantees issued is: in BGN – BGN 20 thousand (31 December 2020: BGN 23 thousand), and in EUR – BGN 7 thousand (31 December 2020: BGN 1 thousand). 99 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 As a result of the analyses made and the methodology applied to calculate expected credit losses for cash and cash equivalents, the management has determined that no impairment is necessary of cash and cash equivalents. Therefore, the Company has not recognised an allowance for impairment of expected credit losses on cash and cash equivalents as at 31 December 2021. 28. EQUITY Share capital As at 31 December 2021, 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 number BGN '000 Balance at 1 January 2020 Treasury shares sold 125,684,432 253,748 (151,748) - 100,656 949 Treasury shares purchased Expenses for treasury shares purchase Balance at 31 December 2020 (461) (2) 125,786,432 101,142 Treasury shares purchased (4,043,533) - (16,546) (82) Expenses for treasury shares purchase Balance at 31 December 2021 121,742,899 84,514 The table below presents the paid in joint-stock capital of the Company at 31 December: 31.12.2021 BGN '000 31.12.2020 BGN '000 Share capital (registered), nominal Share premium 134,798 8,785 134,798 8,785 Total paid capital 143,583 143,583 Company's shares are ordinary, non-cash, with right of dividend and liquidation share and are registered for trade at the Bulgarian Stock Exchange – Sofia AD and Warsaw Stock Exchange. The treasury shares are 13,055,000 at the amount of BGN 50,284 thousand as at 31 December 2021 (31 December 2020: 9,011,467 shares at the amount of BGN 33,656 thousand). The number of shares purchased in the current year is 4,043,533 (2020: 151,748 shares) and there are no shares sold (2020: number of shares sold: 253,748). 100 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Company's reserves are summarised in the table below: 31.12.2021 BGN '000 31.12.2020 BGN '000 Statutory reserves 66,201 28,614 63,335 21,594 Property, plant and equipment revaluation reserve Reserve for financial assets at fair value through other comprehensive income 1,644 342,581 439,040 2,282 321,596 408,807 Additional reserves Total Statutory reserves at the amount of BGN 66,201 thousand (31 December 2020: BGN 63,335 thousand) represent the Reserve Fund, which is set aside under a requirement of the Commercial Act and Company's Articles of Association, and includes two components: (a) amounts from distribution of profit for the Reserve Fund – BGN 57,416 thousand (31 December 2020: BGN 54,550 thousand), and (b) share premium representing the excess of the issue value over the nominal value of the issued shares on the merger of a subsidiaries into Sopharma AD – BGN 8,785 thousand (31 December 2020: BGN 8,785 thousand). The movements of statutory reserves are as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January Distribution of profit 63,335 2,866 59,297 4,038 Balance at 31 December 66,201 63,335 The property, plant and equipment revaluation reserve, amounting to BGN 28,614 thousand (31 December 2020: BGN 21,594 thousand), is set aside from the surplus between the carrying amount of property, plant and equipment and their fair value at the date of the respective revaluation. The deferred tax effect on the revaluation reserve is directly carried to this reserve. The movements of property, plant and equipment revaluation reserve are as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 21,594 8,298 (448) 22,040 (41) Gain/(Loss) on revaluation of property, plant and equipment, net Transfer to retained earnings (409) 4 Deferred tax relating to revaluations Balance at 31 December (830) 28,614 21,594 101 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The reserve of financial assets at fair value through other comprehensive income, amounting to BGN 1,644 thousand (31 December 2020: BGN 2,282 thousand) is formed of the effects of fair-value measurement of other long-term equity investments. Upon derecognition of these investments, the reserve formed is transferred to “retained earnings”. The movements of the reserve of financial assets at fair value through other comprehensive income are as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 2,282 2,873 Net change in the fair value of other long-term equity investments (355) (637) Transfer to retained earnings (283) 46 Balance at 31 December 1,644 2,282 Additional reserves at the amount of BGN 342,581 thousand (31 December 2020: BGN 321,596 thousand) are set aside from distribution of profits under a decision of shareholders and can be used for payment of dividend, share capital increase as well as to cover losses. The movements of additional reserves are as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 321,596 20,985 298,339 23,257 Distributed profit in the year Balance at 31 December 342,581 321,596 Other equity components (warrant issue) Pursuant to Art. 25 of the Company’s Statute dated 21 May 2021, the Board of Directors approves the parameters and takes a decision for issuing upon initial public offering of warrants. By means of Decision No 804 – Е dated 4 November 2011, the Financial Supervision Commission registered an issue of 44 932 633 dematerialised, freely transferrable and registered warrants, with issue value BGN 0.28, issued by Sopharma AD pursuant to Art. 112 b, ph. 11 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-year period, at a fixed price of BGN 4.13 per share. The exercise right arises from the date on which the warrant issue is registered with Central Depository AD – 16 November 2021. 102 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The warrants are admitted to trade on the main BSE market of Bulgarian Stock Exchange – Sofia AD, as from 17 November 2021. The funds raised from the warrant issue, at the amount of BGN 12,512 thousand, are presented as other equity component in the statement of financial position, net of issue costs. 31.12.2021 BGN '000 31.12.2020 BGN '000 Warrants’ issue value Transaction costs 12,579 (67) - - - Other equity components 12,512 Basic net earnings per share 31.12.2021 31.12.2020 Weighted average number of shares Net profit for the year (BGN '000) Basic net earnings per share (BGN) 125,368,350 24,271 125,754,274 28,664 0.19 0.23 As at 31 December 2021, retained earnings amount to BGN 28,137 thousand (31.12.2020: BGN 27,039 thousand). The movement in retained earnings is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 27,039 39,439 Net profit for the year 24,271 28,664 Transfer from revaluation reserve of financial assets at fair value through other comprehensive income 283 (46) 409 Transfer from revaluation reserve of property, plant and equipment Profit distribution to reserves 448 (23,851) (27,295) (158) Actuarial losses on remeasurement (53) Dividend distribution from 2019 profit Advance dividend distribution from 2020 profit Effect from treasury shares sold - (8,798) (5,032) (144) - - Balance at 31 December 28,137 27,039 103 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 29. LONG-TERM BANK LOANS Long-term bank loans include: 31.12.2021 Current 31.12.2020 Current Currency Maturity Non- current portion Total Non- current portion Total Contracted loan portion portion amount '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Extended credit lines EUR Investment-purpose loans 31.08.2023 10,000 6,750 - 6,750 - - - AZN AZN AZN EUR 27 23 18.05.2023 15.04.2022 16.03.2021 15.04.2021 - - - - - - - 14 1 7 5 21 6 - - 35 - - - - - 3 3 32,000 - 2,389 2,404 2,389 2,419 6,750 6,750 15 The loans received in Euro are contracted at interest rate based on one-month EURIBOR plus a mark-up of 1.1 points, but not less than 1.1 points (2020: three-month EURIBOR plus a mark-up of up to 1.7 points but not less than 1.7 points and fixed interest rate at the amount of 22% to 24.10%). The following are established as collateral under the loans payable: x Mortgages of real estate with a carrying amount of BGN 10,075 thousand as at 31 December 2021 (31 December 2020: BGN 35,810 thousand) (Note 15); x Special pledges on machinery and equipment with a carrying amount of BGN 12,890 thousand as at 31 December 2021 (31 December 2020: BGN 13,818 thousand) (Note 15). The long-term bank loan contracts include clauses with covenants for maintaining certain financial ratios. Company's management continuously monitors the observance of these financial ratios in communication with the respective creditor bank. Reconciliation of the movement of liabilities from financing activities The table below shows the changes in the liabilities from financing activities, representing both cash and non- cash changes. Liabilities from financial liabilities are those for which cash flows are or future cash flows will be classified in the Company’s statement of cash flows as cash flows from financing activities. 104 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Changes in cash flows from financing activities Newly arising liabilities over the year Other non- cash changes 01.01.2021 31.12.2021 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Bank loans 75,754 (22,353) - - - 12 587 53,413 587 Lease liabilities to related parties - Lease liabilities to third parties Dividends and unexercised warrant rights 3,434 (1,900) 299 (635) 1,198 325 (22) 14 (48) 269 Total 79,513 (24,275) 313 (84) 55,467 Treasury shares (33,656) - (16,628) 12,512 - - - - (50,284) 12,512 Reserve for warrants issued Net cash flows from financing activities 45,857 (28,391) 313 (84) 17,695 Changes in cash flows from financing Newly arising liabilities over the year Other non- cash changes 01.01.2020 activities 31.12.2020 BGN'000 BGN'000 (34,213) - BGN'000 BGN'000 BGN'000 Bank loans 109,938 28 1 75,754 - Lease liabilities to related parties Lease liabilities to third parties Dividends 2,609 1,677 - 1,223 (2,609) 2,462 (2) (1,928) (19,944) (56,085) 3,434 325 6,441 13,830 15,081 Total 120,665 (148) 79,513 Treasury shares (34,142) 342 - 144 (33,656) Net cash flows from financing activities 86,523 (55,743) 15,081 (4) 45,857 105 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 30. DEFERRED TAX LIABILITIES Deferred income taxes as at 31 December are related to the following items of the statement of financial position: Deferred tax (liabilities)/ assets temporary difference tax temporary difference tax 31.12.2021 31.12.2021 31.12.2020 31.12.2020 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment including revaluation reserve Investment property 69,204 27,632 11,102 511 6,920 2,763 1,110 51 67,427 19,828 10,034 516 6,743 1,983 1,003 52 including revaluation reserve Intangible assets 618 62 1,027 103 Total deferred tax liabilities 80,924 8,092 78,488 7,849 Payables to personnel Receivables (8,242) (4,358) (3,332) (1,096) (17,028) (824) (436) (8,179) (11,889) (4,073) (772) (818) (1,189) (407) Inventories (333) Accrued liabilities Total deferred tax assets (110) (77) (1,703) (24,913) (2,491) Deferred income tax liabilities, net 63,896 6,389 53,575 5,358 On recognising deferred tax assets, the probability of a reversal of the individual differences and the abilities of the Company to generate sufficient taxable profit in the future, had been taken into account. The change in the balance of deferred taxes for 2021 is as follows: Deferred tax (liabilities)/ assets Balance at 1 January 2021 Recognised in the statement of Recognised in equity Recognised in the statement of changes in equity and the current tax return Balance at 31 December 2021 comprehensive income BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment (6,743) (1,003) (103) 818 609 (107) 41 (830) 44 - - (6,920) (1,110) (62) Investment property Intangible assets Payables to personnel - - 6 - - 824 Receivables 1,189 407 (753) (74) 33 - - 436 Inventories - - - 333 Accrued liabilities 77 - 110 Total (5,358) (245) (830) 44 (6,389) 106 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The change in the balance of deferred taxes for 2020 is as follows: Deferred tax (liabilities)/ assets Balance at 1 January 2020 Recognised in the statement of Recognised in equity Recognised in the statement of changes in equity and the current tax return Balance at 31 December 2020 comprehensive income BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment (6,939) (881) (209) 786 144 (122) 106 32 4 - - - - - - - 48 - - (6,743) (1,003) (103) 818 Investment property Intangible assets Payables to personnel - Receivables Inventories Accrued liabilities Cash 618 571 81 - 1,189 407 326 - 73 4 - 77 17 (17) - - Total (6,209) 799 4 48 (5,358) 31. GOVERNMENT GRANTS The government grants are under concluded contracts with the Bulgarian Small and Medium Enterprises Promotion Agency for gratuitous financial aid under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007-2013 and Operational Programme "Energy Efficiency". The table below presents the non-current and the current portion of the grants received by type: 31.12.2021 31.12.2020 Current Non-current portion Current portion BGN '000 BGN '000 Total Non-current portion Total portion BGN '000 BGN '000 BGN '000 BGN '000 Acquisition of machinery and equipment for a new tablets production line 2,100 179 2,279 2,279 179 2,458 Implementation of innovative products in the production of ampoule dosage forms Acquisition of non-current assets and building reconstruction 1,500 296 200 8 1,700 304 1,700 304 200 8 1,900 312 Acquisition of combined exchange ventilation and air conditioning installation Implementation of innovative “artificial tears” eye drops production 74 37 9 83 61 83 61 9 92 85 24 24 Acquisition of machinery and equipment for technological renovation and modernisation of tablet production - - - - 10 10 Total 4,007 420 4,427 4,427 430 4,857 107 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The current portion of the financing will be recognised as current income over the following 12 months from the date of the separate statement of financial position and is presented as 'other current liabilities' (Note 39). 32. LEASE LIABILITIES TO THIRD PARTIES The lease liabilities to third parties included in the statement of financial position are stated net of the future interest due, as follows: Term 31.12.2021 BGN '000 31.12.2020 BGN '000 Up to one year Over one year Total 702 496 1,901 1,533 3,434 1,198 Minimum lease payments to third parties are due, as follows: Term 31.12.2021 BGN '000 31.12.2020 BGN '000 Up to one year Over one year 775 624 1,965 1,617 3,582 (148) 1,399 (201) Future finance costs on leases Present value of lease liabilities 1,198 3,434 The table below presents liabilities per types of leases to third parties: 31.12.2021 31.12.2020 Short-term portion Long-term portion Short-term portion Total Long-term portion Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Leases of motor vehicles Leases of buildings Leases of land 413 79 4 582 97 5 995 176 9 777 717 19 703 1,129 7 1,480 1,846 26 Leases of apparatuses - 18 18 20 62 82 Total 496 702 1,198 1,533 1,901 3,434 108 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The lease liabilities to third parties in BGN amount to BGN 60 thousand (31 December 2020: BGN 107 thousand), in EUR – BGN 901 thousand (31 December 2020: BGN 3,107 thousand), in USD – BGN 143 thousand (31 December 2020: BGN 152 thousand), and in other currencies – BGN 94 thousand (31 December 2020: BGN 68 thousand). The lease payments due over the next 12 months are presented in the statement of financial position as “other current payables” (Note 39). 33. RETIREMENT BENEFIT OBLIGATIONS Long-term payables to personnel include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Long-term retirement benefit obligations Long-term benefit obligations for tantieme Total 4,532 262 4,478 280 4,794 4,758 Long-term retirement benefit obligations The long-term retirement benefit obligations to personnel include the present value of Company's liability at the date of the statement of financial position to pay indemnities to individuals of its employees upon coming of age for retirement. In accordance with the Labour Code in Bulgaria, every employee is entitled to an indemnity on retirement at the amount of two gross monthly salaries, and if he or she has worked for the same employer during the last 10 years of their service the indemnity amounts to six gross monthly salaries at the time of retirement. This is a defined benefits plan (Note 2.23). For the purpose of establishing the amount of these obligations to personnel, the Company has assigned an actuarial valuation as at 31 December 2021 by using the services of a certified actuary. Movements in the present value of retirement benefit obligations to personnel are as follows: 2021 2020 BGN '000 BGN '000 Present value of the obligation at 1 January Current service cost 4,478 473 23 4,345 509 Interest cost 27 Net actuarial (gain)/loss recognised for the period Payments made in the year (9) (17) (544) 158 (486) 53 Remeasurement gains/losses on the retirement benefit obligations, incl.: Actuarial (gains)/losses arising from changes in demographic assumptions Actuarial (gains)/losses arising from changes in financial assumptions (1) (31) 85 4 28 Actuarial losses arising from past experience adjustments 126 Present value of the obligation at 31 December 4,532 4,478 109 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The amounts related to long-term retirement benefits obligations to personnel accrued in the statement of comprehensive income are as follows: 2021 2020 BGN '000 BGN '000 Current service cost 473 23 509 27 Interest cost Net actuarial (gain)/loss recognised for the period Components of defined benefit plan costs recognised in profit or loss (Note 7) (9) (17) 487 519 Remeasurement gains or losses on the retirement benefit obligations, including: Actuarial (gains)/losses arising from changes in demographic assumptions (1) (31) 85 4 28 Actuarial (gains)/losses arising from changes in financial assumptions Actuarial losses arising from past experience adjustments Components of defined benefit plans cost recognised in other comprehensive income (Note 14) 126 53 158 677 Total 540 The following actuarial assumptions were used in calculating the present value of the liabilities as at 31 December 2021: x The discount factor is calculated by using as basis of 0.6% (2020: 0.5%). The assumption is based on yield data for long-term government securities with 10-year maturity; x The assumption for the future level of the salaries is based on the information provided by the Company's management and amounts to 5% annual growth compared to the prior reporting period (2020: 5%); x Mortality rate – in accordance with the table issued by the National Statistics Institute for the total mortality rate of the population in Bulgaria for the period 2018-2020 (2020: 2017 - 2019); Staff turnover rate – from 1% to 16% for the five age groups formed (2020: between 0% and 16%); Early retirement due to illness – between 0.03% and 0.32% for the five age groups formed (2020: between 0.03% and 0.32%). x x This defined benefit plan exposes the Company to the following risks: investment risk, interest risk, longevity risk and salary growth related risk. The Company's management defines them as follows: x investment risk – as far as this is unfunded plan, the Company 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; 110 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 x x interest risk – any decrease 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 x 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: a. salary growth b. discount rate c. staff turnover rate on the expenses for current service cost and interest, and respectively on the present value of the obligation for payment of defined retirement benefits, are assessed as follows: x Impact on the present value of the obligation: 2021 2020 Increase Decrease Increase Decrease BGN '000 BGN '000 BGN '000 BGN '000 Change in salary growth Change in discount rate Change in staff turnover rate 351 (318) (343) (313) 365 353 (320) (343) (314) 368 389 390 x Impact on the current service cost and interest expenses 2021 2020 Increase Decrease Increase Decrease BGN '000 BGN '000 BGN '000 BGN '000 Change in salary growth Change in discount rate Change in staff turnover rate 44 (2) (39) 4 46 - (40) 1 (43) 49 (44) 51 111 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 BGN '000 Poor health retirement BGN '000 Total BGN '000 Payments in 2022 732 304 16 15 15 15 14 75 748 319 Payments in 2023 Payments in 2024 Payments in 2025 Payments in 2026 369 384 384 399 340 2,129 354 2,204 The average weighted duration of defined benefit obligations is 7.5 years (31 December 2020: 7.6 years). Long-term obligations for tantieme are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Long-term benefit obligations for tantieme with maturity in 2023 Long-term benefit obligations for tantieme with maturity in 2024 Long-term benefit obligations for tantieme with maturity in 2022 Total 154 108 - 154 - 126 280 262 34. SHORT-TERM BANK LOANS Short-term bank loans include: Currency Contracted amount '000 Maturity 31.12.2021 31.12.2020 BGN '000 BGN '000 Extended bank loans (overdrafts) BGN BGN BGN EUR BGN BGN 20,000 9,779 31.05.2022 19,967 4,966 9,518 01.06.2022 31.07.2022 31.10.2022 31.07.2021 31.07.2022 9,759 20,000 10,000 20,000 5,000 5,476 4,937 - 10,047 19,987 4,968 - - 35,202 54,423 Extended credit lines BGN EUR 20,000 10,000 31.01.2022 31.08.2021 11,461 - 17,613 1,299 11,461 18,912 Total 46,663 73,335 112 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The bank loans received in EUR have been contracted at interest rate based on one-month EURIBOR plus a mark-up of 1.5 points, and for those in BGN – from 1.3% to 1.45%, and average deposit index plus 1 point (2020: for loans in EUR - 1-month EURIBOR plus a mark-up of 1.3 points, but not less than 1.3 points and 1-month EURIBOR plus a mark-up of 1.5 points, and those in Bulgarian Levs – from 1.3% to 1.45%, and average deposit index plus 1 point). The loans are for working capital. As at 31 December 2020 a portion of the loans drawn at the amount of BGN 23 thousand are in the form of bank guarantees in favour of the National Health Insurance Fund (NHIF) and suppliers for covering obligations. The following collateral has been established in favour of the creditor banks: x Mortgages of real estate with carrying amount of BGN 18,801 thousand as at 31 December 2021 (31 December 2020: BGN 28,617 thousand) (Note 15 and Note 17); Special pledges on: x - - - - - machinery and equipment with carrying amount of BGN 14,606 thousand as at 31 December 2021 (31 December 2020: BGN 15,871 thousand) (Note 15 and Note 17); inventories with carrying amount of BGN 23,552 thousand as at 31 December 2021 (31 December 2020: BGN 26,874 thousand) (Note 23); receivables from related parties with carrying amount of BGN 60,871 thousand as at 31 December 2021 (31 December 2020: BGN 79,292 thousand) (Note 24); trade receivables with carrying amount of BGN 11,735 thousand as at 31 December 2021 (31 December 2020: BGN 11,735 thousand) (Note 25); trade receivables from third parties of a subsidiary with carrying amount of BGN 7,823 thousand as at 31 December 2021 (31 December 2020: BGN 7,823 thousand). The short-term bank loan contracts include clauses with covenants for maintaining certain financial ratios. Company's management continuously monitors the observance of these financial ratios in communication with the respective creditor bank. 35. TRADE PAYABLES Trade payables include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables to suppliers Advances received Total 12,033 638 7,016 202 12,671 7,218 113 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Payables to suppliers by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables for supply of inventories Payables for supply of services Payables for supply for non-current assets Total 6,882 4,085 3,726 2,901 389 1,066 12,033 7,016 Payables to suppliers are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables to foreign suppliers Payables to local suppliers Total 6,723 5,310 4,241 2,775 7,016 12,033 The payables to suppliers are regular and interest-free. The payables in BGN amount to BGN 5,002 thousand (31 December 2020: BGN 2,379 thousand), in EUR – BGN 4,044 thousand (31 December 2020: BGN 2,433 thousand), in USD – BGN 2,980 thousand (31 December 2020: BGN 2,202 thousand), and in other currencies – BGN 7 thousand (31 December 2020: BGN 2 thousand). The common credit period for which no interest is charged on trade payables, is 180 days. The Company has no past due trade payables. The advances from clients are for purchases of: 31.12.2021 BGN '000 31.12.2020 BGN '000 Finished products Services 604 34 202 - Total 638 202 The advances from clients as at 31 December are current. Of them, BGN 38 thousand (31 December 2020: BGN 43 thousand) are denominated in BGN, BGN 600 thousand are denominated in EUR (31 December 2020: BGN 158 thousand) and none are denominated in USD (31 December 2020: BGN 1 thousand). The Company has provided deposits and bank guarantees as security for payables to suppliers under commercial transactions at the amount of BGN 144 thousand (31 December 2020: 343 thousand) (Note 22, 26b, Note 27 and Note 35). 114 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 36. PAYABLES TO RELATED PARTIES The payables to related parties refer to: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables to companies related through key management personnel 830 605 1,144 - Payables to associates Payables to companies related through a shareholder entities with significant influence Payables to subsidiaries 97 69 89 40 Payables to companies controlled by an associate Total 8 - 1,609 1,273 The payables to related parties by type are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables for supply of inventories Payables under leases Service supply 847 587 1,144 - 175 129 1,273 Total 1,609 The payables under leases from related parties originated in relation to lease of buildings and are stated net of future interest due, as follows: Term 31.12.2021 BGN '000 31.12.2020 BGN '000 Up to one year 587 - Total 587 - 115 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The minimum lease payments to related parties are due, as follows: Term 31.12.2021 BGN '000 31.12.2020 BGN '000 Up to one year 612 612 (25) - - - Future finance cost for leases Present value of lease liabilities to related parties 587 - The trade payables to related parties are current. The payables in Bulgarian Levs amount to BGN 953 thousand (31 December 2020: BGN 1,233 thousand), in EUR – BGN 647 thousand (31 December 2020: BGN 36 thousand), and in PLN – BGN 9 thousand (31 December 2020: BGN 4 thousand). The common credit period, for which no interest is charged on trade payables to related parties, is 90 days. The Company has no overdue trade payables to related parties. The term of leases to related parties is until 1 August 2022. The Company has placed a deposit as security for leases as collateral of payables thereunder, at the amount of BGN 189 thousand (31 December 2020: none) (Note 24). 37. TAX PAYABLES Tax payables include: 31.12.2021 BGN '000 31.12.2020 BGN '000 Taxes on expenses Personnel income tax Value Added Tax Corporate income tax Total 401 299 - 372 489 825 - 406 700 2,092 The following tax audits have been carried out of the Company and of the subsidiaries merged into it: Sopharma AD: x x x under VAT Act – until 31 December 2011; full-scope tax audit – until 31 December 2011; National Social Security Institute – until 30 September 2013. 116 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Bulgarian Rose Sevtopolis (transforming company) x x x under VAT Act – until 31 December 2014; full-scope tax audit – until 31 December 2013; National Social Security Institute – until 31 December 2013. Medica AD (transforming company) x x x under VAT Act – until 31 January 2013; full-scope tax audit – until 31 December 2002; National Social Security Institute – until 31 January 2016. Unipharm AD (transforming company) x x x under VAT Act – until 31 August 2018; full-scope tax audit – until 31 December 2017; National Social Security Institute – until 31 December 2017. Tax audit 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 finally the tax liability of the respective company-tax liable entity except in the cases explicitly stated by law. 38. