Sopharma AD

SFA_EN FS SOPHARMA - 31.12.2023_EN_reviewed FS Notes Sopharma - 31.12.2023_EN_reviewed (002) SFA_2023_ind_Management_report_EN_audit_reviewed SFA_Corporate_Governance_Declaration_2023_EN_reviewed SFA_Remuneration_Policy_report_2023_EN_reviewed SFA_2023_ind_Declaraion_by_the_responsible_directors_EN Sopharma AD | 16 Iliensko Shose Str. | 1220 Sofia, Bulgaria | tel: +35928134200 | fax: +35929360286 | [email protected] sopharmagroup.com Annual standalone financial statements of “Sopharma” AD as of 31 December 2023 Contents: Standalone annual financial statements according to IFRS Notes to the standalone financial report according to IFRS Management report and non-financial declaraction Corporate governance declaration Report regarding the application of the remuneration policy Declaration by responsible persons Auditors’ report Audtors’ declaration Company Name: SOPHARMA AD Board of Directors: Ognian Donev, PhD Vessela Stoeva Alexander Chaushev Bisera Lazarova Ivan Badinski Executive Director: Ognian Donev, PhD Procurator: Simeon Donev Finance Director: Boris Borisov Chief Accountant: Yordanka Petkova Head of Legal Department: Alexander Yotov Registered Office: Sofia 16, Iliensko Shousse St. Lawyers: Ventsislav Stoev Stefan Vachev Servicing Banks: United Bulgarian Bank AD DSK Bank AD Eurobank Bulgaria AD ING Bank N.V. - Sofia branch Unicredit Bulbank AD Citibank Europe plc, Bulgaria Branch Auditor: Baker Tilly Klitou and Partners EOOD for the year ended 31 December 2023 restated Revenue 3 250,020 230,832 Other operating income/(losses), net 4 16,133 6,490 Changes in inventories of finished goods and work in progress 11,967 9,915 Raw materials and consumables used 5 (85,392) (81,202) Hired services expense 6 (46,121) (36,424) Employee benefits expense 7 (67,239) (53,667) Depreciation and amortisation expense 15,16 (20,965) (19,429) Other operating expenses 8,9 (8,770) (12,109) Profit from operations 49,633 44,406 Net gain/(loss) on sale of investments in subsidiaries and associates 18,19 2,400 (1,124) Impairment of non-current assets outside the scope of IFRS 9 10 (1,991) (2,899) Finance income 11 7,795 4,678 Finance costs 12 (3,635) (3,713) Finance income/(costs), net 4,160 965 Profit before income tax 54,202 41,348 Income tax expense 13 (6,081) (4,767) Net profit for the year 48,121 36,581 Other comprehensive income: Items that will not be reclassified to profit or loss: Revaluation of property, plant and equipment 15 33 (991) Net change in the fair value of other long-term equity investments 20 1,766 (1,047) Remeasurement of defined benefit pension plans liabilities 34 (855) 548 Income tax relating to items of other comprehensive income that will not be reclassified 13 (3) 99 Other comprehensive income for the year, net of tax 14 941 (1,391) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 49,062 35,190 Basic net earnings per share 28 0.37 0.30 Diluted net earnings per share 28 0.35 0.29 The accompanying notes on pages 5 to 160 form an integral part of these separate financial statements. Executive Director: Ognian Donev, PhD Finance Director: Boris Borisov Chief Accountant (preparer): Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD, № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD * Combined indicators (Note 42) SOPHARMA AD SEPARATE STATEMENT OF COMPREHENSIVE INCOME Notes 2022 * BGN'000 2023 BGN'000 1 Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:47:28 +02'00' Boris Anchev Borisov Digitally signed by Boris Anchev Borisov Date: 2024.03.29 16:03:30 +02'00' Yordanka Nikolova Petkova Digitally signed by Yordanka Nikolova Petkova Date: 2024.03.29 16:04:08 +02'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 16:58:40 +02'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2024.03.29 17:08:33 +02'00' SOPHARMA AD SEPARATE STATEMENT OF FINANCIAL POSITION as at 31 December 2023 * restated restated ASSETS Non-current assets Property, plant and equipment 15 209,456 229,900 218,021 Intangible assets 16 5,893 4,247 4,324 Investment property 17 49,886 49,267 47,302 Investments in subsidiaries 18 90,655 83,124 73,487 Investments in associates and joint ventures 19 112,094 69,372 54,485 Other long-term equity investments 20 3,870 4,706 5,706 Long-term receivables from related parties 21 62,664 67,471 