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY Payables to personnel and for social security are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Payables to personnel, including: Tantieme 6,846 3,396 1,815 1,635 1,188 902 6,329 3,369 1,457 1,503 1,178 916 current liabilities accruals on unused compensated leaves Payables for social security/health insurance, including: current liabilities accruals on unused compensated leaves Total 286 262 8,034 7,507 117 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 39. OTHER CURRENT LIABILITIES Other current liabilities are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Lease liabilities to third parties (Note 32) Provision for financial guarantees granted (Note 2.26) Refund obligations under contracts with customers (Note 2.5.6) Government grants (Note 31) 702 666 630 420 269 85 1,901 427 - 430 325 44 Dividend payables Deductions from work salaries Refund obligations under exercised warrant rights Liabilities under deposits received as guarantees Awarded amounts under litigations Other 6 - 1 1 - 302 - 4 Total 2,783 3,430 The provision for financial guarantees granted, at the amount of BGN 666 thousand (31 December 2020: BGN 427 thousand), arises as a result of commitment undertaken by the Company to perform payments for a debtor which fails to make payment in accordance with a debt instrument (Note 2.26). The movement in the provision for financial guarantees is as follows: 2021 2020 BGN '000 BGN '000 Balance at 1 January 427 381 Increase in provision for financial guarantees recognised within profit or loss for the year 312 249 Decrease in provision for financial guarantees recognised within profit or loss for the year (73) (203) Balance at 31 December 666 427 The commitments undertaken by the Company to make certain payments for a debtor that did not make payment in accordance with a debt instrument are as follows: 2021 2020 BGN '000 BGN '000 Commitments to banks – creditors of debt instruments to related parties 664 426 Commitments to banks – creditors of debt instruments to third parties 2 1 Total 666 427 118 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 40. CONTINGENT LIABILITIES AND COMMITMENTS Significant irrevocable agreements and commitments The Company received government grants under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007 – 2013 and Operational Programme "Energy Efficiency" (Note 31 and Note 39), related to acquisition of non-current assets, buildings reconstruction and technological renovation and modernisation of tablet production facilities and implementation of innovative products in the ampoule production section and the acquisition of combined exchanger installations for ventilation and air conditioning in the production of medical products and implementation of innovative “artificial tears” eye drops (Note 15). 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. 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. Surety and issued guarantees The Company has provided the following collateral in favour of banks under loans received by related parties: (a) under loans of subsidiaries: x Mortgages of real estate with a carrying amount of BGN 43,844 thousand as at 31 December 2021 (31 December 2020: BGN 9,578 thousand) (Note 15); x Special pledges on: - machinery and equipment with a carrying amount of BGN 12,890 thousand as at 31 December 2021 (31 December 2020: BGN 22,283 thousand) (Note 15); - inventories with a carrying amount of BGN 17,000 thousand as at 31 December 2021 (31 December 2020: BGN 17,000 thousand) (Note 23); - trade receivables with a carrying amount of BGN 11,735 thousand as at 31 December 2021 (31 December 2020: BGN 11,735 thousand) (Note 25). (b) under loans to associates x Mortgage of real estate with a carrying amount of BGN 14,876 as at 31 December 2021 (31 December 2020: BGN 14,910 thousand) (Note 15). 119 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company is a co-debtor and guarantor of loans received, bank guarantees issued and leases of the following companies: Company Maturity period Currency Contracted amount Amount guaranteed as at Original currency 31.12.2021 BGN'000 BGN'000 Sopharma Trading AD 2022-2025 2022-2024 EUR BGN 66,393 92,125 129,853 92,125 85,035 72,284 Sopharma Trading AD Sopharma Trading doo, Belgrad 2024-2026 2027 EUR 35,010 68,474 41,000 Doverie Obedinen Holding AD Doverie Obedinen Holding AD PAO Vitamini and Sopharma Ukraine EOOD Momina Krepost AD Biopharm Engineering AD Energoinvestment AD Pharmaplant AD 30,000 5,000 30,000 9,779 BGN 26,250 9,779 2022 2022 EUR EUR 7,000 5,000 7,750 2,000 235 13,691 5,000 7,750 2,000 460 6,009 4,144 2,964 1,050 93 2022-2026 2023-2028 2023 BGN BGN BGN BGN 2023 Total 248,608 41. FINANCIAL RISK MANAGEMENT In the ordinary course of business, the Company 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 the 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 Company. The financial risks are currently identified, measured and monitored through various control mechanisms implemented in order to establish adequate prices for the Company’s finished products and services and the borrowed thereby capital, as well as to assess adequately the market circumstances of its investments and the forms for maintenance of free liquid funds, through preventing undue risk concentrations. Risk management is currently performed by Company’s management following the policy adopted by the Board of Directors. The latter has approved the basic principles of general financial risk management, on the basis of which specific procedures have been established for management of the different types of specific risk such as currency, price, interest, credit and liquidity risk and the risk in using non-derivative instruments. 120 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The structure of the financial assets and liabilities is as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Financial assets Financial assets at fair value through other comprehensive income, incl.: 5,706 5,706 11,607 11,607 210,604 206,828 59,725 11,105 113,901 17,843 3,903 Equity investments Financial assets at amortised cost, incl.: Receivables and loans granted, incl.: Long-term receivables from related parties Other long-term receivables Receivables from related parties Trade receivables 190,119 174,501 49,695 9,546 87,706 25,633 1,804 Loans granted to third parties Other current receivables 117 351 Cash and cash equivalents 15,618 3,776 Total financial assets 195,825 222,211 Financial liabilities 31.12.2021 BGN '000 31.12.2020 BGN '000 Financial liabilities at amortised cost, incl.: Long-term and short-term bank loans 53,413 587 75,754 - Lease liabilities to related parties Lease liabilities to third parties Other loans and liabilities, incl. Trade payables 1,198 13,331 12,033 1,022 276 3,434 8,917 7,016 1,273 628 Payables to related parties Other current payables Total financial liabilities 68,529 88,105 At 31 December 2021, recognised liabilities under financial guarantees amount at BGN 666 thousand (31 December 2020: BGN 427 thousand) (Note 39). The impairment (losses)/gains, net of reversals, related to financial assets and financial guarantees recognised in the statement of comprehensive income are as follows: 31.12.2021 BGN '000 31.12.2020 BGN '000 Financial guarantees granted Receivables under guarantor contracts and guarantees Receivables from clients Dividend receivables Loans granted at amortised cost Cash at amortised cost 239 59 (562) (1,293) (3,427) - 46 - 873 1,293 3,551 (12) Total (4,984) 5,751 121 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Credit risk Credit risk is the risk that any of the Company's clients will fail to discharge in full and within the normally envisaged terms the amounts due. The Company’s credit risk arises both from its operating activities, through its trade receivables, and from its financing activities, including granting loans to related and third parties, commitments undertaken under loans and guarantees, and bank deposits. The Company has developed policies, procedures and rules for credit risk control and monitoring. Trade receivables In its commercial practice, the Company has applied different distribution schemes until arriving at the current effective approach that takes into consideration the market operational condition, the various payment methods, and the inclusion of sales rebates. The Company 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 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 initial indications for problems. The Company’s credit policy envisages assessing each new customer’s creditworthiness before proposing standard delivery and payment conditions. Expected credit losses are calculated at the date of each reporting period. The Company 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 Company 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 invoices versus past due invoices by days. The Company does not have a practice to request collateral for trade receivables and does not insure them. Second, the Company adjusts the impairment provisioning matrixes for each portfolio by adjusting the calculated 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. 122 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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. In view of the short-term horizon of receivables and the forecasts of international institutions (EC, IMF, World Bank) for the next 2022 for the development of the Bulgarian and global economy, the management’s analysis of scenarios shows that the impact of changes in the macroeconomic environment on the provisioning matrix are insignificant in their amount as at 31 December 2021. 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, 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 risk 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 probability 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 receivables, the Company’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). 123 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company 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: Quantitative criteria: x 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; x x 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. x Qualitative criteria: x x x x 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 Company’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 x x 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; x x The debtor reports consecutive periods 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. 124 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Qualitative criteria The debtor is unable to pay due to significant financial difficulties. This includes cases when: x The debtor is in default of the financial contract, for instance with respect to interest payments, collaterals; x x x Adverse changes in the debtor’s business; 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 Company’s expected credit losses. 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: x 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.). x x 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. x The discount rate used to calculate expected credit losses (ECL) is the instrument’s initial effective interest rate 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 Company 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. 125 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below presents the quality of the Company’s financial assets, contract assets and financial guarantee contracts, as well as the maximum exposure to credit risk according to the credit rating adopted as at 31 December 2021: Carrying amount at 31 December 2021 Expected credit losses (IFRS 9) Internal credit risk categorisation Gross carrying amount Impairment loss (allowance) Financial assets Notes BGN '000 BGN '000 BGN '000 Trade receivables from related parties For a 12- month period N/A 69,946 (1,845) 68,101 24 Lifetime (credit- impaired) Long-term loans granted to related parties Regular Stage 1 49,792 30,960 (97) 49,695 28,871 21 Trade receivables from third parties For a 12- month period N/A (2,089) 22,25 Lifetime (credit- impaired) Short-term loans granted to related parties Renegotiated Stage 2 15,194 6,314 4,011 1,804 (1) (6) - 15,193 6,308 4,011 1,804 24 22 Lifetime (credit- impaired) Long-term loans granted to third parties Renegotiated Stage 22 Lifetime (credit- impaired) Short-term loans granted to related parties Regular Stage 1 24 Lifetime (credit- impaired) Short-term loans granted to third parties Renegotiated Stage 2 - 26 (a) Receivables under guarantor contracts and guarantees to related parties For a 12- month period N/A N/A 271 (59) 212 24 24 Receivables under lease deposit For a 12- month period 189 - 189 Total: 178,481 (4,097) 174,384 126 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below presents the quality of the Company’s financial assets, contract assets and financial guarantee contracts, as well as the maximum exposure to credit risk according to the credit rating adopted as at 31 December 2020: Carrying amount at 31 December 2020 Expected credit losses (IFRS 9) Internal credit risk categorisation Gross carrying amount Impairment loss (allowance) Financial assets Notes BGN '000 102,760 59,843 BGN '000 (2,634) (118) BGN '000 100,126 59,725 Trade receivables from related parties For a 12- month period N/A 24 21 Lifetime (credit- impaired) Long-term loans granted to related parties Regular Stage 1 Trade receivables from third parties For a 12- month period Lifetime N/A 23,329 (1,989) 21,340 22,25 (credit- impaired) Short-term loans granted to related parties Renegotiated Stage 2 13,176 7,620 3,158 642 (35) 13,141 7,608 3,158 642 24 Lifetime (credit- impaired) Long-term loans granted to third parties Renegotiated Stage 2 (12) 22 Lifetime (credit- impaired) Short-term loans granted to third parties Regular Stage 1 - - 26 (a) 26 (a) Lifetime (credit- impaired) Short-term loans granted to third parties Renegotiated Stage 2 Receivables under guarantor contracts and guarantees to related parties For a 12- month period Lifetime (credit- impaired) N/A 368 266 103 - - - 368 266 103 24 24 Short-term loans granted to related parties Regular Stage 1 Lifetime (credit- impaired) Short-term loans granted to third parties Underperformin g Stage 3 26 (a) Lifetime (credit- impaired)) Short-term loans granted to related parties Underperformin g Stage 3 5,672 (5,672) - 24 24 Dividend receivables from related parties For a 12- month period N/A 1,293 (1,293) - Total: 218,230 (11,753) 206,477 127 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below provides information about the Company’s exposure to credit risk and the impairment for expected credit losses on loans granted and trade receivables as at 31 December 2021: Correlation to an external credit rating Average percentage of expected credit loss Impairment loss (allowance) at 31 December 2021 Gross carrying amount at 31 December 2021 Category BGN '000 BGN '000 Performing trade receivables (Stage 1) N/A В3 3.90% 0.20% 0.03% 0.02% 0.00% 0.00% 0.00% 100,906 49,792 16,104 5,584 4,011 1,347 277 (3,933) Regular loans (Stage 1) (97) (6) (1) - Renegotiated loans (Stage 2) Renegotiated loans (Stage 2) Regular loans (Stage 1) В3 B1 B1 Renegotiated loans (Stage 2) Ba3 В2 - Renegotiated loans (Stage 2) Receivables under guarantor contracts and guarantees Receivables under lease deposit - N/A N/A 21.77% 0.00% 271 189 (59) - Uncollectable trade receivables (court and awarded receivables) N/A 100.00% 148 (148) Total: 178,629 (4,244) The table below provides information about the Company’s exposure to credit risk and the impairment for expected credit losses on loans granted and trade receivables as at 31 December 2020: Correlation to an external credit rating Average percentage of expected credit loss Impairment loss (allowance) at 31 December 2020 Category Gross carrying amount at 31 December 2020 BGN '000 BGN '000 Performing trade receivables (Stage 1) N/A В3 3.67% 0.20% 0.23% 126,089 58,704 15,383 (4,623) (118) (36) Regular loans (Stage 1) Renegotiated loans (Stage 2) Under-performing loans (Stage 3) В3 Саа1 В2 98.22% 0.20% 0.00% 0.00% 0.00% 5,775 5,366 3,158 1,405 443 (5,672) Renegotiated loans (Stage 2) Regular loans (Stage 1) Regular loans (Stage 1) (11) В2 - - - Ba2 Ba2 Renegotiated loans (Stage 2) Receivables under guarantor contracts and guarantees N/A 0.00% 0.00% 368 246 - - Renegotiated loans (Stage 2) Non-performing dividend receivables Uncollectable trade receivables (court and awarded receivables) Ba3 N/A N/A 100.00% 100.00% 1,293 (1,293) 20 (20) Total: 218,250 (11,773) 128 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The Company has concentration of receivables from related parties (trade receivables and loans), as follows: 31.12.2021 31.12.2020 Client 1 Client 2 45% 41% 38% 42% The Company monitors 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 Company has concentration of trade receivables from a client who is not a related party, amounting to 57,19% of all trade receivables (31 December 2020: 66,59 %) (Note 25). Cash The Company’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 Company performs its activities with an active exchange with foreign suppliers and clients. Therefore, it is exposed to currency risk mainly in respect of USD. The Company supplies part of its basic raw and other materials in USD. The currency risk is related with the adverse floating of the exchange rate of USD 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 remaining part of Company's operations is usually denominated in BGN and/or EUR. The Company sells a significant part of its finished products in Euro and thus eliminates the currency risk. The accounts and balances with the subsidiaries in Ukraine are also denominated in Euro. Nevertheless, in relation with the instability in the country and the devaluation of the Ukrainian Hryvnia, for the purpose of mitigating the currency risk the Company, through its subsidiaries, exercises currency policy that includes the immediate translation in EUR of proceeds in a local currency as well as using higher trade margins to compensate eventual future devaluation of the Hryvnia. To control foreign currency risk, the Company has introduced a system for planning import supplies, sales in foreign currency as well as procedures for daily monitoring of US dollar exchange rate movements and control on pending payments. 129 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The assets and liabilities denominated in BGN and foreign currency are presented as follows: 31 December 2021 in USD in EUR in BGN in other Total currency BGN '000 BGN '000 BGN '000 BGN'000 BGN '000 Equity investments Receivables and loans granted 23 - 5,683 - 5,706 7,000 324 42,836 1,384 124,664 13,847 1 63 64 174,501 15,618 Cash and cash equivalents Total financial assets 7,347 44,220 144,194 195,825 Long-term and short-term bank loans - - 6,750 587 46,663 - - - 53,413 587 Lease liabilities to related parties Lease liabilities to third parties Other loans and payables 143 2,980 3,123 901 4,104 60 6,231 94 16 1,198 13,331 68,529 Total financial liabilities 12,342 52,954 110 31 December 2020 in USD in EUR in BGN in other Total currency BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments Receivables and loans granted 23 1,533 10,051 - 11,607 5,092 281 52,313 1,542 149,420 1,925 3 28 31 206,828 3,776 Cash and cash equivalents Total financial assets 5,396 55,388 161,396 222,211 Long-term and short-term bank loans - 13,735 61,989 30 75,754 Lease liabilities to third parties Other loans and payables 152 2,486 2,638 3,107 2,469 107 3,956 68 6 3,434 8,917 Total financial liabilities 19,311 66,052 104 88,105 Foreign currency sensitivity analysis The effect of Company’s sensitivity to 10% increase/decrease in current exchange rates of BGN to USD and to other 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, is presented below. The final effect has been measured and presented as impact on the post-tax financial result and on the equity. 130 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 USD 31.12.2021 BGN '000 31.12.2020 BGN '000 Financial result Retained earnings Financial result Retained earnings + + - 380 380 248 248 (380) (380) (248) (248) - In case of 10% increase in the exchange rate of USD to BGN, the final effect on post-tax profit of the Company for 2021 would be an increase by BGN 380 thousand (1,57%) (2020: increase at the amount of BGN 248 thousand) (0,87%). The same effect in terms of value would be seen on equity – 'retained earnings' component. On 10% decrease in the exchange rate of USD to BGN, the ultimate impact on the (post-tax) profit of the Company would be equal and reciprocal of the stated above. The impact of the remaining currencies (other than USD) on 10 % increase in their exchange rates to BGN on Company’s (post-tax) profit is insignificant. The ultimate effect thereon for 2021 is a decrease by BGN 102 thousand (-0,42%) (2020: a decrease by BGN 31 thousand (-0,11%). The effect on equity is of the same amount and in a direction of increase / decrease and reflects in the component 'retained earnings'. The management is of the opinion that the presented above currency sensitivity analysis, based on the balance sheet structure of foreign currency denominated assets and liabilities, is representative for the currency sensitivity of the Company for the year. Price risk On the one hand, the Company is exposed to price risk due to two main factors: (a) contingent increase of supplier prices of raw materials, since more than 80% of the raw materials are imported and they represent 50% on the average of all production costs; and (b) growing competition on the Bulgarian pharmaceutical market is also reflected in drug prices. For the purpose of mitigating this influence, the Company applies a strategy aimed at optimization 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. On the other hand, the Company is exposed to a price risk related to the held thereby shares, classified as other long-term equity investments. 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. At this stage the management has taken a decision for a significant 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. 131 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Liquidity risk Liquidity risk is the adverse situation when the Company encounters difficulty in meeting unconditionally all of its obligations within their maturity. The Company generates and maintains a sufficient volume of liquid funds. An internal source of liquid funds for the Company is its main economic activity generating sufficient operational flows. Banks and other permanent counterparts represent external sources of funding. To isolate any possible liquidity risk, the Company 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 complemented by the monitoring of due dates and maturity of assets and liabilities as well as control of cash outflows. Maturity analysis The table below presents the financial non-derivative liabilities of the Company, grouped by remaining term to maturity, determined against the contractual maturity at the reporting 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. 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 Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN '000 BGN '000 Long-term and short-term bank loans Lease liabilities to related parties 11,549 87 111 175 29,832 262 5,536 88 6,825 - - 53,853 612 - 368 - Lease liabilities to third parties Other loans and payables Total liabilities 71 153 231 320 275 256 - 1,399 13,331 7,819 5,225 12 19,526 5,664 30,337 6,219 7,193 256 69,195 31 December 2020 up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN '000 BGN '000 Long-term and short-term bank loans Lease liabilities to third parties 18,349 171 1,340 387 15,252 469 41,334 938 12 1,266 - 5 351 - 76,292 3,582 Other loans and payables 4,850 23,370 3,391 5,118 15 661 8,917 Total liabilities 15,736 42,933 1,278 356 88,791 132 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Risk of interest-bearing cash flows Interest-bearing assets are presented in the structure of Company's assets by cash, bank deposits and loans granted, which are with fixed interest rate. Company's borrowings in the form of long-term and short-term loans are usually with a floating interest rate. Lease liabilities have both variable and fixed interest rates. This circumstance makes the cash flows of the Company partially dependent on interest risk. This risk is covered in two ways: (a) optimisation of the sources 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, can be achieved and maintained in a proportion favourable for the Company. 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 Company's management currently monitors and analyses its exposure to changes in interest rates. 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. 31 December 2021 interest- free with floating with fixed interest % Total interest % BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 5,706 - - - 5,706 Receivables and loans granted 98,719 75,782 174,501 Cash and cash equivalents 108 15,510 - 15,618 Total financial assets 104,533 15,510 75,782 195,825 Long-term and short-term loans 31 53,382 - 587 53,413 587 Lease liabilities to related parties - - - 103 Lease liabilities to third parties Other loans and liabilities 1,095 - 1,198 13,331 68,529 13,331 13,362 - Total financial liabilities 53,485 1,682 133 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 31 December 2020 interest- free with floating with fixed interest % Total interest % BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 11,607 123,601 108 - - - 83,227 - 11,607 206,828 3,776 Receivables and loans granted Cash and cash equivalents Total financial assets 3,668 3,668 135,316 83,227 222,211 Long-term and short-term loans - - 75,724 120 30 3,314 75,754 3,434 Lease liabilities to third parties Other loans and liabilities 8,917 - - 8,917 Total financial liabilities 8,917 75,844 3,344 88,105 The table below demonstrates the Company's sensitivity to possible changes in interest rates by 0.50 points 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. 2021 Increase/ decrease in interest rate Impact on post-tax Impact on equity financial result profit/(loss) increase/(decrease) EUR BGN USD Increase Increase Increase (37) (211) (1) (37) (211) (1) EUR BGN USD Decrease Decrease Decrease 37 211 1 37 211 1 2020 Increase/ decrease in interest rate Impact on post-tax Impact on equity financial result profit/(loss) increase/(decrease) EUR BGN USD Increase Increase Increase (76) (280) (1) (76) (280) (1) EUR BGN USD Decrease Decrease Decrease 76 280 1 76 280 1 134 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Capital risk management The capital management objectives of the Company 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. The Company 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 the difference between total borrowings, as presented in the statement of financial position, and cash and cash equivalents. Total employed capital is calculated as the sum of equity and net debt. In 2021, the strategy of the Company management is to maintain the ratio within the range of 5%-10% (2020: 10% – 15%). The table below shows the gearing ratios based on capital structure: 2021 2020 BGN '000 BGN '000 Total borrowings, including: bank loans 55,198 53,413 587 79,188 75,754 - lease liabilities to related parties lease liabilities to third parties Less: Cash and cash equivalents Net debt 1,198 3,434 (15,618) 39,580 564,203 603,783 (3,776) 75,412 536,988 612,400 Total equity Total capital Gearing ratio 0.07 0.12 The cash and liabilities shown in the table are disclosed in Notes 27, 29, 32, 34, 36 and 39. Fair value measurement The fair value concept presumes realisation of financial assets through a sale based on the position, assumptions and judgments of independent market participants in a principal or most advantageous market for a particular asset or liability. The Company acknowledges as a principal market for its financial assets and liabilities the financial market in Bulgaria – the Bulgarian Stock Exchange, the large commercial banks – dealers, and for some specific instruments – direct transactions between the parties. However, in most cases especially in regard of trade receivables and payables as well as loans and deposits, the Company 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 statement of financial position at market value determined by applying a particular valuation method (investments in securities, loans with floating 135 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 interest rate) and therefore, their fair value is approximately equal to their carrying amount. With regard to loans, extended with fixed interest rate, the method used for setting this rate uses as a starting point for the calculations the current observations of the Company with regard to the market interest levels. As far as the Bulgarian market of various financial instruments is still not sufficiently active – with stability, satisfactory volumes and liquidity for purchases and sales of certain financial assets and liabilities – there are no sufficient and reliable market price quotations for them, and for this reason, the Company uses other alternative valuation methods and techniques. Company's management 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. 42. SEGMENT REPORTING Company’s segment reporting is organised on the basis of the production of main groups of finished products: x x x x x Tablet dosage forms; Ampoule dosage forms; Medical products; Other forms; Other revenue. Medical products include: plasters, sanitary and hygienic products, dressings, and medical cosmetics. The other forms include: lyophilic products, ointments, syrups, drops, suppositories, inhalers, haemodialysis concentrates, sachets and substances. Other revenue includes revenue from assets leased and revenue from agricultural production. Segment revenue, expenses and results include: Tablet dosage forms Ampoule dosage forms Other forms Medical products 2021 2020 Other revenue 2021 2020 Total 2021 2021 2020 2021 2020 2021 2020 2020 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Segment revenue Segment cost Segment result 133,875 (59,769) 74,106 142,086 (67,838) 74,248 27,025 (18,253) 8,772 23,666 (15,890) 7,776 26,415 (16,860) 9,555 27,689 (19,283) 8,406 10,521 (6,791) 3,730 11,105 (7,889) 3,216 2,318 (98) 2,191 200,154 206,737 (735) (101,771) (111,635) 2,220 1,456 98,383 95,102 Non-allocated operating income 4,131 4,188 Non-allocated operating expenses (66,839) 35,675 (66,467) 32,823 131 Profit from operations Net gain/(loss) on sale of investments in subsidiaries and associates (11,223) Impairment of non-current assets outside the scope of IFRS 9 Finance income/(costs), net (4,719) 7,176 (7,373) 6,184 Profit before income tax 26,909 31,765 Income tax expense (2,638) (3,101) Net profit for the year 24,271 28,664 136 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Segment assets include: Tablet dosage forms Ampoule dosage forms Other dosage forms Medical products Other revenue Total 2021 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2020 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Property, plant and equipment 71,104 74,466 18,190 19,070 21,851 20,100 2,598 2,829 - - 113,743 116,465 Investment property - 33,498 - 35,244 - 12,474 30,664 - 14,798 33,868 - 10,194 32,045 - 12,689 32,789 - 2,876 5,474 - 3,500 6,329 47,302 - 44,759 - 47,302 59,042 44,759 66,231 Inventories Segment assets 104,602 109,710 47,302 44,759 220,087 439,012 659,099 227,455 422,883 650,338 Non-allocated assets Total assets Segment liabilities include: Tablet dosage forms Ampoule dosage forms Other dosage forms Medical products 2021 2020 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Other revenue Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Government grants 2,583 440 2,780 401 1,700 236 1,900 182 61 85 83 39 92 47 - - - - 4,427 1,116 4,857 971 Payables to personnel 401 341 Social security payables 118 168 72 100 118 178 12 27 - - 320 473 Segment liabilities 3,141 3,349 2,008 2,182 580 604 134 166 - - 5,863 89,033 94,896 6,301 107,049 113,350 Non-allocated liabilities Total liabilities The capital expenditures, depreciation/amortisation and non-monetary expenses other than depreciation/amortisation by business segment include: Tablet dosage forms Ampoule dosage forms Other dosage forms Medical products Other revenue Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Capital expenditures Depreciation and 921 3,748 764 439 2,410 1,708 1,710 1,767 11 - - 5,522 109 4,106 11,419 10,125 amortisation 5,551 5,813 2,149 2,149 292 287 101 9,801 Non- monetary expenses, other than depreciation and amortisation 1,160 1,879 305 425 565 426 134 83 - 92 2,164 2,905 137 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 43. RELATED PARTY TRANSACTIONS The companies related to Sopharma AD and the type of their relationship are as follows: Related parties Relation type Relation period Donev Investments Holding AD Telecomplect Invest AD Sopharma Trading AD Pharmalogistica AD Shareholder with significant influence Shareholder with significant influence Subsidiary company 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 Subsidiary company Sopharma Poland OOD – in liquidation Subsidiary company Electroncommerce EOOD Biopharm Engineering AD Vitamina AD Subsidiary company Subsidiary company Subsidiary company Subsidiary company Sopharma Buildings REIT 2020 and until 7 June 2021 Momina Krepost AD Subsidiary company 2020 and until 9 March 2021 Momina Krepost AD Briz SIA Joint venture as from 10 March 2021 Subsidiary company 2020 and until 31 December 2021 2020 and 2021 Sopharma Warsaw EOOD Sopharma Ukraine EOOD TOO Sopharma Kazakhstan Phyto Palauzovo AD Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company 2020 and 2021 2020 and 2021 2020 and 2021 Veta Pharma AD 2020 and 2021 Rap Pharma International OOD Aromania OOD 2020 and 2021 until 23 December 2020 Pharmachim EOOD as from 14 April 2020 and 2021 Sopharma Trading Pharmaceuticals OOD Subsidiary company through Sopharma Trading AD until 3 August 2020 Sopharma Trading Belgrade OOD Sopharmacy EOOD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 Sopharmacy 2 EOOD Sopharmacy 3 EOOD Sopharmacy 4 EOOD Sopharmacy 5 EOOD Sopharmacy 6 EOOD Sopharmacy 7 EOOD Sopharmacy 8 EOOD Sopharmacy 9 EOOD Sopharmacy 10 EOOD Sopharmacy 11 EOOD Sopharmacy 12 EOOD Sopharmacy 13 EOOD 138 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Sopharmacy 14 EOOD Sopharmacy 15 EOOD Sopharmacy 16 EOOD Sopharmacy 17 EOOD Sopharmacy 18 EOOD Sopharmacy 19 EOOD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 2020 and 2021 Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD as from 1 October 2020 and 2021 Sopharmacy 20 EOOD Sopharmacy 21 EOOD Sopharmacy 22 EOOD Sopharmacy 23 EOOD Sopharmacy 24 EOOD Sopharmacy 25 EOOD Sopharmacy 26 EOOD Sopharmacy 27 EOOD Sopharmacy 28 EOOD Sopharmacy 29 EOOD Sopharmacy 30 EOOD Sopharmacy 31 EOOD Sopharmacy 32 EOOD Sopharmacy 33 EOOD Sopharmacy 34 EOOD Sopharmacy 35 EOOD Sopharmacy 36 EOOD Sopharmacy 37 EOOD Sopharmacy 38 EOOD Sopharmacy 39 EOOD Sopharmacy 40 EOOD Sopharmacy 41 EOOD Sopharmacy 42 EOOD Sopharmacy 43 EOOD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 139 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Sopharmacy 45 EOOD Sopharmacy 46 EOOD Sopharmacy 47 EOOD Sopharmacy 48 EOOD Sopharmacy 49 EOOD Sopharmacy 50 EOOD Sopharmacy 51 EOOD Sopharmacy 52 EOOD Sopharmacy 53 EOOD Sopharmacy 54 EOOD Sopharmacy 55 EOOD Sopharmacy 56 EOOD Sopharmacy 57 EOOD Sopharmacy 58 EOOD Sopharmacy 59 EOOD Sopharmacy 60 EOOD Sopharmacy 61 EOOD Sopharmacy 62 EOOD Sopharmacy 63 EAD Sopharmacy 64 AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD Subsidiary company through Sopharma Trading AD as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 as from 1 October 2020 and 2021 2020 and until 30 November 2021 2020 and until 30 November 2021 2020 and until 30 Brititrade COOO OOO Tabina Subsidiary company through Briz OOD Subsidiary company through Briz OOD Subsidiary company through Briz OOD ZAO Interpharm November 2021 until 31 January 2020 2020 and until 30 November 2021 2020 and until 30 November 2021 SOOO Brizpharm OOO Farmacevt Plus Subsidiary company through Briz OOD Subsidiary company through Briz OOD Subsidiary company through Briz OOD BOOO SpetzApharmacia 2020 and until 30 November 2021 2020 and until 30 November 2021 OOO Bellerophon Subsidiary company through Briz OOD Subsidiary company through Briz OOD Alenpharm Plus ODO 140 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Subsidiary company through Briz OOD Subsidiary company through Briz OOD Subsidiary company through Briz OOD 2020 and until 30 November 2021 2020 and until 30 November 2021 2020 and until 30 November 2021 2020 and until 30 November 2021 ODO Salyus Line ODO Medjel OOO GalenaPharm Zdorovey OOO Subsidiary company through Briz OOD Subsidiary company through Briz OOD Subsidiary company through Briz OOD 2020 and until 1 October 2021 UAB Recesus Zdorovey Pharm OOO from 2 March 2021 to 30 November 2021 from 15 February 2021 to 30 December 2021 from 2 November 2021 SIA Briz Trading SIA BAH Subsidiary company through Briz OOD Subsidiary company through Briz OOD to 30 November 2021 from 8 December 2021 2020 and 2021 Sopharma Properties REIT Doverie Obedinen Holding AD Companies at DOH Group Elpharma AD – in liquidation Sofprint Group AD Associate Associate Companies controlled by an associate 2020 and 2021 Company related through key management personnel Company related through key management personnel Company related through key management personnel Company related through key management personnel Company related through key management personnel Company related through key management personnel until 28 August 2020 2020 and 2021 Sofconsult Group AD 2020 and 2021 VES Electroinvest Systems EOOD Eco Solar Invest OOD 2020 and 2021 2020 and 2021 2020 and until 14 June 2021 Sirius OOD Company related through key management personnel Company related through key management personnel 2020 and until 14 June 2021 2020 and until 14 June 2021 Melnitsa Stefanovo EOOD OKP Investments OOD Alpha In EOOD Company related through key management personnel Associate 2020 and 2021 from 7 June 2021 to 10 June 2021 as from 14 June 2021 Sopharma Buildings REIT Consumpharm OOD Company related through key management personnel The sales made by Sopharma AD to its related companies for the year ended at 31 December are as follows: 2021 2020 Sales to related parties BGN ‘000 BGN ‘000 Sales of finished products to: Subsidiaries 112,286 114,701 112,286 114,701 Interest on loans granted to: Companies controlled by an associate Subsidiaries 1,918 256 26 2,194 554 - Joint venture Associates 2 75 2,202 2,823 141 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2021 2020 Sales to related parties BGN ‘000 BGN ‘000 Sales of services to: Subsidiaries 2,347 13 2,706 63 Companies related through key management personnel Associates 7 7 2,367 2,776 Sales of goods and materials to: Companies related through key management personnel Subsidiaries 700 322 - 912 654 2 Companies controlled by an associate 1,022 1,568 Fees under guarantor contracts and guarantees to: Subsidiaries 423 14 368 - Joint venture Companies controlled by an associate 5 - 442 368 Dividend income from: Subsidiaries 414 9,179 414 9,179 Sales of non-current assets to: Companies related through key management personnel Companies controlled by an associate - - - 1 1 2 Other income from: Subsidiaries 10 10 - - Total sales to related parties: 118,743 131,417 The purchases made by Sopharma AD from its related companies for the year ended at 31 December are as follows: Supplies from related parties 2021 2020 BGN '000 BGN '000 Supply of inventories from: Companies related through key management personnel Companies controlled by an associate Subsidiaries 8,936 42 10,420 62 27 55 Associates 9 - 9,014 10,537 142 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Supplies from related parties 2021 2020 BGN '000 BGN '000 Supply of services from: Subsidiaries 4,665 778 5,062 1,076 368 Companies controlled by an associate Shareholding companies with significant influence Companies related through key managing personnel 383 248 230 6,074 6,736 Supplies of non-current assets from: Subsidiaries 122 - - - - Companies related through key managing personnel 122 Investments acquired in: Associates 20,800 8,472 - 3,474 3,474 Subsidiaries 29,272 Other supplies from: Shareholding companies with significant influence Companies controlled by an associate Subsidiaries 13 8 6 104 2 2 23 112 Dividends accrued to: Shareholding companies with significant influence Key management personnel - - - 6,883 157 7,040 Total supplies from related parties 44,505 27,899 The terms and conditions of transactions with related parties do not deviate from the market ones for similar transactions. The accounts and balances with related parties are presented in Notes 21, 24, and 36. The members of the key personnel are disclosed in Note 1. Salaries and other short-term benefits of key managing personnel at the amount of BGN 1,256 thousand (2020: BGN 1,321 thousand) are as follows: x x current wages and salaries – BGN 969 thousand (2020: BGN 917 thousand); tantieme – BGN 287 thousand (2020: BGN 404 thousand). 143 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 44. EVENTS AFTER THE REPORTING PERIOD On February 24, 2022, Russian military forces started hostile invasion in Ukraine. Subsequently, a number of countries imposed sanctions on certain individuals and legal entities in Russia. It is expected that the war in Ukraine and related economic sanctions and other measures taken by governments around the world will have a significant impact on both local and global economies. The management of Sopharma AD believes that the unprovoked invasion of the Russian army into Ukraine could seriously affect the activities of the Company, as about 40% of the sales of products are realized in Ukraine and Russia. At this stage, the company has reduced its activity in these markets, including due to logistical inability to make deliveries. As of the date of approval of these separate financial statements, the Company has no commercial counterparties included in sanctions lists published by the European Union. The company owns investments in two subsidiaries in Ukraine. As of December 31, 2021 the amount of the investment in the subsidiary Sopharma Ukraine is BGN 9,669 thousand and the amount of the investment in the subsidiary Vitamini is BGN 1,283 thousand. As of the date of approval of these separate financial statements the assets of these subsidiary companies are not physically affected by military activities, but it may be necessary in the future to reconsider the value of these investments depending on the development of the war and its impact on the activities of the companies. As of December 31, 2021 the Company has trade receivables from a company, which is selling production of Sopharma AD in Russia in the amount of BGN 11,729 thousand. As of the date of approval of these separate financial statements the Company has received payments for these trade receivables in full. Despite the potential negative economic effects of the war and the likelihood for it to escalate into a long conflict, the Company has sufficient current assets and funding to continue to exist as a going concern. There are no other events after the date of the statement of financial position that require disclosure in these separate financial statements. 144 MANAGEMENT REPORT 2021 “SOPHARMA” AD 28 March 2022 . Content I. General information about “Sopharma” AD................................................................................4 1. 2. 3. Registration and activity of the Company................................................................................. 4 Shareholder structure as at 31 December 2021 ........................................................................ 4 Board of directors ................................................................................................................... 4 II. Recent developments.................................................................................................................5 1. 2. Industrial activity .................................................................................................................... 5 Products ................................................................................................................................. 5 III. 1. Information under Article 39 of the Accountancy Act ..............................................................6 An overview of the Company's performance and the main risks it faces (Article 39 (1) of the Accountancy Act / .............................................................................................................................. 6 2. Analysis of financial and non-financial key performance indicators of Sopharma (Article 39, item 2 of the Accountancy Act), as well as a description of the company's position and explanation of the annual financial statements (Article 247 (1) of the Commerce Act/................................................................. 9 Sales revenues .................................................................................................................................... 9 3. 39, paragraph 3 of the Accountancy Act /.......................................................................................... 13 4. Future development of “Sopharma” AD (article 39, item 4 of the Accountancy Act) and planned economic policy in the following year (Article 247 (3) of the Commerce Act)...................................... 14 Significant events occurring after the date of preparation of the annual financial statements / Article 5. 6. Research and development (article 39, item 5 of the Accountancy Act)................................... 14 Information on the acquisition of own shares required by Article 187d of the Commerce Act / Article 39, Item 6 of the Accountancy Act / .................................................................................................. 17 7. 8. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/................. 17 Use of financial instruments /Article 39, item 8 of the Accountancy Act/ ................................ 17 IV. Information under Article 247 and Art. 240b of the Commerce Act........................................19 Information under Art. 247 of the Commerce Act................................................................... 19 Information under art. 240b of the Commercial Code on the obligation of Board members to notify in 1. 2. 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 conditions22 V. Information on Annex 10 to art. 32, para 1, item 2 of Regulation 2 of LPOS...............................22 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 “Sopharma” AD in general and changes in the reporting year .................................................................................................................................. 22 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 an individual seller or buyer / user, in case their share exceeds Management report – “Sopharma” AD 2021 1 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................................................................................................... 22 3. 4. Information on significant transactions concluded ................................................................. 23 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 .......................................................................................................... 23 5. activity and realized income and expenses; assessment of their impact on the current year results.... 24 6. Information on off-balance sheet transactions - nature and business purpose, the financial impact of Information about events and indicators unusual for the issuer that have a significant impact on its 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................. 24 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..................... 24 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 ......................................................................... 24 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 granted24 10. 11. Information on the use of funds from the issuance of new securities during the reporting period26 Analysis of the relationship between the financial results reflected in the financial statements for the financial year and earlier published forecasts for these results .......................................................... 26 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 27 13. possible changes in the financing structure of this activity................................................................. 27 14. Information about changes in the reporting period in the basic principles of management of the issuer and its group of companies under accounting the Law ...................................................................... 27 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management.................................................. 27 Assessment of the feasibility of investment intentions, indicating the amount of available funds and 16. 17. Information about changes in management and supervisory boards during the accounting year27 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:......................................................................................................................................... 28 Management report – “Sopharma” AD 2021 2 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. ................................................................................................................................. 28 19. occur in the holding of shares or bonds by current shareholders or bondholders ............................... 29 20. Information about pending legal, administrative or arbitration proceedings relating to liabilities or Arrangements (including after the end of the financial year) as a result of which future changes may 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......... 29 21. Information about the Investor Relations Director, including telephone number and mailing address 29 VI. 1. Information Appendix 3 to Article 10, paragraph 2, item 4 of Ordinance 2 of LPOS ................29 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....... 29 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............................................................................................................ 30 3. 4. Information about shareholders with special control rights.................................................... 31 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.......................... 31 Management report – “Sopharma” AD 2021 3 I. General information about “Sopharma” AD 1. Registration and activity of the Company “Sopharma” AD (The Company) 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 Company is from 15 November 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. The Company has marketing authorizations under the Law on Pharmaceutical products in Human Medicine for all products of its manufacturing portfolio. 2. Shareholder structure as at 31 December 2021 "Donev investments holding" AD 10,54% "Telecomplect invest" AD 27,86% "Sopharma" AD (treasury shares) 26,01% CUPF "Alianz Bulgaria" 20,68% 5,23% Other legal persons 9,68% Other physical persons 3. 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: Bissera Lazarova, Alexander Тchaushev and Ivan Badinski. The Company is represented and managed by the Executive Director Ognian Donev, PhD. The company has two procurators - Simeon Donev and Ivan Badinski. Management report – “Sopharma” AD 2021 4 II. Recent developments 1. Industrial activity “Sopharma” AD has eight manufacturing plants, conforming with EU Good Manufacturing Practices (GMP), which are located in Bulgaria. The company is the largest Bulgarian manufacturer of ampoules and suppositories. The production activities of the Company are realized and developed in the following areas: x Substances and preparations based on plant raw materials (phytochemical production); x Ready-to-use formulations, incl.: 9 Hard tablets, coated tablets, film-coated tablets, capsules; 9 Galenic - suppositories, drops, syrups, ointments; 9 Parenteral - injection solutions, lyophilic powder for injection. x Medical and cosmetic products, incl.: 9 Plasters; 9 Bandages; 9 Sanitary-hygiene products; 9 Herbal cosmetics; 9 Concentrates for hemodialysis. 2. Products 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 the products are plant-based. The Company's traditional products (in particular Tabex, Carsil and Tempalgin) have a major share in its export revenues, 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: ¾ Carsil - traditional plant-based product used to treat gastro-enterology diseases (liver diseases); ¾ Tempalgin - traditional analgesic (painkiller); ¾ Tabex - traditional plant-based smoking cessation product; ¾ Tribestan - traditional plant-based product that stimulates the functions of the sexual system; ¾ Broncholitin - traditional plant-based product used to suppress cough; Management report – “Sopharma” AD 2021 5 ¾ Analgin - generic analgesic (pain reliever); ¾ Nivalin - traditional plant-based product used for diseases of the peripheral nervous system; ¾ Methylprednisolone - generic medicine for cases of severe allergies and certain life- threatening conditions; ¾ Vitamin C - widely used nutritional supplement; ¾ Valeriana - generic non-prescription herbal medicine used to reduce stress; ¾ Medical devices - gauzes, compresses and dressings. III. Information under Article 39 of the Accountancy Act 1. An overview of the Company's performance and the main risks it faces /Article 39 (1) of the Accountancy Act/ Key financial indicators 1-12/2021 BGN '000 1-12/2020 BGN '000 Change % Indicators Revenues EBITDA 200 154 53 220 206 737 51 053 (3.18)% 4.24% Operating profit Net profit CAPEX** 35 675 32 823 8.69% 24 271 28 664 (15.33)% (19.8)% Change % 7 755 9 670 31.12.2021 BGN '000 456 746 202 353 564 203 22 436 31.12.2020 BGN '000 435 891 214 447 536 988 16 091 Indicators Non-current assets Current assets 4.78% (5.64)% 5.07% Owners’ equity Non-current liabilities Current liabilities 39.43% (25.50)% 72 460 97 259 * tangible and intangible fixed assets acquired Indicators 1-12/2021 1-12/2020 EBITDA/ Revenues 26.6% 24.7% Operating profit/Sales Revenue Net profit/ Sales Revenue 17.8% 12.1% 15.9% 13.9% 31.12.2021 31.12.2020 Debt/ Equity 0.17 0,21 Net debt*/ EBITDA on annual basis 0.74 1,5 * the net debt comprises the sum of borrowings from banks and lease liabilities less cash and cash equivalents. Management report – “Sopharma” AD 2021 6 COVID-19 On 11 March 2020 the World Health Organization declared a Coronavirus Pandemic, as a result, the Government of the Republic of Bulgaria, announced various measures to prevent the spread of the disease. Measures implemented include working from home, a temporary lockdown of schools, universities, restaurants, cinemas, theaters, museums and sports facilities, retailers, with the exception of food retailers, grocery stores and pharmacies. The management of “Sopharma” AD has carefully analyzed the potential effects of the pandemic and the constraints imposed by the government, expecting overall reductions in economic activity and liquidity in the economy of the country, which are also expected to affect the Company's activities. The effects on the Company's activities as a result of the events may include a decrease in revenues, emergency expenses, delay in the implementation of projects, planned investments, etc. Based on the publicly available information, up to the date of the financial statements, the management has taken actions aimed at limiting the negative effects of the pandemic events, which include: x Ensuring continuous operation in compliance with measures to limit the spread of COVID-19, including - strict access control and measurement of the temperature of employees and visitors, the prohibition of clustering of people and the distribution of workplaces in the production in an appropriate way, which ensures the absence of close contact between employees, the separation of traffic flows in buildings and spaces between them, etc.; x Negotiations with suppliers to keep the rhythm of raw materials and supplies flowing, as well as meeting the enterprise's needs for specific raw materials dictated by the demand for specific medicine products and medical supplies needed to deal with the pandemic; x Providing information to customers on the way of working in order to maintain delivery schedules; x Negotiations with the partner financial institutions of the Company and the provision of adequate information to them, so that additional financing may be provided timely on a need basis or for some of the Group's entities, to postpone loan payments, if it’s necessary to secure cash flows and others. The management believes that going concern basis is appropriate for these separate financial statements, as the Company has sufficient liquid resources to continue in the foreseeable future. At the date of these separate financial statements, the management of the Company does not intend to discontinue operations. Risks, related to the Company’s business and the industry the Company operates in x The Company faces significant competition. x The Company is dependent on regulatory approvals. x Government regulations affecting the Company's business may change, thus possibly increasing compliance costs or otherwise affecting its operations. Management report – “Sopharma” AD 2021 7 x Part of the Company’s revenues, in particular in Bulgaria, depend on the inclusion of the Company’s medicines in reimbursement lists. x The Company’s production facilities and processes are subject to strict requirements and regulatory approvals that may delay or disrupt the Company’s operations. x 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. x The Company is subject to operational risk, which is inherent to its business activities. x The Company is subject to multiple laws and regulations on environmental protection and health and safety work conditions and is exposed to potential environmental liabilities. x Litigations or other out-of-court proceedings or actions may adversely affect the Company’s business, financial position and results of operations. Risks, related to Bulgaria and other markets in which the Company operates x The macroeconomic environment, particularly in Bulgaria, Russia and Ukraine, has a significant effect on the Company’s operations; x The political environment in Bulgaria and in the export markets, especially Russia and the Ukraine, has a significant effect on the Company’s operations and financial position; x Risks related to the Bulgarian legal system; x Developing legal frameworks in some countries in which the Company sells its products, in particular Russia and Ukraine, may negatively impact the Company’s operations in these countries; x Risks relating to exchange rates and the Currency Board in Bulgaria; x The interpretations of tax regulations may be unclear and tax laws and regulations applicable to the Company may change. Currency risk The Company performs its activities in active exchange with foreign suppliers and customers. Therefore, it is exposed to currency risk, mainly in respect of the USD. The Company supplies part of its main raw materials in USD. The currency risk is related to the negative movement of the USD exchange rate against the BGN in the future business operations, the recognized foreign currency assets and liabilities and the net investments in foreign companies. The rest of the Company's operations are usually denominated in BGN and/or in EUR. The Company sells some of its finished products in Russia in EUR and thus eliminates the currency risk associated with the depreciation of the Russian ruble. In EUR are also dominated the balances with the subsidiaries in Ukraine. However, in order to minimize currency risk, the Company conducts through its subsidiaries a monetary policy that includes advance payments and the reduction of deferred payment terms and immediate currency conversion of foreign currency earnings to EUR, as well as applying higher trade mark-ups to offset possible future impairment of the hryvnia. Management report – “Sopharma” AD 2021 8 In order to control the foreign currency risk in the Company, a system of planning import deliveries, foreign currency sales, as well as procedures for daily monitoring of movements in the dollar exchange rate and control of forthcoming payments is introduced. 2. Analysis of financial and non-financial key performance indicators of Sopharma /Article 39, item 2 of the Accountancy Act/, as well as a description of the company's position and explanation of the annual financial statements /Article 247 (1) of the Commerce Act/ Sales revenues Sales revenues from products in 2021 decreased by BGN 6,7 million to BGN 197,8 million compared to BGN 204,5 million in 2020. Sales revenues 250 000 204 546 197 836 200 000 135 178 150 000 118 977 2020 2021 79 097 100 000 50 000 0 69 368 Domestic market Export sales Total 2021 2020 change Revenues by markets 9% BGN '000 BGN '000 % (12)% 14% EUROPE BULGARIA OTHER EUROPE 100 786 79 097 17 953 197 836 114 554 69 368 20 624 204 546 51% BULGARIA OTHER Total 40% (13)% (3)% European market Sales revenues for 2021 for European countries decreased by BGN 13,8 million or 12 % compared to 2020 due to the decrease of sales in Russia with 9 %, Ukraine with 31 %. The decrease in sales in the Ukraine and Russia is due to the accumulated higher levels of finished products in the main distributors at the beginning of the reporting period, as in the domestic market in Ukraine the group reports an increase in value and quantity of sales compared to the previous period. Management report – “Sopharma” AD 2021 9 Bulgarian market Sales of “Sopharma” AD in the domestic market increase by BGN 9,7 million or by 14% to BGN 79,1 million in 2021 compared to BGN 69,4 million in 2020. At the end of the year the Company has a 2.84% share of the total Bulgarian pharmaceutical market in value and 10.49% of sales in volume. The positions of the main competitors of the Company in the country are as follows: Nоvartis – 7.04% (3.76% in units), Roche – 5.76% (0.14% in units), Merck Sharp Doh – 4.02% (0.13% in units), Teva – 3.90% (9.80% in units), Pfizer – 3.65% (0.69% in units), Abbvie – 3.34% (0.06% in units), Astrazeneca – 3.18% (0.48% in units), Bayer – 2.82% (1.97% in units), Sanofi-Aventis – 2.72% (2.46% in units). The products with the largest share of sales in the country are Analgin, Methylprednisolone, Antistenocardin, Famotidine, Parecatamol, Buscolyzin, Allergosan. Other markets Revenues from other markets decreased with BGN 2,6 million or 12,6 % compared to 2020, mainly as a result of a decrease of the export for Kazakhstan. Sales by therapeutic groups N Nervous system A Digestion and metabolism 11% 4% C Cardio-vascular system R Respiratory system 2% 4% 34% 7% G Urinary system and sex hormones M Musculoskeletal system 11% H Hormonal products, exc. sex hormones and insulin Other 27% Operating expenses For the current period more significant changes are reported in the cost of materials, mainly in the part of basic materials for production, which is related to the reduced sales during the period. Personnel costs decreased by BGN 3,7 million as the main reason was the decrease in the total number of employees in the company. In the costs for external services the most significant change is in the costs for consulting services, which increase by BGN 2,1 million, while in the direction of decrease the costs of construction and maintenance of buildings have the largest contribution. Other operating expenses also decreased by BGN 4.5 million, mainly due to decrease expenses for scrap of fixed assets with BGN 3 million. Management report – “Sopharma” AD 2021 10 Financial income and expenses Financial income decreased by BGN 4,5 million to BGN 8,8 million in 2021 compared to BGN 13,3 million in 2020, as a result of the decrease in income from share participation by BGN 9 million, reflecting the accrued dividend from “Sopharma Trading” AD in the previous period, as this reduction was partially offset by a recovered impairment on a loan granted to a subsidiary (SIA Briz - Latvia). Financial expenses decreased by BGN 5,5 million to BGN 1,6 million in 2021, compared to BGN 7,1 million in 2020, mainly due to decreased impairment expenses for expected credit losses. Financial results 60 000 51 053 53 220 50 000 40 000 30 000 20 000 10 000 0 35 675 32 823 28 664 24 271 2020 2021 EBITDA Operating profit Net profit Profit before interest, taxes, depreciation and amortization (EBITDA) in 2021 increased by BGN 2.1 million to BGN 53,2 million compared to BGN 51,1 million 2020. Operating profit in 2021 increased by BGN 2,9 million or 8,7 % to BGN 35,7 million in 2021 compared to BGN 32,8 million in 2020. Net profit in 2021 decreased by BGN 4,4 million or by 15,3%, to BGN 24,3 million compared to BGN 28,7 million in 2020. Assets Non-current assets compared to the end of the year changed mainly due to an increase in investments in associates by BGN 48,4 million, mostly as a result of reaching 32,8% share of the capital of “Sopharma Imoti” REIT. An increase is reported in investment properties (earned logistics system) and a decrease in investments in subsidiaries (exemption from participation in SIA Briz - Latvia, “Sopharma Buildings” REIT and “Momina Krepost” AD) and long-term loans by BGN 10 million. Current assets decreased by BGN 12 million, while receivables from related parties (mainly in the part of receivables from contracts with customers) decreased by BGN 26,5 million, while trade receivables increased by BGN 8,2 million. Management report – “Sopharma” AD 2021 11 Liabilities and owners’ equity The equity of “Sopharma” AD increased by BGN 27,2 million compared to 31 December 2020. Non-current liabilities increased by BGN 6,3 million, as a result of an increase in long-term bank loans by BGN 6,7 million compared to the end of the previous year. Current liabilities decreased by BGN 24,8 million compared to 31 December 2020, mainly as a result of the decrease in short-term bank loans by BGN 26.6 million, financed by the realized free cash flow for the period. An increase in trade liabilities in the amount of BGN 5,5 million is reported compared to 31 December 2020. Cash flows 1-12/2021 BGN '000 1-12/2020 BGN '000 Net cash flows from / (used in) operating activities 86 468 (7 213) 27 268 (6 491) (1 928) 18 849 Purchases of property, plant and equipment, intangible assets, net Payments under lease contracts Free cash flow (normalized) (1 900) 77 355 The free cash flow (normalized with the payments under lease contracts), generated for 2021 amounts to BGN 77,4 million inflow compared to BGN 18,3 million inflow in 2020. 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; 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 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. Management report – “Sopharma” AD 2021 12 In 2021, separately collected and delivered waste decreased by 0.3% 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” AD, with which “Sopharma” AD has concluded a contract for the recovery of packaging waste. Personnel In 2021, the average number of employees of “Sopharma” AD is 1 860 (compared to 1 991 in 2020). Relative share 31.12.2021 1 768 811 % 100% 46% 2% Number of workers and employees as at 31 December 2021 Higher education College education 35 Secondary education 899 51% Primary education 23 1% Employees under 30 years Employees 31 - 40 years Employees 41 - 50 years Employees 51 - 60 years Employees over 60 years Women 148 300 492 643 185 1 120 648 8% 18% 28% 36% 10% 63% 37% Men 3. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act / On February 24, 2022, Russian military forces started hostile invasion in Ukraine. Subsequently, a number of countries imposed sanctions on certain individuals and legal entities in Russia. It is expected that the war in Ukraine and related economic sanctions and other measures taken by governments around the world will have a significant impact on both local and global economies. The management of Sopharma AD believes that the unprovoked invasion of the Russian army into Ukraine could seriously affect the activities of the Company, as about 40% of sales of products are realized in Ukraine and Russia. At this stage, the company has reduced its activity in these markets, including due to logistical inability to make deliveries. As of the date of approval of these separate financial statements, the Company has no commercial counterparties included in sanctions lists published by the European Union. Management report – “Sopharma” AD 2021 13 The company owns investments in two subsidiaries in Ukraine. As of December 31, 2021 the amount of the investment in the subsidiary Sopharma Ukraine is BGN 9,669 thousand and the amount of the investment in the subsidiary Vitamini is BGN 1,283 thousand. As of the date of approval of these separate financial statements the assets of these subsidiaries companies are not physically affected by military activities, but it may be necessary in the future to reconsider the value of these investments depending on the development of the war and its impact on the activities of companies. As of December 31, 2021 the Company has trade receivables from a company, which is selling production of Sopharma AD in Russia in the amount of BGN 11,729 thousand. As of the date of approval of these separate financial statements the Company has received payments for these trade receivables in full. Despite the potential negative economic effects of the war and the likelihood to escalate into a long conflict, the Company has sufficient current assets and funding to continue to exist as a going concern. 4. Future development of “Sopharma” AD /article 39, item 4 of the Accountancy Act/ and planned economic policy in the following year /Article 247 (3) of the Commerce Act)/ x On the local market, the Company aims to provide patients with alternative treatment by registering new generic products in shorter terms; x On the foreign markets, efforts are focused on preserving and increasing the share in the main markets (Russia, Ukraine and Poland), as well as establishing and expanding market positions in other countries (Middle and Eastern Europe and Caucasus region). x The Company continues the policy of active partnership with established international pharmaceutical companies, with new companies, as well as expanding the product range of already established collaborations. x Optimization of product portfolio. 5. Research and development /article 39, item 5 of the Accountancy Act/ “Sopharma” AD 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 strategic goal of “Sopharma” AD is to achieve a stable result of developing eight to ten new products per year in the future. The 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. Management report – “Sopharma” AD 2021 14 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. Regarding the generic products it produces for their market distinctiveness, “Sopharma” AD relies on brand names, all of which are registered trademarks of the Company. In all the years of its existence “Sopharma” AD has generated and defended its industrial property. As a result, the Company 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 Company's special policy towards product and technological innovation, and in particular innovation. New developments and products During the reporting period January - December 2021 in the Division "Development and Regulatory Compliance" the following activities were performed: New registrations and re-registrations / changes New registrations of medicinal products x Received 18 Authorizations for the use of medicinal products for new destinations, namely: - - - - - - - - - - Ambrolytin 30 mg tablets (Estonia); Dexketoprofen Sopharma 50 mg/2 ml solution for injection/infusion (Poland); Alyssum 7 mg / ml syrup (Romania). Ambrolytin 30 mg tablets (Bulgaria); Ambrolytin Max 30 mg/5 ml syrup (Poland); Vitamin B6 Sopharma 25 mg film-coated tablet (Azerbaijan); Vitamin B Complex 5 mg/1 mg/5 mg/50 mg/ml solution for injection (Kazahstan); Zondaron 2 mg/ml solution for injection/infusion (Moldova); Broncholytin Ivy 7 mg/ ml syrup (Uzbekistan); Deavit Neo 0,5 mg/ ml oral drops, solution (Uzbekistan). License: - - - - - - - - Xabanel 10; 15; 20 mg film-coated tablets (Bulgaria); Rosuvastatin Sopharma film-coated tablet - 10 mg, 20 mg (Bulgaria). Carsil 22,5 mg film-coated tablets (Bulgaria); Betagamma 50mg/50mg/0,5mg10mg solution for injection (Bulgaria); Broncholytin 40 mg tablets (Uzbekistan); Sophalor 5 mg film- coated tablets (Uzbekistan); Talert 10 mg film- coated tablets (Uzbekistan); Hellituspan syrup (Peru) Management report – “Sopharma” AD 2021 15 x Documentation has been submitted for the registration of 32 medicinal products to agencies of new destinations. Food additives x 15 nutritional supplements have been notified – 9 for Bulgaria; 3 for Serbia and 2 for the Ukraine. Re-registrations / changes x Renewed Marketing Authorizations for 45 medicinal products. x Submission of documentation for the renewal of the Marketing Authorizations for 70 medicinal products. x 573 changes for medicinal products approved by agencies. x 496 changes for medicinal products submitted to agencies. Developments x Pharmaceutical development of 6 new medicinal products / projects is underway: - - - - - - 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. xThe development of Glycerax Pico oral drops has been completed. x1 active substance is being developed. Transfer and validation of technological processes x 2 medicinal product and 2 food supplements were transferred. x 20 medicinal products / active substances have been transferred/are in the process of transfer. x 19 production processes / technologies have been validated/optimized. Management report – “Sopharma” AD 2021 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/ In the current year 4 043 533 treasury shares were purchased and no shares sold. The treasury shares purchased during the year amount to 3% of the Company's share capital and the average acquisition price is BGN 4,12 per share. Equity, net of Shares treasury shares Number BGN '000 Balance at 1 January 2020 Sold back Treasury shares Treasury shares repurchased Expense on treasury shares Balance at 31 December 2020 125 684 432 253 748 (151 748) - 100 656 949 (461) (2) 101 142 125 786 432 Treasury shares repurchased Expense on treasury shares Balance at 31 December 2021 (4 043 533) - 121 742 899 (16 546) (82) 84 514 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 13 055 000 treasury shares, representing 9.68% 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 Company. Financial risks are currently identified, measured and monitored by various control mechanisms introduced to determine adequate prices for the company's products and services and borrowed capital and to adequately assess the market circumstances of the company investments and forms of maintenance of the free liquid assets, without allowing undue concentration of risk. Risk management is currently conducted by the management of the company in accordance with the policy defined by the Board of Directors. The latter has adopted basic principles for general financial risk Management report – “Sopharma” AD 2021 17 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. Credit risk The credit risk is the risk that the clients of the company will not be able to pay fully and within the usual time limits the amounts due. 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. In its commercial practice, the company has applied different distribution schemes until it achieves the current effective approach tailored to the market situation of business, the various forms of payment, and the inclusion of commercial rebates. The company works with contractors with a history of relationships in its core markets, partnering with more than 70 Bulgarian and foreign licensed drug dealers. Work with NHIF and state hospitals also requires a policy of deferred payments. In this sense, although there is a concentration of credit risk, it is controlled through selection, ongoing monitoring of liquidity and financial stability of the trading partners as well as direct communication with them and the search for rapid measures at first indicators of problems. Liquidity risk The liquidity risk is expressed in the negative situation that the company will not be able to meet unconditionally all its obligations according to their maturity. The Company generates and maintains a sufficient volume of liquidity. An internal source of liquidity for the company is its core business generating sufficient operational flows. External sources of funding are banks and other permanent partners. In order to isolate potential liquidity risk, the company operates a system of alternative mechanisms of action and forecasts, the ultimate effect of which is the maintenance of good liquidity, respectively the ability to finance its business activity. This is complemented by ongoing monitoring of the maturity of assets and liabilities and control of outgoing cash flows. Risk of interest-bearing cash flows In the structure of the Company'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 company in the form of long-term and short-term loans are usually variable interest rates. This circumstance partly puts the cash flows of the company at 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 company. 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. Management report – “Sopharma” AD 2021 18 The management of the Company is 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. 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 Company and explains the annual financial statements. Remuneration received during the year by members of the Board of directors The remuneration and other short-term income of the Board of Directors for 2021 amounted to BGN 1 256 thousand (2020: BGN 1 321 thousand) are as follows: Current - BGN 969 thousand (2020: BGN 917 thousand); Tantieme - BGN 287 thousand (2020: BGN 404 thousand). Acquired, held and transferred by the members of the Board during the year shares and bonds of the company The shares of the Company acquired, held and transferred by the members of the Board of directors in 2021 are as follows: Members of the Board of directors 31.12.2021 Relative 31.12.2020 Relative Acquired shares in 2021 Transferred shares in 2021 share of the capital % share of the capital % Shares Shares Change Ognian Ivanov Donev 6 608 350 4.90% 3 038 940 2.25% 3 596 410 3 596 410 Vessela Lyubenova Stoeva Ognian Kirilov Palaveev Alexandar Viktorov Tchaoushev Bissera Nikolaeva Lazarova Ivan Venetskov Badinski Simeon Ognianov Donev 150 0.0001% 150 0.0001% - - 187 520 262 442 - 0.14% 0.19% - 187 520 0.14% 0.08% - - - 111 142 - 151 300 151 300 - - - - - 350 0.0003% 195 450 0.14% 350 0.0003% 200 450 0.15% 5 000 -5 000 Management report – “Sopharma” AD 2021 19 The Company has no issued bonds. Rights of members of 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: x x x x x x “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; x “Simba Private Kindergarten” EOOD, UIC 204683684, with seat and headquarters in Sofia, 16 Iliensko Shose Str. Vessela Lyubenova Stoeva controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: x “VES elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square; x x x “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: x “Alpha In” EOOD, UIC 131156322, with headquarters in Sofia, 1B Dimcho Debelianov Str. Ivan Venetskov Badinski does not hold a direct / indirect significant share (over 25%) of the capital of companies. Management report – “Sopharma” AD 2021 20 Bissera Nikolaeva Lazarova controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: x “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: Ognian Ivanov Donev participates in the managing/controlling body in the following companies: x “Sopharma Trading” AD, UIC 103267194, with headquarters in Sofia, 5 Lachezar Stanchev Str. – Chairman of the Board of Directors. x “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str. – Chairman of the Supervisory Board. x “Telecomplect” AD, UIC 831643753, with address management in Sofia, 5 Lachezar Stanchev Str., Building A – Chairman of the Supervisory Board. x “Doverie Capital” AD, UIC 130362127, with headquarters in Sofia, 82 Knyaz Dondukov Blvd. – Member of the Supervisory Board. x “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: x “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square - Мember of the Board of Directors; x “VES Elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square – Manager; x “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Deputy Chairperson of the Board of Directors. Alexandar Victorov Tchaoushev participates in the management/supervisory body of the following companies: x “DK-Domostroene” AD, UIC 102148397, with registered office in Burgas, PO Box 8000, Pobeda area – Мember of the Board of Directors; x “Alpha IN” EOOD, UIC 131156322; with seat and headquarters: Sofia, 1b Dimcho Debelyanov Str. - Manager; x “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: x “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 Management report – “Sopharma” AD 2021 21 companies: x Sopharma Imoti REIT, UIC 175059266, with seat and headquarters in Sofia, 5 Lachezar Stanchev Str. – Member of the Board of Directors. x “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors and Procurator. 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). 2. Information under art. 240b of the Commercial Code 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 2021 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 “Sopharma” AD in general and changes in the reporting year The information is included in Section III, item 2 of this document. The Company 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. Major clients of the Company with a share over 10% in sales revenues for 2021 are “Sopharma Trading” AD with 40% share, “Delta Sales” LTD with 28% share and ООО “Sopharma Ukraine” with a relative share of 12%. Management report – “Sopharma” AD 2021 22 x “Sopharma Trading” AD with headquarters in Sofia, Nadezhda district, 16 Rozhen Blvd., its main activity is wholesale and retail of medicines and sanitary products. “Sopharma Trading” AD is a subsidiary of “Sopharma” AD, acting as a "pre-wholesaler" in the process of realization of its production. x “Delta Sales”LTD with address 45 PALL Mall London UK, with main activity trade with medicines abroad. Relations between the company and “Sopharma” AD are governed by a sales agreement. x ООО “Sopharma Ukraine” with headquarters and address of management - Ukraine, Kiev, Obolonski area, 9 Prospect Moskovskii, hull 4, fl. 2, office 4-203. “Sopharma Ukraine” is a subsidiary of “Sopharma” AD. Materials used exceed 3 500 items which have a dynamic structure and diverse origin (synthetic, vegetable), physical state (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 2021 none of the suppliers’ share exceeds 10% of the total cost of services rendered and materials. 3. Information on significant transactions concluded The Company 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, except for the effect of the sale of the subsidiary SIA Briz, Latvia. 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 Financial Statements “Related Party Transactions”. At the Regular General Meeting of Shareholders, held on 4 June 2021, the following transactions were voted between the Company and related parties: 9 Conclusion of a contract for purchase and sale of electricity between “Sopharma” AD as a Buyer and “Energoinvestments” AD as a Seller, pursuant to which “Sopharma” AD will Management report – “Sopharma” AD 2021 23 purchase electricity from the Seller “Energoinvestments” AD for a period of 3 years, as of 1 July 2021. “Sopharma” AD has not concluded 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 2021 there are no events and indicators of unusual nature. 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 Company as at 31 December 2021 are stated in the annual financial statements in 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 loan agreements are listed in the annual financial statements in the Notes to the annual financial statements “Long-term bank loans” and “Short-term bank loans”. The Information about the loans of subsidiaries will be available in the consolidated financial statements of the Group. 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 Management report – “Sopharma” AD 2021 24 related parties, and the specific terms, including the deadlines for payment and the purpose for which they were granted Long-term loans to other related parties: Contractual amount BGN 81 900 thousand; interest rate - 3.0%; maturity – 31.12.2025; balance at 31.12.2021 – BGN 49 695 thousand; x x Contractual amount of EUR 708 thousand; interest rate - 3.33%; maturity – 31.12.2022; balance as of 31.12.2021 - 0. 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) promissory notes. Long-term loans provided by “Sopharma” AD to third parties: x x Contractual amount of EUR 695 thousand; interest rate - 3.05%; maturity – 12.10.2022; balance at 31.12.2021 - 0; Contractual amount of EUR 3 000 thousand; interest rate – 3.05%; maturity – 29.06.2023; balance at 31.12.2021 - BGN 6 308 thousand. Provided current loans by “Sopharma” AD to related companies: Subsidiaries: x Contractual amount BGN 14 109; interest rate - 4.10%; maturity - 31.12.2022; Balance at 31.12.2021 – BGN 5 583 thousand. Other related parties: x Contractual amount BGN 4 000 thousand; interest rate - 3.33%; maturity - 31.12.2022; balance at 31.12.2021 – BGN 4 011 thousand; x Contractual amount BGN 10 997 thousand; interest rate - 3.10%; maturity - 31.12.2022; balance at 31.12.2021 – BGN 8 263 thousand. Joint ventures: x Contractual amount BGN 3 500 thousand; interest rate - 3.50%; maturity - 31.12.2022; balance as of 31.12.2021 - BGN 1 347 thousand. Provided short-term loans to related parties are to help finance the activities of these companies for achieving their strategic purposes. They are secured by pledges of shares and securities. Information on the loans of subsidiaries will be available in the consolidated financial statements of the Group. Management report – “Sopharma” AD 2021 25 The commercial loans provided by “Sopharma” AD to third parties are as follows: x Contractual amount BGN 4 184 thousand; interest rate – 4.30%; maturity – 31.12.2022; balance as at 31.12.2021 – BGN 187 thousand; x Contractual amount EUR 695 thousand; interest rate – 3.05%; maturity – 12.10.2022; balance as at 31.12.2021 – BGN 1 527 thousand; x Contractual amount BGN 949 thousand; interest rate – 4.70%; maturity – 31.12.2022; balance as at 31.12.2021 – BGN 90 thousand. 10. Information on the use of funds from the issuance of new securities during the reporting period Pursuant to Article 25 of the Articles of Association of the company on 21 May 2021, the Board of Directors determines the parameters and decides on the issuance of warrants for the initial public offering. By Decision № 804 - Е of 4 November 2021, the Financial Supervision Commission entered 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 funds raised from the issue of warrants in the amount of BGN 12,512 thousand are presented as other capital components in the statement of financial position, net of the costs of the issue. At the end of the reporting period, the funds have not yet been used for the purposes disclosed in the prospectus for the issue, namely: - BGN 2,300,000 for investment on a production site in the town of Sandanski. For this investment the Company has made a firm commitment; - BGN 3,940,043.31 for repayment of short-term bank loans; - BGN 6,320,310.37 for potential future acquisitions of new products or new companies (at the date of the prospectus, the Company has no firm commitment to such transactions or negotiates such transactions). 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. Management report – “Sopharma” AD 2021 26 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 Company's management currently controls the collection of receivables, the implementation of financial ratios of bank contracts concluded and regularly services its obligations. Financial risk management is fully disclosed in the "Financial Risk Management" as part of the individual 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 2022 includes investments of BGN 11,7 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 accounting the Law During the reporting period there were no changes in the main management principles of “Sopharma” AD and its economic group. 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. 100m 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 At the regular general meeting of the shareholders of the Company held on 4 June 2021, a decision was made to dismiss the members of the Board of directors due to the expiration of their term and to elect a new Board of directors with a five-year term consisting of: Ognian Donev, Vessela Stoeva, Alexander Tchaushev, Ivan Badinski and Bissera Lazarova. Management report – “Sopharma” AD 2021 27 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, which is not public company 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 held by members of the Board of Directors shares of “Sopharma” AD is listed in section IV of this report - information Art. 247a paragraph 2 of the Commerce Act. 31.12.2021 31.12.2020 Rel. share of the capital % Rel. share of the capital % Members of the Audit Committee Number of shares Number of shares Change Tzvetanka Zlateva Vasil Naidenov - - - - - 386 0.000003% 186 0.000001% 200 - Kristina Atanasova - Eliot - - - - By Decision № 804 - Е of 4 November 2021, the Financial Supervision Commission entered 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. Management report – “Sopharma” AD 2021 28 31.12.2021 rel. share of Member of the Board of Directors total number of subscribed warrants % Number of warrants Ognian Ivanov Donev 11 907 394 26.5% Vessela Lyubenova Stoeva Ognian Kirilov Palaveev Alexander Victorov Tchaushev - - - - - - - - - - - - Bissera Nikolaeva Lazarova Ivan Venetskov Badinski Simeon Ognianov Donev As of 31 December 2021 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 mailing address Director of Investor Relations is Pelagia Viatcheva, tel. +359 2 8134 523, correspondence address - Sofia, 5 Lachezar Stanchev Str., Building A, fl. 11. VI. Information Appendix 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 Management report – “Sopharma” AD 2021 29 represented by each class. The total number of issuers by Sopharma AD as at 31 December 2021 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 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: x Physical persons: 6 393 – 14 212 430 shares – 10.54% x Legal persons: 141 – 120 585 469 shares – 89.46% 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: 9 claims against them; 9 taking action or refusal to act, related to the fulfillment of obligations to the Company; 9 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 2021 are as follows: Number of shares 37 559 169 % of the capital 27.86% SHAREHOLDERS “Donev Investment Holding” AD, UIC: 831915121, Sofia, 12 Positano Str. “Telecomplect invest” AD, UIC: 201753294, Sofia, 9 Slaveykov Square “Sopharma” AD, UIC: 831902088, Sofia, 16 Iliensko Shose Str. 27 881 287 13 055 000 7 054 547 20.68% 9.68% 5.23% CUPF “Allianz Bulgaria”, UIC: 130477720, Sofia, 42 Damian Gruev Str. Management report – “Sopharma” AD 2021 30 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. 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. Digitally signed OGNIAN by OGNIAN IVANOV DONEV Date: 2022.03.28 12:25:23 +03'00' IVANOV DONEV Date: 28 March 2022 Ognian Donev, PhD /Executive Director/ Management report – “Sopharma” AD 2021 31 DECLARATION for corporate governance according to art. 40 of the Accounting Act and art. 100n, para 8 of LPOS of “SOPHARMA” AD The undersigned Ognian Ivanov Donev, in my 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” AD (the Company) in addition to the Code “Sopharma” AD adopted with a Decision of the Board of Directors and continues 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 Company, its shareholders and all stakeholders - employees, business partners, creditors of the Company, potential and future investors and society as a whole. The Board of Directors of “Sopharma” AD adheres to the Good Corporate Governance Program, which is in line with effective regulation, internationally recognized standards for good corporate governance and the Bulgarian National Code of Corporate Governance. Along with the principles of recommendatory nature, “Sopharma” AD establishes a certain set of requirements for corporate governance, compliance with which is mandatory for the management bodies of the Company, namely: x Protection of shareholders' rights; x Ensuring fair treatment of all shareholders, regardless of the number of shares held by them; x Recognition of the rights of the interested parties and promotion of the cooperation between the Company and the interested parties; x Ensuring timely and accurate disclosure of information on all matters related to the Company, including the financial condition, results, ownership and management of the Company; x Supporting the strategic management of the Company, control over the activities of the Board of Directors and its accountability to the Company and the shareholders. The Corporate Governance Code is applied on a "comply or explain" basis. This means that companies comply with the Code, and in case of deviation, their management should clarify the reasons for doing so. Companies publish information on the implementation of the Code in their annual reports and on their web pages. . 1 The actions of the management of “Sopharma” AD 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 Company. The Board of Directors 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. 1. MANAGEMENT OF THE COMPANY - 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, determined by the General Meeting of Shareholders. 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: x monitors the results of the Company's activities and, if necessary, initiates changes in management; x treats all shareholders equally, acts in their interest and with the care of a good trader; x strives to follow the economic, social and environmental priorities of the encourages the implementation and monitors the compliance of the subsidiaries Company; x with the adopted principles of sustainable development at group level, also promotes the establishment of a culture of sustainable development; x ensures and controls the integrated functioning of the accounting and financial reporting systems; x ensures and controls the construction and operation of a risk management system, incl. for internal control and internal audit; x is responsible for the creation and reliable functioning of the financial information system of the Company; x gives the guidelines, approves and controls the implementation of: the business plan of the Company, essential transactions, as well as other activities, as established in the Articles of Association of the Company; x 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. . 2 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 Company are observed. The Management Agreement with the Executive Director is in accordance with the Articles of Association and the Policy developed by the Board of Directors to determine the remuneration of the members of the Board of Directors, approved by the General Meeting of Shareholders on September 25, 2020. The contract contains clauses that determine the obligations and tasks of the person, the criteria for the amount of his remuneration, his obligations for loyalty to the Company and the grounds for dismissal. 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 Art. 234 of the CA and Art. 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 Company. The Board of Directors shall ensure a proper distribution of tasks and responsibilities among its members. The main functions of the members of the Board of Directors and the number of independent members are enshrined in the Articles of Association and the law. 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 Company. 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 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 Company and compliance with legal requirements. According to the Articles of Association of the Company, the members of the Board of Directors may be re-elected without restriction. . 3 1.4. Remuneration of the members of the Board of Directors The Board of Directors of “Sopharma” AD has prepared and implements a Remuneration Policy, adopted by the General Meeting of Shareholders on September 25, 2020. 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 of the Company. In accordance with the legal requirements and good practice for corporate governance, the amount and structure of remuneration take into account: x The obligations and the contribution of each member of the Board of Directors in the activity and the results of the Company. The members of the Board of Directors 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. x The possibility for selection and retention of qualified and loyal members of the Board of Directors of “Sopharma” AD. These requirements are applied through the Remuneration Policy of the members of the Board of Directors, adopted by the General Meeting of Shareholders on September 25, 2020. x The need for compliance of the interests of the members of the Board of Directors, the long-term interests and the sustainable development of the Company. The remuneration of the members of the Board of Directors is 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 Company. x 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. According to the Articles of Association of the 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. x The remuneration and bonuses of the members of the Board of Directors and of the Executive Director of the Company must be determined by the General Meeting of Shareholders. x 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 of the Board of Directors has not been granted shares, stock options or other financial instruments. By qualified majority, the Board of Directors may decide to determine the range of employees, among which an amount of up to 2% of the value of the 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/. . 4 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 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 website: www.sopharmagroup.com 1.5. Conflict of interests The members of the Board of Directors 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 “Sopharma” AD, in the Code of Ethics of the Company, as well as in the Policy for Disclosure of Information of “Sopharma” AD in connection with the requirements of MFPA and Regulation 596/2014. of the EU. The members of the Board of Directors have an obligation to immediately disclose conflicts of interest and to provide the shareholders with access to information on transactions between the Company and its subsidiaries and members of the Board of Directors or related persons. 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 Board of Directors 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. Art. 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 Board of Directors is supported by committees, as the Board of Directors 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 Board of Directors 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. 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. . 5 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 Company'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 “Sopharma” AD 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. “Sopharma” AD has 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 “Sopharma” AD, represented by the Board of Directors, 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 company. The management provides 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 management of “Sopharma” AD provides 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 “Sopharma” AD ensures the right of all shareholders to express their opinion and ask questions. x Shareholders with voting rights have the opportunity to exercise their voting rights at the General Meeting of the 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. x 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. x 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. x 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. . 6 x The Management Board shall determine the procedures and the procedure for holding the General Meeting of Shareholders in a manner that does not complicate or increase the cost of voting unnecessarily. x 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. All members of the Management 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: www.sopharma group .com, 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 Company maintains on its website a special section on the rights of shareholders and their participation in the General Meeting of Shareholders. The management of the Company 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 management of the Company guarantees 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 2021 “Sopharma” AD held two General Meetings of Shareholders. In order to preserve the health of shareholders and their relatives, during general meetings in a pandemic, the Management actively encouraged the participation of shareholders and the exercise of their voice to be absent by correspondence. 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. . 7 3.5. The management of “Sopharma” AD guarantees the provision of sufficient information to investors regarding the rights granted by all shares of each class before their 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 Company, the corporate management does not prevent the shareholders, including the institutional ones, from consulting each other on issues related to their basic shareholder rights. committing abuses. 3.7. Shareholder transactions with controlling rights and abusive transactions The management of “Sopharma” AD does 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 Board of Directors of “Sopharma” AD prepares a Report on the implementation of the remuneration policy of the members of the Board of Directors in 2021. 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 management of the Company approves 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, Management establishes and maintains 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 management of the Company also: x ensures that the disclosure system provides complete, timely, accurate and comprehensible information that allows for objective and informed decisions and assessments; promptly discloses the capital structure of the Company 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 x x of the Articles of Association of the Company ensures 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; x approves and controls the observance of internal rules for preparation of the annual and interim reports and the procedure for disclosure of information; has adopted a Disclosure Policy, which ensures the timely disclosure of any x material periodic and incidental information about the Company, its management, its corporate management, its operational activities, its shareholder structure; . 8 x discloses 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 activities that qualify as environmentally sustainable. As part of the disclosure system, “Sopharma” AD maintains a website of the Company with approved content, scope and periodicity of the disclosed information. The Company's website is: www.sopharmagroup.com. The information disclosed through the Company's website includes: ¾ ¾ ¾ basic commercial and corporate information identifying the Company; up-to-date information on the shareholder structure; The Articles of Association of the Company and the adopted policies related to the activities and functioning of the Company; ¾ information on the structure and composition of the management and control bodies of the Company, as well as basic information on their members, including information on their committees; ¾ financial statements for the last 10 years; ¾ the materials for the forthcoming general meetings of the shareholders of the Company, as well as additional ones, received by law; ¾ 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 Company for this period; ¾ ¾ ¾ ¾ ¾ information for auditors; information about upcoming events; information on issued shares and other financial instruments; important information related to the activities of the Company; 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 Art. 223a of the Commerce Act; ¾ contact information with the Investor Relations Director of the Company. The company also maintains foreign language versions of the corporate website with similar content in the following languages: English, Russian and Polish. The company periodically discloses information about corporate governance. Disclosure of corporate governance information is in accordance with the "comply or explain" principle. The management ensures the disclosure of any material periodic and incidental information about the Company, through channels that provide equal and timely access to relevant information by users. In 2021 the Management of “Sopharma” AD discloses 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). . 9 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 Management is committed to establishing specific actions and policies regarding the sustainable development of the company, including the disclosure of information related to climate and social aspects of their activities. The corporate Management ensures effective interaction with stakeholders. This category includes certain groups of persons who are directly affected by the Company and who in turn can influence its activities, incl. suppliers, customers, employees, creditors, public pressure groups and other employees. The company identifies the stakeholders in relation to its activities based on their degree and areas of influence, role and attitude to its sustainable development. In its Disclosure Policy, management complies with legal requirements and the principles of transparency, accountability and business ethics. The management of the Company guarantees sufficient information to all interested parties about their legally established rights. In accordance with this policy, the management of “Sopharma” AD has developed 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 Company and the economic, social and environmentally friendly development of the environment in which it operates. Corporate management maintains effective relationships with stakeholders. Periodically, in accordance with the legal norms and the good international practice for disclosure of non- financial information, the Company 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 Company; environmental protection and human rights violations. Management guarantees the right to timely and regular access to relevant, sufficient and reliable information about the Company when stakeholders participate in the corporate governance process. 6. INSTITUTIONAL INVESTORS, FINANCIAL INSTRUMENTS MARKETS AND OTHER INTERMEDIARIES The corporate management ensures effective interaction of the Company with its shareholders - institutional investors, as well as with the regulated markets of financial instruments and investment intermediaries in these markets. The management of the Company uses the services of investment intermediaries, whose recommendations or actions are based on market information and principles. The same applies respectively to the operators on the markets where 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. . 10 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 “Sopharma” AD complies with all parts of the Corporate Governance Code that are applicable to the Company. 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 accounting of “Sopharma” AD 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 management and of further development and improvement. The internal control system of the financial reporting and accounting of “Sopharma” AD is a set of behavioral and technical principles, rules, means, procedures and control actions, which are specially developed and adapted to the specifics of the Company, its activities and reporting system. It is aimed at: x 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 x 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: x The Company complies 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; x the Company follows the instructions and guidelines of the top management regarding the reporting and documentation; x there is the required efficiency and effectiveness of the financial and accounting process, incl. consolidation and documentary justification; x there is a high degree of security in the protection and maintenance of the company's assets, incl. and prevention of fraud and error; and there is the provision of reliable, high-quality and timely financial and operational x information for internal and external users. The main components of the internal control system for financial reporting and accounting include: a) adoption and observance of the ethical principles and rules of conduct, which are adopted by the Code of Ethics of the employees of “Sopharma” AD and with regard to financial reporting and accounting and all related processes, procedures and actions of all staff of the company; . 11 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 accounting, 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. Control environment Ethical principles and rules related to the processes of accounting, financial reporting and accounting The management of the various levels of “Sopharma” AD has introduced and constantly monitors 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 company. 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 company. 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 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: . 12 x 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; x 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; x 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; x 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 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; x 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 the Sopharma Group; x 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 Company has 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. . 13 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 Company for risk assessment related to financial reporting The Board of Directors, the Audit Committee, the Chief Financial Officer and the Chief Accountant 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 accounting 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 Company as main: a) external risks are defined as: change in the business environment and the market environment of the company 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 company, 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, who proposes management solutions and properly reflects their effects in the financial statements. The new risk factors are identified by the CFO 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 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. Company information system. Accounting Department of the company - organization of the accounting function in the company 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. . 14 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 relevant to the objectives and process of financial reporting covers methods and documentation that: x x 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; x x determine the time period during which the transactions and operations have occurred in order to allow their recording in the appropriate accounting period; x present the transactions and transactions and related disclosures in the financial statements in accordance with the requirements of the reporting framework. Information Technology Department is responsible for the good and risk-free functioning of the information system in the company. Accounting Department - fulfillment of the accounting function and key role in the financial reporting process The Accounting Department of the 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 policy of the Company is subject to annual approval at two levels - by the Chief Financial Officer and the Board of Directors. 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 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. . 15 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, 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. 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 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. The physical controls applied 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. . 16 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 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 company is in the process of constantly expanding the formalized control procedures and activities. Ongoing monitoring of controls An important priority goal of the management, 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 Company 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. . 17 IV. Information referred to in Art. 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 Art. 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 Company. 2. Holders of all securities with special control rights and description of these rights; There are no securities with special rights. According to the Articles of Association of “Sopharma” AD, all shares issued by the Company 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 possession of the securities; There are no restrictions on voting rights. 4. The rules governing the appointment or replacement of members of the board and the amendment of the Articles of Association; 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 Art. 234 of the CA and Art. 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: . 18 x x 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; x x 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; x 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 Statute 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 General Meeting 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, according to Chapter Three, Art. 11a of the Articles of Association of the company, as well as in connection with the decisions taken by the GMS, held on 23.06.2010, of EGMS of 30.11.2011, of EGMS of 01.11.2012 , of EGMS of 28.02.2013 and to EGMS from 23.02.2018. 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 company is managed and represented by a Board of Directors, which consists of five individuals meeting the requirements of Art. 234 of the CA and Art. 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 Activity Report. According to Art. 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: x Alexandar Viktorov Tchaoushev The members of the Board of Directors are acquainted with the rights and obligations related to their position. . 19 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 Company, except for those which, according to the current legislation and the Articles of Association, are within the exclusive competence of the General Meeting. Assigns the implementation of its decisions and the implementation of functions for the operational management 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 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. . 20 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: x 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 x 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; x 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; x 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; x 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; x 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: x x x x x 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 Vasil Naidenov with a 3-year term , who was re-elected 3 consecutive times. With a decision of the GMS from 02.06.2017 Vasil Piralkov was replaced by Kristina Atanasova. . 21 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” AD 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, 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 Company in the implementation of diversity policies are: x 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. x 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 company's reputation and overall performance to external stakeholders and society. x x x Creating opportunities for disadvantaged groups and building the unity of society. “Sopharma” AD 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 company. “Sopharma” AD 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” AD. They meet the high standards applied by the Company in order to achieve its goals and strategies. The composition of the Board of Directors and the number of persons included in it is consistent with the size, complexity and scope of the Company's activities and ensures a sufficient level of general expertise. . 22 The members of the Board of Directors of “Sopharma” AD 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 Board of Directors of the Company includes economists, financiers and individuals with higher education in the field of international relations and other areas of business. The principle of gender equality has been observed, as evidenced by the many women holding senior management positions in the Society, such as Ms. Vessela Stoeva and Ms. Bisera Lazarova, members of the Board of Directors, Ms. Tsvetanka Zlateva and Ms. Kristina Atanasova, members of the Audit Committee, are just examples. The policy of diversity with regard to governing bodies does not allow for age restrictions. The Society has 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. The male-female ratio is 37% to 63% in favor of women and is imposed by the nature of the production process. The diversity policy with regard to staff (directors of directorates, heads of structural units, employees) does not allow for age restrictions. There are no cases of discrimination in the Company 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. Digitally signed OGNIAN by OGNIAN IVANOV DONEV Date: 2022.03.28 12:26:02 +03'00' IVANOV DONEV 28.03.2022 Sofia Ognian Donev, PhD Executive Director . 23 Non-financial Declaration to the Annual Separate Financial Statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 “SOPHARMA” AD 28 March 2022 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Contents I. About the Declaration ..........................................................................................................................2 II. Scope of the Declaration ......................................................................................................................2 1. Vision, strategy and corporate governance.....................................................................................2 2. Sources of corporate governance………………………………………………………………………………………………..5 3. Imprint of the company's activity……………………………………………………………………………………………….6 4. Employees...................................................................................................................................... 10 III. Spheres covered by the non-financial declaration....................................................................... 14 1. Market............................................................................................................................................ 14 2. Organizational structure……………………………………………………………………………………………………………18 3. Company development ................................................................................................................. 18 4. Risks................................................................................................................................................ 21 IV. Strategy for corporate social responsibility.................................................................................. 22 1. Definition ....................................................................................................................................... 22 2. Memberships ................................................................................................................................. 23 3. Commitment to stakeholders ....................................................................................................... 24 4. Society ............................................................................................................................................ 27 ꢀ 1 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 I. About the Declaration The Non-Financial Declaration describes the commitments that “Sopharma” AD, as a corporate citizen, fulfills for the shareholders and investors, state and local authorities, consumers, customers and partners, the environment and society. The Company maintains an active dialogue with all its stakeholders in defining the important topics in an atmosphere of transparency and completeness of the dissiminated information concerning its business activities to the interested parties. With a clear awareness of the impact of the Company’s business operations on the socio-economic sphere, the environment and the community in general, “Sopharma” AD has been able to implement a measurement system focused on the actually established impacts and to work towards their ongoing improvement. The declaration complies with the reporting requirements of Art. 48 of the Accountancy Act and contains a description of the policies and companies regarding their activities in the field of ecology, social issues, employees, anti-corruption, human rights. II. Scope of the Declaration The Declaration gives a broad overview of various aspects of the activities of “Sopharma” AD as a corporate citizen. It focuses on the companys activities for the period 01.01.2021 - 31.12.2021. The declaration contains quantitative data used as impact indicator in the main areas described below. 1. Vision, strategy and corporate governance Vision and strategy The vision and strategy of “Sopharma” AD are determined by the corporate philosophy and the mission that the Company has adopted as the basis of its activity. Corporate philosophy of “Sopharma” AD The production of medicines is not only technological process, it is a human mission based on the highest standards of quality, safety and medicinal effectiveness. Our core values “Sopharma” AD has an active and decisive role in raising the standard of living and health of people. The company delivers quality products to patients around the world, working honestly and following ethical business practices. 2 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Our values: x x x We take care of everyone's health, through our social projects and by providing reliable health information. We strive to protect the environment for future generations, as well as for the positive impact on the economy. We work to establish a permanent and effective dialogue with all participants in the pharmaceutical industry that contribute to the improvement of the health system. x x We build sustainable profitable partnerships with our suppliers. We care for our employees, supporting the happiness and development of our team members. x We create value through profit and growth. Sopharmas mission is to be an active participant in the development of the pharmaceutical industry, which also contributes to the economic development and prosperity of the Bulgarian nation. To play a key role in raising the standard of living, in making people healthier, happier and more protected. This highly responsible corporate behavior lays at the foundations of Sopharma‘s business development. The CSR strategy is part of the development strategy and the various initiatives and projects support Sopharma's core business activities forming a part of the company's DNA. Corporate management “Sopharma” AD is a Bulgarian joint-stock company with a one-tier management system. The Company is managed by a Board of Directors in a membership consisting of: Ognian Donev PhD – Chairman, Deputy Chairman Vessela Stoeva, Bissera Lazarova, Aleksandar Tchaushev, Ivan Badinski. The company is represented and managed by the Executive Director Ognian Donev, PhD. The company has two procurators - Simeon Donev and Ivan Badinski. The Board of Directors determines the guidelines and the strategic plan for development of the Company and the operational implementation is performed by a managerial team reporting to the Executive Director. 3 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Corporate citizenship policy Corporate citizenship of “Sopharma” AD develops according to the following regulations and rules: x x Regulations and rules for corporate citizenship The Constitution and the laws of the Republic of Bulgaria x The ten principles of UNGC and the UN Sustainable Development Goals SDG - The non- financial declaration of “Sopharma” AD is aligned with the guidelines of the UN Global Compact and follows the 10 principles in the strategic plan 2015+. This report is based on the Progress Report, which Sopharma AD reports from 2006. From 2016 Sopharma reports at level “advanced”. The company monitors the updating of the legislation concerning its activity and follows for its strict implementation. 2. Sources of corporate governance Systems and documents in the field of corporate governance, in accordance with which Sopharma AD operates: Coroporate governance systems Description Adoption date Last update Prospect The prospectus contains detailed information about the issuer of a financial instrument and about the issue itself. 2021 2003 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. 2021 2021 Decisions taken at the General The decisions of the shareholders are fundamental for the activity at least once a of the Company. year Meeting of Shareholders Code of conduct of Instructions and explanations for the duties and responsibilities of 2007 2021 the board of directors the members of the Board of Directors. 4 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Good corporate governance program A system of rules protecting the rights of shareholders and other stakeholders. 2009 2021 2021 Good The good manufacturing practices is a system of rules and procedures which serves to guarantee the high quality of the medicinal products at every stage of their manufacturing. 2003 Manufacturing Practice GMP 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. Principles and examples of Pharmaceutical Development. 2003 2021 ICH “Q8 2004 2006 2014 2013 2021 2021 2021 2021 Pharmaceutical Development” ICH “Q9 Quality Risk Management. ISO 17025 Principles and examples of tools of quality risk management. General requirements for the competence of the laboratories for testing and calibration. AXAPTA ЕRP - program, which is an 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. Internal Insider regulations Instructions and clarification on the obligations and responsibilities with regard to in connection with the Law on the Implementation of Measures Abuse with Financial Instruments. 2007 2021 5 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 3. Imprint of the company's activity Economic impact We create added value for our stakeholders Shareholders and investitors State and local authorities Clients and partners Environment and society Economic and financial data 2021 2020 % Stakeholders change Decision for payment of dividends by the General Meeting in the amount of BGN per 1 share - BGN 0.04 for the first half (100)% Shareholders Taxes paid in thousand BGN Incl: Taxes paid (other) in thousand BGN 11 994 7 939 4 055 9 488 5 220 4 268 (26.41)% (52)% State and local authorities Corporate tax paid in thousand BGN Payments to suppliers in thousand BGN (5)% 104 150 44 657 118 969 48 807 (12.47)% (8.5)% Suppliers /including hired services/ Payments for wages and social insurance in thousand BGN Employees The economic footprint 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. 6 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Social Impact We promote the development of health culture and invest in civil society Economic and financial data 2021 2020 Stakeholders Plants / Number of employees 8/ 1 768 111 9/ 1 991 123 Work places - employees Employees Training courses /expenses BGN ‘000/ Social benefits and payments /expenses BGN ‘000/ 2 024 2 037 Employees Medical services /expenses BGN ‘000/ Donations 747 206 830 465 Employees Employees, Local communities /expenses BGN ‘000/ Investments related to the development of the generic business sphere and the health system / number (sponsorships and participation in seminars) - 15 All stakeholders Investments related to development of the business environment (KRIB, ABIRD etc.) / number 2 9 All stakeholders Investments to sport and healthy lifestyle programs / number Investments in public communications /number - - 14 3 Society Society Projects related to promoting health culture and investing in civil society. “Sopharma” AD works to increase the economic and social development of society, to promote a healthy lifestyle and to improve the health culture. The company holds on to traditions that nurture fundamental values, such as health care in harmony with nature, strengthening the community and nurturing the competitive spirit. 7 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 x Supporting various sports activities and competitions: o Support for the International Cycling Tour (ICBM) of Bulgaria o Sponsorship of the European Cycling Championship o Sponsorship of the Bulgarian Federation of Sports Acrobatics and support of a competition from the World Cup of Acrobatics for children and youth o UN Global Compact Network Initiatives - “Games of Goodness” - Supporting sport with a cause: collective, individual or virtual games o In 2021, efforts were made to provide a safe environment for employees and partners in a COVID-19 pandemic situation. In the face of pandemics and difficult deliveries, measures were introduced to prevent the lack of vital medicines, medicines with increased consumption and directly related to the treatment of COVID-19. o Investing in new digital communication channels to help society tackle smoking. o Tabex Application - a tool for creating community, advice and mutual support between people who want to quit smoking. The application is installed by 10 540 people for a period of one year. o Creation and development of 3 product pages with up-to-date product information and long-standing advice to the public. o Donations to hospitals, Bulgarian Red Cross, homes for the elderly. 8 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Ecologic impact Responsible use of resources and environmental protection Indicators 2021 2020 Cost of raw materials 16,859 16 305 (electricity, headenergy, fuels, water; without main materials, waste and impairment) /expenses BGN ‘000/ Costs for transport services 3 181 3 570 Separate waste collection 442 tons 1 700 tons Exhaust emissions into the atmosphere 0* 0* Emissions to wastewater Waste water is treated in WWTP ** Employees trainings and inclusion in environmental Instruction of employees; protection activities Instructions for recovery and separate collection of waste; Instructions on how to deal with waste substances in the units; Participation of employees in an initiative of the UN Global Compact - Action to collect household appliances for recycling. * The plants of Sopharma AD are certified according to Good Manufacturing Practices (GMP), which also require control of 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 / decrease by BGN 389 thousand in 2021 or by 10.9% compared to 2020. Projects related to responsible use of resources and environmental protection x Separate waste collection, minimization, utilization and recycling of production and municipal waste; x Caps for the Future - Charity collection of plastic caps at all production sites; x Providing regular training of personnel on environmental issues and pollution prevention; 9 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 x Responsible implementation of the mandatory requirements of Decree of the Council of Ministers 137 and the Ordinance on packaging and waste; x Switching from plastic to paper sticks in the production of ear sticks; x Separate collection of household waste (paper, plastic, batteries) at the workplace. Containers provided at all production sites; x Reduction of printed advertising materials by 50% per year until 2025, by switching to digital content; x Annual measurement of waste gas emissions into the atmosphere; x Monthly measurement of emissions into wastewater at production sites A and B of Sofia Water; x Investments in the creation of “smart” buildings, facilities for renewable energy sources; x 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; x Measurement of the annual emissions of waste gases in the atmospheric air from the Phytochemical Plant – Kazanlak and the Solid Dosage Forms Plant - Sofia. x Creation and development of an internal Info portal with sections with training materials in support of employee development, special discounts and conditions from the company's trading partners and useful daily information about life in Sopharma. 4. Employees We are focused on the responsible behavior of our employees and provide equal job opportunities “Sopharma” AD invests in its employees with the conviction that they are its most valuable asset. As a responsible Employer the Company follows up certain principles of labor interrelations: x Zero tolerance for any kind of discrimination in the workplace; x Ensuring healthy and safe working conditions; x Ensuring opportunities for development based on equality; x Ensuring the right of association and labor protection of employees. 10 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Safe working conditions Due to the nature of its activity Sopharma guarantees the safe health working conditions following the standards of the GMP. • For the jobs, professions and types of work for which Personal protective equipment is applied, including special work clothes, an order is followed, signed by the Executive Director of “Sopharma” AD - Ognian Donev, prepared according to Regulation No. 3 on Minimum Safety and Protection Requirements workers' health when using PPE on work place / Prom. State Gazette, no. 46/2001), Ordinance on free working and uniform clothing (promulgated SG No. 9/2011) and in accordance with Article 284 of the Labor Code. • For safe work with machines and equipment the operators follow the safety instructions with which they are familiar and obliged to follow. / Approved with the signature of the Production Director" /. • Prevention of risk situations concerning the health of the employees - a three-month periodic briefing is conducted in all factories for employess in each section documented with the personal signature of the employee. Workplaces corresponding to the knowledge and skills of employees The funds invested in raising the qualification of employees (training) in 2021 amounted to BGN 111 thousand. Beyond its direct commitments as an employer, “Sopharma” AD creates and develops social projects and programmes and participates in community events directed at the employees and at their families. Healthy life: - - - - - - Additional health services; Availability of nurse in the plants of the Company; Annual free examinations by specialists; Fitness free of charge; Inclusion in the programme for physical activity Multisport; Involve employees in various competitions such as @SopharmaTeam: tennis court; cycling competition; participation in ultra marathons. 11 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 @SoSociety, SoSopharma Indicator 2021 2020 Parental Care Employees that took parental leave Employees that returned to work in the reporting period after parental leave ended Employees that took unpaid parental leave Employees that returned to work after parental leave ended that were still employed 12 months after their return to work 4% <1% 4% <1% <1% 3% <1% 3% A baby set for each new-born baby/ number Assistance for each first year pupil – a rucksack with all the needed aids/number 43 34 50 39 Free kindergarten on the territory of Sopharma for children of the employees of the Company, opened 2012/number of children 28 22 Leisure time Free library / number of employees using the services 60 70 Structure of employees by gender 2021 (2020) Gender of employees Man Women 2021 37% 63% 2020 37% 63% Structure of employees in education 2021 (2020) Employees/education Number 2021 Relative share % 2021 Number 2020 Higher education 811 35 46% 2% 891 41 Colleges Secondary school Еlementary education 899 23 51% 1% 1 024 28 12 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Structure of employees by age 2021 (2020) Employees / Age Number 2021 Relative share % 2021 Number 2020 under 30 31- 40 148 300 492 643 185 8% 184 360 574 679 187 17% 28% 36% 11% 41 – 50 51 – 60 Over 60 Structure of the employees of the group of “Sopharma” AD in 2021 Employees Total Men Women Hierarchy 2021 % 2021 % Top management 5 2 40% 3 60% Senior Management 59 25 42% 34 58% 13 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 III. Spheres covered by the non-financial declaration 1. Market “Sopharma” AD is aware of its role of a significant factor in the pharmaceutical sector at a European level and in the Bulgarian economy. As a leading Bulgarian manufacturer, exporter and distributor of pharmaceutical products, the Company imposes standards to the companies along the chain, following the principles of transparency and responsibility of the management. “Sopharma” AD invests in the fields of science and development, quality management, industrial property, publicity and transparency. The products and business model it creates, position “Sopharma” AD among the top 10 companies on the Bulgarian pharmaceutical market and first in terms of sales in units with a 10.5% of the market. The group is represented in more than 45 countries, but the key markets are Bulgaria, Russia, Ukraine, Kazakhstan and Poland, and the strategic plan focuses on further expanding its presence in the region. Review of the results Key indicator Unit % 2021 2020 Market share in units 10.5 10 Market share in value % 2.8 3 The market share in units of the products of “Sopharma” AD as well as the share of the OTC products are an indicator for the positioning of the Company in the consciousness of the users. The reputation of the Company as a function of the sustainable business model, the quality of the products, as well as the adequate CSR (Corporate Social Responsibility) Strategy have an impact over the preferences by the end user at the point of purchase of medicines. The positions of the main competitors of the company on the territory of the country are as follows: Novartis — 7.04% (3.76% in units), Roche - 5.76% (0.14% in units), Merck Sharp Doh – 4.02% (0.13% in units), Teva – 3.90% (9.80% in units), Pfizer - 3.65% (0.69% in units), Abbvie – 3.34% (0.06% in units), Astrazeneca - 3.18% (0.48% in units), Bayer – 2.82% (1.97% in units), Sanofi-Aventis - 2.72% (2.46% in units). The products with the largest share of sales in the country are Analgin, Methylprednisolone, Antistenocardin, Famotidine, Parecatamol, Buscolyzin, Allergosan. 14 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Production activity “Sopharma” AD has eight manufacturing plants in Bulgaria, which function in compliance with the requirements of the EU and of the Bulgarian legislation: 1. Plant for solid dosage forms, Sofia 2. Plant for solid, semi-solid and liquid dosage forms, Vrabevo 3. Plant for solid dosage forms, phytochemical and synthetic products, Kazanlak 4. Ampoule plant, Sofia 5. Lyophilic production, Sofia 6. Suppository plant, Sofia 7. Gamma sterilization, Sofia 8. Plant for medical products, solid and liquid dosage forms, Sandanski “Sopharma” AD is the largest Bulgarian manufacturer of ampoules and suppositories and a sole manufacturer of lyophilic dosage forms in Bulgaria. 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.: hard tablets, coated tablets, film-coated tablets, capsules; - - - - Galenic - suppositories, drops, syrups, ointments, gels, creams; Parenteral - injection solutions, lyophilisate powder for injections; Hemodialysis solutions; Medical and cosmetic products, incl.: plasters; dressing products; sanitary-hygiene products; herbal cosmetics. Products “Sopharma” AD produces products in the following therapeutic groups: cardiovascular, gastroenterological, dermatological, psycho-neurological, antiallergic, respiratory, analgesic, rheumatological. The Company has more than 200 products in its portofolio, mainly generics and 15 traditional products, of which 12 are plant-based. 15 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Taking into consideration the responsibility related to its market position, Sopharma invests in new production capacities, technologies and products to achieve more effective treatment and in new digital applications for marketing its products: Investments 2021 2020 Renewed Marketing authorizations / number 45 5 Documentation submitted for the renewal of the Marketing Authorizations medicinal products of agencies/ number Pharmaceutical developments of medicinal products and active substances / number Investments in new technologies / transferred and validated / number Marketing authorizations for pharma products for new destinations / number Cosmetic products, food supplements and medical devices notified / registered in Bulgaria and other countries 32 18 19 18 14 4 11 30 27 40 The Company invests in enrichment of the generic portfolio by working on the implementation of generics: x Proven to be efficient x Ratified as a golden standard in the treatment of various diseases x Topical with regard to the markets Responsible marketing “Sopharma” AD pursues a flexible marketing policy, taking into account the possible increase of the delivery prices of the raw materials, the changes in the requirements to the manufacturers of medicines for the suppliers of raw materials, as well as the specifics of the market of medicines. Activities are consistent with the Change Control Criteria (ICH Q10 3.2.3) and Material and Process Requirements under Good Manufacturing Practice (GMP) guidelines Part 1, with internal procedures approved in a standard operating procedure for change control and standard operating procedures on the approval of manufacturers of active substances, auxiliary substances, packaging materials, feedstock and are managed through an internal eDMS system. The selection and evaluation criteria cover quality criteria, regulatory compliance, certification status, documentation as well as economic, financial criteria and delivery parameters. Approved manufacturers and the implementation of deliveries are subject to continuous monitoring as part of the management of the purchase process. Sopharma has a developed policy and procedures for evaluation of its counteragents making a regular risk assessment. The Company has over 70 Bulgarian and foreign licensed traders of medicines, with proven history of the interrelations on the main markets as its partners. 16 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 The communication messages of the Company are in conformity with the national ethical rules for advertisement and commercial communication. Ethical competition “Sopharma” AD strictly observes the national and European legislation and the requirements related to the rules for ethical competition. The Company is guided in its activity by the conviction that ethical behavior is a mandatory condition for development of the free market. The Company is exposed to strong competition on the one hand and on the other hand – to new forms of cooperation in the sphere of health care. “Sopharma” AD invests mainly in the development of generic production and the role of the generic industry for sustainable healthcare in Bulgaria and in Europe is expected to grow. 2. Organizational structure Chairman of the Board of Directors and Executive Director Deputy Chairman of the Board of Directors Member of the Board of Directors Independent Member of the Board of Directors Independent Member of the Board of Directors Business Development Trade Directorate Production Resources Finance Logistics Market presence of “Sopharma” AD in: Ukraine Poland Kazakhstan Baltic States and Belarus Turkey Operational Directorate Investor relations Process efficiency and product quality Azerbaijan Georgia Cooperation and licenses Administrative Directorate Labor protection Human Resources Quality аssurance Armenia Development and regulatory compliance Tunisia China Intelectual Property Legal Department Financial and accounting department Quality control Israel and the Palestinian Territories Technical Directorate 17 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 3. Company development The pharmaceutical community united in its economic organization “Bulgarian Pharmacy Cooperative Company” starts the construction of the first production laboratory for production of medicinal products in the country. First production building of the Bulgarian Pharmacy Cooperative Company 1933 The production laboratory of the Bulgarian Pharmacy Cooperative Company moves in a building especially constructed for its needs on “Iliensko shousee” and grows into “Galenus” – a pharmaceutical plant in which better conditions are a prerequisite for faster development. This leads to increase of production capacity and widening of the product portfolio. “Galenus” is the first modern industrial plant for production of medicinal products on the Balkan Peninsula, competing with popular German and Swiss companies. 1942 Pharmaceutical factory “Galenus” All machines for the production of solid forms are moved into the “Galenus” plant. The average production capacity of one machine reaches 5,576 tablets per hour. The main products are Aspirin, Chinin and Doverin produced with imported and high quality raw materials. In the same year, after the nationalization, the “Galenus” plant is renamed into Chemical-pharmaceutical plant – the ancestor of Sopharma. 1953 Chemical-Pharmaceutical Plant - Sofia After a successful privatization Sopharma becomes a private pharmaceutical company. The first years after privatization are a period of constant 2000 modernization and improvement. For the two years after the privatization period Sopharma unites six enterprises in a modern and dynamic corporate structure including: Sopharma AD, Unipharm ASD, Vramed AD, Pharmachim Holding AD, NIFHI AD and Rostbalkanpharm. Privatization The President of the Republic of Bulgaria George Parvanov officially opened the new pharmaceutical plant “Sopharma – Vrabevo”. In this modern plant for production of medicinal products Sopharma invested 20 million BGN. Each step of the construction of the plant followed internationally accepted GMP (Good Manufacturing Practices) standards. Pharmaceutical plant “Sopharma – Vrabevo”, which is fully compliant with the European standards for Good Manufacturing Practices (GMP) 2003 18 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 In 2004 Sopharma licensed its production facilities according to the European GMP which secured its strategic position after the EU accession in 2007. In the same year Sopharma increased its production capacity by adding another member to its group of companies - Bulgarian Rose - Sevtopolis AD. Sopharma fully licenses its production capacities according to the European standards for Good Manufacturing Practices 2004 In 2005 Sopharma opened the most modern logistics center in Bulgaria (logistics terminal) for distribution of pharmaceutical products. The logistics center fully complies with the European Good Distribution Practice (GDP). Most modern Bulgarian logistics center 2005 2006 Sopharma initiated the planning and construction process of a new highly technological tablet factory for the production of solid forms with doubled capacity and investment potential of over 40 million EUR. All activities related to planning, construction and validation fully comply with the European standards for pharmaceutical production and are approved by the Bulgarian Health Agency. For this project Sopharma received the First Class Investor Award. Construction of a new high-tech tablet factory for production of solid forms In 2007 Sopharma made the next step in modernization and increased production capacity in the tablet production of Bulgarian Rose - Sevtopolis AD, Kazanlak. Completion of a new ampoule plant in Sofia 2007 Being the only producer of ampoules in Bulgaria in 2007 Sopharma undertook a reconstruction of its ampoule facility in order to increase its production capacity. The official opening of the new plant for pharmaceutical substances took place in 2008 2008 2010 Start of construction of two new production plants in Serbia and Bulgaria and establishing of a subsidiary in Poland. Registration of the first original product of Sopharma in Western Europe Listing on Warsaw Stock Exchange. The next step in being an excellent public company 2011 2012 For the first time in the modern history of the company we open a new administrative office, more accessible to our guests and partners. For a third consecutive year Sopharma is given the “Best public company” award from the Capital Top 100 ranking. Opening our new administrative offices 19 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 The new state-of-the-art solid-forms factory of Sopharma is operational and won three awards in the construction sector. The company takes several steps towards the consolidation of the Group. 2013 Opening the new state-of-the-art solid dosage forms factory After concluding the largest projects for modernization of the production facilities we can now put strong focus on R&D. 2014 2015 Opening a new page Bulgarian Rose - Sevtopolis AD is finally merged into Sopharma. Sopharma Trading AD entered the Serbian Market. Consolidation and expansion “Sopharma” AD acquires 68% of the capital of “Veta Pharma” AD. 2016 2017 Consolidation and expansion Consolidation and expansion "Sopharma" AD acquires 51% of the capital of the Moldovan distributor of medicinal products RAP Pharma International. "Sopharma" AD acquires 75% of the successful start-up for the development and marketing of Aromania food supplements. "Medica" AD is merged into "Sopharma" AD. "Unipharm" AD is merged into "Sopharma" AD. The company celebrates its 85th anniversary. 2018 2019 Consolidation and expansion Expansion "Sopharma" AD registered the first generic - "Urimax duo" in the field of urology. “Sopharma Trading” AD acquires sole control over the companies “SCS Franchise” AD and “Sanita Franchising AD, which strengthens its position on the pharmacy market.” "Sopharma" AD sold the shares owned by it from the capital of "Aromania" AD, after having mastered all significant brands and activities. Аs a result of lengthy negotiations and an agreement reached with the other shareholders, a change in the shareholder structure of the subsidiary SIA "BRIZ" was entered in the Commercial Register of the Republic of Latvia as a result of which "Sopharma" AD remains the sole owner of the capital of the company. Marketing Authorization was obtained for 5 new medicinal products - Solifenax 5 mg film- coated tablet (Bulgaria), Ambrolitin 30 mg/5 ml syrop (Bulgaria, Latvia, Estonia), Ketoprofen 100 mg/ 2 ml solution for injection (Bulgaria), Sofazolon 40mg powder and solvent for solution for injection (Bulgaria), Dexketoprofen 50mg/2ml solution for injection (Latvia, Lithuania, Estonia). Consolidation and expansion 2020 20 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 “Sopharma” AD realized a successful issue of warrants amounting to over BGN 12 million. Consolidation and expansion 2021 4. Risks “Sopharma” AD monitors the following risks, which it has identified as significant and potentially affecting of its activities: x Risks related to the macroeconomic situation in the country and other markets; x Risks associated with the business and the industry in which the Company operates; x Risks related to the markets in which Sopharma operates; x Risks related to foreign exchange rates and the currency board in force in Bulgaria; x Credit risk. Risk Low Medium High Socio - political Loss of confidence in media (consumers also stop believing the ads included or additional info); The reputation of “Sopharma” AD may be affected by misleading information in media; Changes in legislation and or incorrect Reducing the macroeconomic stability; The unstable political situation in Bulgaria and countries in regulations may lead to Group's expenses increasing; Loss of confidence in the of doctors or a which “Sopharma” AD operates expertise may affect the company's pharmacists; activities; Decline in foreign investment; Household indebtedness. Restrictions consumption, including for medicines. on household Employees Ecological Fluctuation due to the highly Shortage of skilled workers with competitive market; experience. Pressure to raise salaries and social benefits. As a result of certified production, environmental risks are minimized; Potential risk as a result of natural cataclysm. Anticorruption Standart operating procedures for decion making. An attempt for involving to non-transparent practices on the institutions; Unethical competition. part of monitoring 21 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 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 interact with all levels of government with our stakeholders and therefore have the right and responsibility to express our position of a corporate citizen. IV. Strategy for corporate social responsibility 1. Definition For “Sopharma” AD responsible corporate ctizenship is the only path to a sustainable business development with a clear vision of the goals, the necessary resources to achieve these goals and the impact from the company's business on the economic, social and environmental sphere. Along with the investments made in its business, “Sopharma” AD works hard to achieve UN’s SDG 2015. “Sopharma” AD actively communicates its activities with all stakeholders. The CSR strategy, initiatives and specific activities are planned and developed, coordinated and implemented by the Media and Advertising Manager, after obtaining the approval of the Board of Directors of “Sopharma” AD. The policies and specific projects are focused on 4 main areas: x x x x Health and healthy lifestyle Compassionate business and care for the environment Education Community 22 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Strategic Management Market Employees Responsible employer: Zero discrimination regarding the right to work Environment Environmental management systems Community Contribution to economic Corporate Citizenship Anticorruption Transparent corporate governance development Guaranteed Ensuring the right of association Reduciton of environmental impacts Developing the healthcare system Work on SDG 2015 quality and safety of products and services Sustainability Employee Responsible use of resources Health prevention Participation in the establishment and implementation of international pharmaceutical standards development: hierarchically and as a qualification and education Ethical Decent labor wages Reduction of direct Providing Working with partner Competition impacts аffordable organizations healthcare Responsible marketing Ensuring healthy and safe work conditions Reduction of indirect impacts Investing in education Joint projects of organizations in which „Sopharma” is a member Responsible procurement Social benefits for employees Participation in environmental projects Investments in public communications Development of the generic industry in the country Development of pharmacy sphere Internal communication Training of employees for separate collection of waste and environmental issues 2. Memberships In order to adequately create and implement its CSR strategy, “Sopharma” AD works with partner organizations such as the BCAUSE foundation, the Bulgarian Public relations association, the European association of communication directors, the Investor Relations association. The company is a member of a number of business and branch organizations with which it holds discussions and works on the objectives and challenges faced by CSR in Bulgaria. 23 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 “Sopharma” AD is member of : x Confederation of the Employers and Industrialists in Bulgaria (CEIBG). http://ceibg.bg/ x Member-cofounder of the Association of Bulgarian Exporters (ABE), which goal is to develop the National strategy for export Member of AHK, a connecting link between Bulgarian and German economics, with more than 450 German, Bulgarian and multinational companies – members. http://bulgarien.ahk.de/bg/ x А founder-member of the Association of Bulgarian Pharmaceutical Manufacturers, at present Bulgarian Generic Pharmaceutical Association (BGPharmA), its priorities being harmonization of interests with regard to the general national and international mechanisms for regulation of drug manufacture and use, improvement of GMP principles application and observation of loyal competition principles. http://www.bgpharma.bg x Founder-member of the Bulgarian National Committee of the International Chamber of Commerce and elected 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. Its principal mission is to stimulate transborder trade and investments and to assist business corporations to face the challenges and possibilities resulting from globalization. www.iccwbo.org, http://www.icc-bulgaria.bg x Member of UN Global Compact Bulgarian Network. http://www.unglobalcompact.bg x Member of the National Corporate Governance Committee, established to promote the implementation of good corporate governance practices and the development of the Bulgarian National Corporate Governance Code. The Commission is a permanent independent body created 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 Finance Corporation (IFC). www.nkku.bg 3. Commitment to stakeholders From the point of view of “Sopharma” AD, an interested party is any group which is directly or indirectly related to the company's activities and has the potential to influence it and can influence the decision-making for the business development of the Company. The relations with the interested parties are an indicator of the degree of success of the Company, of its place in the economic and social life in the country and an assessment of the viability of the adopted course for its development. 24 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 x Key stakeholders are the patients for whom Sopharma's products are a a remedy and means of improving the quality of their lives. x Shareholders - as a public company Sopharma AD recognizes its obligation to provide adequate and timely information about its activities in the field of CSR to all shareholders and potential investors in the Company. x The state and local government authorities. x Partners - Sopharma's success depends on the success of the companies down the chain of suppliers and partner companies. x Employees - Today’s employees are among the most valuable assets of any company, especially in high-tech manufacturing - such as the pharmaceutical - and the investments in personnel generate a considerable return. Employees are the first ambassadors of the company's mission, of its corporate culture and reputation. In addition to the healthy and safe work environment, career opportunities and the social benefits which Sopharma accepts to be the minimum in its labor relations, the company strives to build an atmosphere of shared common values with its employees and to engage in public projects which are of importance to them. x Local community - “Sopharma” AD owns 8 factories in the country and is a major investor in some regions undertaking responsibilities far beyond its business commitments. The company invests resources in projects of considerable importance for these regions. At the same time - and as the biggest Bulgarian pharmaceutical manufacturer “Sopharma” AD has been able to successfully launch a number of various nationwide campaigns. “Sopharma” AD maintains an ongoing open dialogue with all stakeholders through different communication channels depending on the target group: the official corporate media, official BSE announcements, the social networks. 25 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 The dialogue with the shareholders, the central and local authorities, business partners and the non-governmental organizations is carried out both through the traditional communication channels but also via the participation in and the support of a number of various events, discussions and joint projects. Traditional communication channels have been the Sopharma Group website, the company's activity reports, the COP report submitted to the United Nations Global Compact and the newsletters published by the partner organizations. The informal communication channels include Sopharma profiles in various social networks, the company’s mobile applications, etc. “Sopharma” AD communicates to all stakeholders through different channels: Stakeholders Patients Communication channels Product websites; Frequency of communication Weekly; Official corporate sites of “Sopharma” AD. When there is new information; “Sopharma” AD uses the group's website to provide reliable information related to European generic associations; changes in the regulatory framework concerning the end user, etc. Website of the group www.sopharmagroup.com Daily Daily Copmany profiles on FB, Instagram, Twitter; Social platform “Tabex”; mobile app General Meeting of Shareholders; Notifications; When needed Regularly Shareholders Meetings; Sopharma's official corporate media - Website of the group www.sopharmagroup.com Participation in online forums dedicated to problems in pharmacy; Official sites of the state and local authorities, of the control bodies; The official corporate media of “Sopharma” AD; State and Local authorities Digital transformation in the pharma sector; Forum on the markets in the Eurasian Union. Participation in working groups related to the healthcare system and pharmacy. Every day Regularly, depending on the program of the particular group Regularly Chain partners Employees Business meetings. Intranet page; When needed FB page of “Sopharma” AD; Corporate website of the Group www.sopharmagroup.com; New info page with inside Daily When needed 26 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 information for employees; Bulletin boards; When needed Internal mailing. When needed When needed Daily Society Healthy life conferences; Public communication conferences; FB pages of “Sopharma” AD; Profiles on social media Instagram, YouTube. 4 conferences per year Daily Daily Partners Meetings and conferences; Business meetings. Regularly 4. Society “Sopharma” AD uses its extensive expertise and resources to contribute not only to the economic and social development, but also to enhance the cultural environment and the quality of human life through the creation and development of specific projects. The company supports the development of an active civil society in the country and takes firm positions on a number of socially important issues. Local Societies x “Sopharma” AD invests in its local industries to protect the economic life of local communities. Traditionally, the company was a supporter of different projects in Vrabevo such as a shopping center with a pharmacy store and a restaurant; St. Archangel Mihail church’s roof repairs; local lyceum Christo Botev in Vrabevo, local lyceum in Sandanski; x “Sopharma” AD works together with the Municipality of Veliko Tarnovo and the Bulgarian Red Cross with donations of medicines to homes for the elderly and pension clubs; x In 2021 “Sopharma” AD continuеs with donations of medicines and tools for health indicators measurement, such as blood sugar; x Donations for research in the fields of pharmacy and biology and support for the publication of a textbook; x Donation of medicines (OTC and food supplements) of first necessity to the Center for Social Rehabilitation and Integration and the Day Care Center for the Elderly in Dimovo. 27 Non-financial Declaration to the Annual separate financial statement of “Sopharma” AD according to the requirements of Articles 48-52 of the Accountancy Act - 2021 Partnerships 1. Bulgarian Network of Global Compact As an active member of the Bulgarian Network of the UN Global Compact, “Sopharma” AD participates in a number of projects focused on health and a healthy lifestyle. Investments in public communication “Sopharma” AD supports the development of public communications as a basis for any democracy. The Company works beyond the ideas of traditional pharmaceutical projects and supports forums and festivals related to longevity, healthy lifestyles, the development of public communications. Digital Social Responcibility “Sopharma” AD communicates with its stakeholders through its website: https://www.sopharmagroup.com/en and through product pages of focal OTC products and nutritional supplements. For the first time a Bulgarian public company provides interactive tools for investors and shareholders related to the shares of the Company and the structure of the group. The Company communicates with all stakeholders through the new digital tools and continues to invest and develop its digital channels. The Company communicates through the Youtube channel of “Sopharma” AD and its profiles in Twitter and Facebook. Pharmaceutical Industry Тhe European industry for generic and biosimilar medicines „fulfils its mission by providing high-quality medicines for patients in Europe, by increasing their access to effective treatment and partnerships for sustainable health“. The generics and biosimilar industry is developing a model for sustainable pharmaceutical innovation related to the creation and production of value-added products that can improve health revenues and hospital efficiency. The purpose of this document is to enable users of the information in it to feel the attitude of management to the sustainable development of the Company and its role as a corporate citizen. Digitally signed by OGNIAN OGNIAN IVANOV DONEV Date: 2022.03.28 IVANOV DONEV 12:26:47 +03'00' 28 March 2022 _________________________ Ognian Donev, PhD Executive director 28 REPORT REGARDING THE APPLICATION OF THE REMUNERATION POLICY FOR THE MEMBERS OF THE BOARD OF DIRECTORS OF “SOPHARMA” AD FOR 2021 The present report has been prepared in accordance with art. 12, par. 1 of Ordinance №48 of the Financial Supervision Commission from 20 March 2013 and art. 8 (2) of the Remuneration policy for the members of the Board of Directors of “Sopharma” AD, prepared by the Board of Directors and approved by the Annual General Meeting of shareholders on 25 September 2020. In the present report the Company discloses the details of the application of the Remuneration policy for the members of the Board of Directors and the Executive Director, emphasising on the avoidance of incentives for taking excessive risk, conflict of interest or other behavior, leading to adverse consequences. 1. Information about the decision process in preparing the Remuneration policy, including, if applicable, information about the term and composition of the Remuneration committee, the name of the external consultants, whose services have been used in preparing the Remuneration policy The Remuneration policy has been adopted in accordance with Ordinance № 48 from 20 March 2013 and in compliance with the provisions of the Law on Public Offering of Securities regulating the remuneration of the members of the managing and controlling bodies of public companies. The latest changes in the remuneration policy were adopted by the General Meeting of Shareholders on 25 September 2020. The remunerations of the members of the Board of Directors are based on the operational results of the Company and are in accordance with the business strategy, goals, values and long-term interests of the Company, as well as the avoidance of discrimination, conflict of interest and unequal treatment of persons in determining their remuneration. The Company has not formed a Remuneration committee. No external consultants have taken part in preparing the Remuneration policy. In 2021 “Sopharma” AD applied Remuneration policy of the Board of Directors in accordance with legal requirements and the recommendations of the National Corporate Governance Code. 2. Information about the relative weight of the variable and fixed components of the remuneration of the members of management and controlling bodies According to the Remuneration policy the members of the Board of Directors and the Executive Director are entitled to remuneration, the type, size and due period of which are determined with a decision of the Annual General Meeting and which is paid out under the terms and conditions of the management contracts between them and the Company. 1 On the basis of art. 24, par. 3, letter A of the Company's Articles of Association and a decision of the Annual General Meeting of 04 June 2021 the permanent monthly remuneration of a member of the Board of Directors is BGN 10 000 / ten thousand / or BGN 120 000 / one hundred and twenty thousand / annually, and of the Executive Director the permanent monthly remuneration is BGN 30 000 / thirty thousand / or BGN 360 000 / three hundred and sixty thousand/. The Executive Director of the Company annually received an additional payment of 1% of the profit for 2020 recorded in the Individual Annual Financial Statements approved by the General Meeting of Shareholders, namely BGN 286 649 /two hundred and eighty-six thousand six hundred and forty-nine/, with 40% being deferred by the GMS for a period of three years. The ratio between fixed and variable remuneration in 2021 is 1.26. 3. Information about the criteria for achieved targets, based on which stock options, stocks of the Company or other types of variable payment are provided and an explanation how the criteria under art. 14, par. 2 and 3 from Ordinance 48 contribute to the long-term interests of the company The current Remuneration policy for the members of the Board of Directors does not allow the inclusion of stocks, stock options or other rights for acquisition of stocks of the Company in the remuneration of the members of the Board of Directors. No part of the remuneration is based on changes in the price of the shares of the Company. The criteria for the variable remuneration of the Executive Director are objective and measurable and are based on the achieved results, previously determined by the company in the remuneration policy, which promote the long-term stability of the company and include non-financial indicators, such as compliance with applicable rules and procedures. 4. Clarifications regarding the applied methods for determining the successful reaching of targets The financial criteria for achieved results, which are set in the Policy for determining the remuneration and are used in the assessment for determining the variable remuneration of the Executive Director in 2021 are the realization of revenues from the operations of “Sopharma” AD and the realization of positive gross financial result. The specific parameters of the financial criteria were determined at the end of 2020 by a decision of the Board of Directors dated 14 December 2020, based on an analysis of the results achieved under the financial criteria set for the previous year, as well as the approved budget and strategy for the next calendar year. The assessment of the fulfillment of the financial criteria for achieved results is performed annually, based on the audited by the auditor annual financial statements of the company. The non-financial criteria for achieved results for 2021 are determined by the Board of Directors of “Sopharma” AD, according to the immediate need for change and a flexible approach to adjusting the work environment, processes and relationships with third 2 countries in order to maintain the normal pace of work during the COVID-19 pandemic, successful completion of the project for serialization of products exported to the Russian market and completion of the intranet platform for daily communication with employees and the digitization of internal documents concerning remuneration, leave and others. In addition, Art. 12 of the Policy for formation of the remuneration of the members of the Board of Directors contains a clause, allowing the Company to request the returning of the paid variable remuneration, determined on the basis of the principles of art. 9.3 of the same. Remuneration based on data, which subsequently proves to be false, shall be subject to returning. The decision for requesting the returning shall be taken by the General Meeting of Shareholders of the Company. 5. Clarification regarding the correlation between the remuneration and the achieved results Chapter II and III of the Remuneration policy contain the main guidelines applied in determining the remuneration of the members of the Board of Directors. 6. Base remuneration and justification of the annual scheme for bonus payments and/or all other non-monetary additional remunerations On the basis of art. 24, par. 3, letter B of the Articles of Association the Executive Director of the company will receive an additional payment of 1% of the profit for 2020 recorded in the approved Annual Financial Statements by the General Meeting of shareholders, namely BGN 286 649 two hundred and eighty-six thousand six hundred and forty-nine/. In 2021 the Executive Director have been accrued tantiems for the amount of BGN 286 649 and BGN 340 941 has been paid. According to Article 9.3, para. 4 of the Remuneration Policy 40% of the Executive Director's additional remuneration is deferred for a period of three years. As of 31 December 2021 the deferred variable remuneration of the Executive Director amounts to BGN 445 770,60 and shall be distributed as follows: - BGN 126 400,37 has a maturity of 2022; - BGN 153 290,87 has a maturity of 2023; - BGN 108 811,82 has a maturity of 2024. 7. Description of the main features of the scheme for additional voluntary retirement insurance and information about the paid and/or due contributions by the Company in favor of the relevant member of the management or supervisory body for the for the respective financial year, when applicable The Company has no obligations regarding an additional voluntary retirement insurance of the members of the Board of Directors and the Company has no liabilities related to retirement benefits for the members during the reporting financial year. 8. Information regarding the deferment period for the payment of the variable remuneration 3 According to the Articles of Association, 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 bonus of up to one percent of the net profit of the Company. The payment 40% of the one-time payment to the Executive Director shall be deferred for a period of 3 years. Repayment of the deferred portion of the variable remuneration is made once a year at maturity. 9. Information about the compensation policy after contract termination In case of early termination of the Management contract with a member of the Board of Directors, respectively with the Executive Director, the total amount of the compensations, due in relation to the early termination, as well as the payments, related to the notification period or provisioned in the clause, prohibiting the conduct of competing activities, cannot exceed the amount of the annual fixed remuneration of the person paid for the last two years. The above mentioned compensations shall not be payable when the contract is terminated due to unsatisfactory results and/or faulty behavior of the member of the Board of Directors, respectively of the Executive Director. 10. Information about the period, in which the shares cannot be transferred and the options on shares cannot be exercised, concerning variable remuneration, based on shares The current Remuneration policy for the members of the Board of Directors does not provision for this type of remuneration. 11. Information about the policy for retaining of certain amount of stock until the end of the term of the members of the management and controlling bodies after expiration of the period under item 10 in which the shares cannot be transferred and the options on shares cannot be exercised The Remuneration policy for the members of the Board of Directors does not envisage provisions for this type of remuneration. 12. Information about the contracts of the members of the management and controlling bodies, including the term of each contract, the notification period for termination and details regarding the compensations and/or other due payments in the event of early termination The members of the Board of Directors were elected by decision of the General Meeting in 4 June 2021 for a period of 5 years. 13. Full amount of the remuneration and other incentives of the members of the management and controlling bodies for the respective financial year Total accrued remuneration of the Board of Directors for the current financial year amounted to BGN 1 341 817. 4 14. Information about the remuneration of each person, who has been member of a management or controlling body of a public company for a certain period in the respective financial year a) the full amount of the paid and/or accrued remuneration of the person for the respective financial year Paid remuneration 696 441 Accrued remuneration 642 149 BGN Ognian Ivanov Donev Vessela Lyubenova Stoeva 193 930 193 930 51 364 51 364 Ognian Kirilov Palaveev Bissera Nikolaeva Lazarova Alexandar Viktorov Tchaoushev Ivan Venetskov Badinski Procurator - Ivan Badinski Procurator - Simeon Donev 99 897 120 000 174 477 60 000 99 897 120 000 174 477 60 000 128 665 128 665 b) the remuneration and other tangible and intangible incentives received by the person from companies of the same group Total remuneration received from other companies in the same group amounted to BGN 24 000 for Ognian Donev. c) remuneration received by the person in the form of profit sharing and/or bonuses and the reasons for its provision In 2021 at the Annual General meeting on 4 June 2021 is voted (On the basis of art. 24, par. 3, letter "B" of the Company’s Articles of Association) to Ognian Ivanov Donev, in his quality as Executive Director of the Company and member of the Board of Directors, to be paid an additional remuneration of 1% (one percent) of the amount of profits realized in 2020 according to the adopted Annual Financial statement. None of the other members of the Board of Directors of “Sopharma” AD received any remuneration from the Company in the form of profit sharing and/or other bonuses. d) any additional payments for services provided by the person outside of their normal functions when such payments are allowed under the contract signed with him Vessela Lyubenova Stoeva – Deputy Chairman of the Board of Directors of “Sopharma” AD was paid and BGN 73 930 under a contract of employment as an "Adviser on Economic Affairs to the Executive Director". Ivan Venetskov Badinski, member of the Board of Directors of “Sopharma” AD, was paid BGN 54 477 under a contract of employment as a “Director of Co-operation and Licensing” аnd BGN 60 000 in his capacity as procurator of the Company. The contracts with the other members of the Board of Directors of “Sopharma” AD do not provide for additional payments for services provided by them outside of their normal functions. 5 e) paid and / or accrued compensation for the termination of their contract during the last financial year None. f) an overall assessment of all non-monetary benefits, expressed as a remuneration, outside of those specified in letters a) – e) In 2021 no member of the Board of Directors of “Sopharma” AD has received non-monetary benefits, expressed as remuneration, outside of those specified in letters a) – e). g) information regarding all loans, payments of welfare cost and guarantees by the Company or its subsidiaries or other companies subject to consolidation in its annual financial statement, including data on the remaining outstanding part and interests. In 2021 no member of the Board of Directors of “Sopharma” AD has received loans, guarantees by the Company or its subsidiaries or other companies subject to consolidation in its annual financial statement. Social insurance for the members of the Board of Directors in the amount of BGN 13 982,40 have been accrued. 15. Information about shares and/or share options and/or other incentive schemes based on shares a) number of offered stock options or the provided shares by the Company during the financial year and the conditions under which they were proposed, respectively provided; b) the number of exercised shares options during the financial year and for each of them, the number of shares and the exercise price of the options or the interest amount under the share incentive scheme at the end of the financial year; c) the number of unexercised share options at the end of the financial year, including data on their price and date of exercise and the essential conditions for the exercise of rights; d) any changes in the terms and conditions of existing share options adopted during the financial year. The current remuneration policy of members of the Board of Directors of “Sopharma” AD does not provide for to be granted stock options, shares of the Company or other incentive schemes based on shares to the members of the corporate management and such were not paid or provided. 16. Information about the annual change in remuneration, the company's performance and the average full-time remuneration of non-directors in the previous at least five financial years, presented together in a way that allows 6 2014 2015 2016 2017 2018 2019 2020 2021 Year BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 BGN’000 Gross remuneration of all members of the Board of Directors for the year (incl. 1,168 999 1,157 1,120 1,190 1,141 1,233 1,122 tantieme) Average amount of remuneration per member of the Board of Directors per year Results of the company (net profit) 234 27,291 23,729 200 25,354 24,886 231 38,347 24,367 224 44,228 30,273 198 33,298 34,671 228 40,382 34,879 247 28,664 36,397 187 24,271 33,256 Gross remuneration based on full- time employees of the company (excl. BoD) Average amount of remuneration based on full- time employees of the company (excl. BD) 13 13 13 15 15 16 18 19 7 17. Information on exercising the possibility to demand a refund of the variable remuneration The return of paid variable remuneration is regulated in Chapter VI, item 12 of the Policy for formation of the remuneration of the members of the Board of Directors of Sopharma AD, adopted by EGM on 25 September 2020. 18. Information about all deviations from the procedure for the implementation of the remuneration policy in connection with extraordinary circumstances under Art. 11, para. 13, including an explanation of the nature of the exceptional circumstances and an indication of the specific components not implemented During the current period there are no deviations from the procedure for the implementation of the remuneration policy. Program for the application of the Remuneration policy for the next financial year. The current Policy adopts as guiding principles Recommendation 2009/386/EC in addition to Recommendation 2004/913/ЕC and Recommendation 2005/162/ЕC regarding the remuneration of directors of companies, the shares of which are admitted to trading on a regulated market, implemented through Ordinance №48 from 20 March 2013 by the Financial Supervision Commission. The Board of Directors believes that the principles for determining the remuneration, underlying the Policy, are effective as of the present moment with regard to the accomplished financial results for the reporting period. As at the date of preparation of the report the Board of Directors has not proposed any changes of amendments in the Remuneration policy, approved by the General Meeting of shareholders. The Board of Directors is responsible for the timely announcement of the Remuneration policy, approved by the General Meeting of Shareholders, and its subsequent amendments, in a clear and accessible manner. The Company prepares an annual Report on the remuneration of the members of the Board of Directors, which is a separate document to the annual financial statements. The Report contains the necessary information described in art. 13 of Ordinance №48 of the Financial Supervision Commission and after its adoption by the General Meeting of shareholders it is published on the website of the Company - www.sopharmagroup.com. Digitally signed by OGNIAN OGNIAN IVANOV DONEV Date: 2022.03.28 IVANOV 28.03.2022 DONEV 12:27:17 +03'00' Ognian Donev,PhD / Executive Director/ 8 DECLARATION under art. 100n, par. 4, item. 4 of the Law on Public Offering of Securities We, the undersigned Ognian Ivanov Donev, in the capacity of representative “Sopharma” AD, Boris Anchev Borisov, in the capacity of Financial Director and Yordanka Nikolova Petkova in the capacity of Chief Accountant of “Sopharma” AD, entered in the Commercial register of Sofia City Court under company file № 9359/1991, with seat and address of management: Sofia, Nadezhda district, 16 “Iliensko shoes” Str. DECLARE that to our knowledge: 1. The set of financial statements, prepared in accordance with the applicable accounting standards, reflects a true and fair view of the assets and liabilities, financial position and profit of “Sopharma” AD; 2. The preliminary management report includes a fair review of the development and the performance of “Sopharma” AD, together with a description of the principal risks and uncertainties facing the Company. Digitally signed by OGNIAN IVANOV DONEV Date: 2022.03.28 12:27:46 +03'00' 28 March 2022 Sofia OGNIAN IVANOV DONEV Digitally signed by BORIS ANCHEV BORISOV Date: 2022.03.28 12:37:39 +03'00' BORIS ANCHEV BORISOV Digitally signed by Yordanka Nikolova Petkova Date: 2022.03.28 12:38:40 +03'00' Yordanka Nikolova Petkova Baker Tilly Klitou and Partners EOOD 5, Stara planina street 5th Floor Sofia 1000 Bulgaria T: +359 2 9580980 F: +359 2 8592139 info@bakertilly.bg www.bakertilly.bg INDEPENDENT AUDITORS’ REPORT To the Shareholders of Sopharma AD REPORT ON THE AUDIT OF THE SEPARATE FINANCIAL STATEMENTS Opinion We have audited the accompanying separate financial statements of Sopharma AD (“the Company”), which comprise the separate statement of financial position as at December 31, 2021, and the separate statement of comprehensive income, the separate statement of changes in equity and the separate statement of cash flows for the year then ended, and notes to the separate financial statements, including a summary of significant accounting policies. In our opinion, the accompanying separate financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2021, 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 separate financial statements section of our report. We are independent of the Company within the meaning of the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by International Ethics Standards Board for Accountants (IESBA Code), together with the ethical requirements of the Independent Financial Audit Act (IFAA) that are relevant to our audit of the separate 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. %(:-736=ꢀxꢀ%7796%2')ꢀxꢀ8%<ꢀꢀ ꢀ &EOIVꢀ8MPP]ꢀ/PMXSYꢀERHꢀ4EVXRIVWꢀ)33(ꢀXVEHMRKꢀEWꢀ&EOIVꢀ8MPP]ꢀMWꢀEꢀQIQFIVꢀSJꢀXLIꢀKPSFEPꢀRIX[SVOꢀSJꢀ&EOIVꢀ8MPP]ꢀ-RXIVREXMSREPꢀ0XHꢁꢂꢀXLIꢀQIQFIVWꢀSJꢀ [LMGLꢀEVIꢀWITEVEXIꢀERHꢀMRHITIRHIRXꢀPIKEPꢀIRXMXMIWꢁ Emphasis of Matter We draw attention to Note 2.2. to the separate financial statements disclosing that at the date of their issuance, the consolidated financial statements of the Company for the same period have not yet been issued. The management plans to issue the consolidated financial statements not later than 30 April 2022. Our opinion is not qualified in respect of this matter. We draw attention to note 44 to the separate financial statements disclosing the Management assessment regarding current and potential effects for the Company from the military conflict between Russia and Ukraine. Our opinion is not qualified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter 1. Valuation of investments in subsidiaries In this area our audit procedures performed are: The Company has certain investments in Consideration and evaluation of Company’s analysis on its investment in each of these subsidiaries and its potential of return by applying the discounted future cash flows method; subsidiaries, with carrying amount of BGN 26,503 thousand – included in the disclosure in Notes 18 to the separate financial statements. The following specific features are observed with regard to these companies: specific and difficult economic environment in the countries where some of these companies operate; and/or very active investment policy related to fast expansion in difficult markets; and/or underutilized capacity and reporting of losses. These circumstances presume that certain risk exists for overstating the investments in the subsidiaries. Analysеs and assessment of the relevance of Company’s budgets and projections as at 31 December 2021; Analyses and assessment of the appropriateness of the key judgments and assumptions, used by Company’s management, including the discount rate used in the application of the discounted cash flows model. The review of the indicators and the tests of the management for the necessity in impairment of the Recalculation of the material amounts, recognized investments in these subsidiaries is a complex as impairment, on the basis of the method adopted by Company’s management; process which requires from the management to apply significant assumptions, various judgments and estimates with regard to the future return on the investments while for the purposes of measuring the recoverable amount it uses the method of discounted future cash flows. The latter are determined specifically for each subsidiary, which is treated as a separate cash generating unit, and taking into account a number of factors, such as: specific activities and location, business environment, past experience with the company, expected growth in the volume of sales for subsequent reporting Testing and assessment of the completeness, appropriateness and adequacy of the disclosures in Company’s separate financial statements with regard to the measurement of investments in subsidiaries. Key audit matter How our audit addressed the key audit matter periods, appropriate discount rate, other risks, etc. Therefore, there is inherent uncertainty in these assessments of the management. The calculations have been performed by the management with the assistance of independent certified appraisers – external experts. On this basis and at the discretion of the management, some of the investments in these subsidiaries have been partially impaired. Due to the circumstances that (a) the process of estimating and testing of possible impairment losses on the investments in subsidiaries assumes a number of judgments, higher degree of subjectivity and uncertainty in the projection assumptions, including revenue projections, cash flow projections and growth rate, the level of uncertainty including due to the fact that part of the subsidiaries are abroad and operate under specific economic conditions; and (b) the materiality of the reporting item itself, as disclosed above, we have determined this matter as a key audit matter. 2. Valuation of trade receivables, receivables In this area our audit procedures performed are: from related parties and loan granted to third parties As disclosed in Notes № 21, 22, 24, 25 and 26(A) We have obtained understanding of the process for to the separate financial statements, the Company the application of IFRS 9, with focus on has gross trade receivables, receivables from related implemented methodology in Companys model for parties and loans granted to third parties amounting determination of impairment allowance for credit to BGN 178,481 thousand and impairment loss losses, including the use of key assumptions and allowances amounting to BGN 4,097 thousand. estimates. In 2021 the Company has applied IFRS 9 “Financial Inquiries, walkthroughs and obtaining of instruments”, according to which credit losses are understanding of the process, related to determined based on expected credit losses. determination of credit losses for trade receivables, receivables from related parties, and loans granted to third parties. The application of the model for determination of Assessment and test of design and operating the allowance for credit losses for trade receivables, effectiveness of key controls in the process of receivables from related parties and loans granted to monitoring and determination of the amount of third parties, result in significant complexity and the impairment allowance for credit losses. necessity of key estimates and judgements for the Managements final calculations related to Key audit matter How our audit addressed the key audit matter identification of doubtful exposures as well as determination of the amount of credit losses. To determine the amount of impairment loss Review and assessment of the adequacy of the allowance for credit losses, the Company applies methodology used by the Company for the purposes model based on significant estimates and of identification of credit losses and calculation of judgements: impairment loss allowance in accordance with the concept 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. x Interpretation of the requirements for determination of impairment loss allowance in accordance with IFRS 9, on which the Companys model for determination and calculation of the expected credit losses is based; x x 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; Assessment of the completeness, appropriateness and adequacy of the disclosures in the Company’s separate financial statements with regard to credit risk and impairment allowance for credit losses for trade receivables, receivables from related parties and loans granted to third parties. x 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 separate financial statements of the Company and, b) inherent level of uncertainty in the use of multiple estimates and judgements by the management of the Company 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. Information Other than the separate financial statements and Auditors’ Report Thereon The Management Board of the Company (“the Management”) is responsible for the other information. The other information comprises the annual report on activities, including the non-financial declaration, the corporate governance statement, statement and the report on the implementation of the remuneration polcicy prepared by the management in accordance with Chapter Seven of the Accountancy Act, but does not include the separate financial statements and our auditors’ report thereon. Our opinion on the separate 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 separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the separate 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 separate financial statements Management is responsible for the preparation and fair presentation of the separate 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 separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the separate financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Audit Committee of the Company (“Those charged with governance”) are responsible for overseeing the Company’s financial reporting process. Auditors’ Responsibilities for the Audit of the separate financial statements Our objectives are to obtain reasonable assurance about whether the separate 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 separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: x Identify and assess the risks of material misstatement of the separate 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 Company's internal control. x x x 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 Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the separate 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 Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. x 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 separate 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 separate financial statements and Auditors’ Report Thereon”, with respect to the annual report on activities, the corporate governance statement, the non-financial declaration, and the report on the implementation of the remuneration policy, 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: x x x The information included in the annual report on the activities for the financial year for which the separate financial statements have been prepared, is consistent with the separate financial statements. The annual 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 separate financial statements have been prepared. x x The non-financial Declaration, covering the financial year for which the separate financial statements have been prepared, has been provided and prepared in accordance with the requirements of Chapter Seven of the Accountancy Act. The report on the implementation of the remuneration policy for the financial year for which the financial statements have been prepared has been submitted and meets the requirements set out in the ordinance under Art. 116c, para. 1 of the Public Offering of Securities 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 Company and the environment in which it operates, acquired during our audit, in our opinion, the description of the main features of the Company’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 separate financial statements under Art. 100m, para 4, p.3 b) “b” of the Public Offering of Securities Act Reporting under Art. 100m, para 4, p.3 “c” of the Public Offering of Securities Act The information on transactions with related parties is disclosed in Note 43 to the separate 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 for the year ended 31 December 2021, 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 separate 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 “c” of the Public Offering of Securities Act Our responsibilities for the audit of the separate financial statements as a whole, described in the section Auditors’ Responsibilities for the Audit of the separate financial statements include assessment whether the separate financial statements present true and fair view of material transactions and events. Based on the audit procedures performed on the material transactions, underlying the separate financial statements for the year ended 31 December 2021, 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 separate 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 Company are considered in the context of forming our audit report on the separate financial statements taken as a whole, and not with the purpose of expressing the audit opinion on these material transactions. Reporting for compliance of the electronic format of the separate financial statements, included in the annual separate financial statements according to art. 100m, para 4 of the Public Offering of Securities Act in relation to the requirements of the ESEF Regulation In addition to our reporting responsibilities according to ISAs described in section “Auditors’ Responsibilities for the Audit of the separate financial statements”, we have also performed the procedures required by 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. These procedures are related to inspection of the format and whether human readable part of this electronic format complies with the audited separate financial statements and issuing an opinion in relation to compliance of the electronic format of separate financial statements of “Sopharma AD” for the year ended 31 December 2021, included in electronic file “097900BGGW0000048796-20211231-EN-SEP.xhtml”, 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”). In relation to these requirements, the electronic format of the separate financial statements, included in the annual separate financial statements according to art. 100m, para 4 of the Public Offering of Securities Act, should be presented in XHTML format. Management of the Company is responsible for the implementation of the requirements of the Regulation ESEF when preparing the electronic format of the separate financial statements in XHTML. Our opinion is related to the electronic format of the separate financial statements, included in electronic file “097900BGGW0000048796-20211231-EN-SEP.xhtml”and does not include other information, included in the annual separate financial statements according to art. 100m, para 4 of the Public Offering of Securities Act. Based on the procedures performed, our opinion is that electronic format of the separate financial statements of the Company for the year ended 31 December 2021, included in the attached electronic file “097900BGGW0000048796-20211231-EN-SEP.xhtml”is prepared in all material respects in compliance with the Regulation ESEF. 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. x x x x Baker Tilly Klitou and Partners EOOD were appointed as statutory auditors of the separate financial statements of the Company for the year ended December 31, 2021 by the general meeting of shareholders held on June 4th, 2021 for a period of one year. The audit of the separate financial statements of the Company for the year ended December 31, 2021 represents fifth statutory 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 Company’s 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. x x We hereby confirm that in conducting the audit we have remained independent of the Company. For the period covered by our statutory audit, other than the audit, we have performed agreed upon procedures on the financial information of Sopharma AD for 2018, 2019 and 2020, related to prospectus for public offering of warrants of the Company. Audit company №129 Baker Tilly Klitou and Partners EOOD Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2022.03.28 22:45:52 +03'00' Galina IVAYLO YANCHEV YANCHEV Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2022.03.28 22:50:16 +03'00' Dimitrova Lokmadjieva -Nedkova Ivaylo Yanchev Registered auditor, responsible for the audit Galina Lokmadjieva - Nedkova Managing Director March 28, 2022 Baker Tilly Klitou and Partners EOOD 5, Stara Planina Str., 5th floor 1000 Sofia, Bulgaria 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 at 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 engaged to carry out a mandatory financial audit of the separate financial statements of Sopharma AD for the year 2021, prepared 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 March 28, 2022. We hereby certify that as reported in our audit report on the annual separate financial statements of Sopharma AD for 2021 issued on March 28, 2022: 1. Art. 100m, para. 4, item 3, letter "a" Audit opinion: In our opinion, the accompanying separate financial statements give a true and fair view of the financial position of the Company as at 31 December 2021 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 43 to the separate financial statements. Based on the audit procedures we performed on related party transactions as part of our audit of the separate 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 separate financial statements for the year ended 31 December 2021 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 separate 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 Auditing of the Separate Financial Statements" include assessing whether the separate 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 separate financial statements for the year ended 31 December 2021, 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. The results of our audit procedures on the Company's transactions and events that are material to the Company's financial statements are reviewed by us in the context of our opinion on the separate financial statements as a whole and not for the purpose of issuing 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 separate annual financial statements of SOPHARMA AD for the reporting period ending 31 December 2021, dated 28 March 2022. 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 March 2022 regarding the issues covered by Art. 100m, para. 4, item 3 of POSA. Baker Tilly Klitou and Partners EOOD: Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2022.03.28 IVAYLO YANCHEV YANCHEV 22:58:07 +03'00' ____ 28 March 2022 Sofia Ivaylo Yanchev Registered auditor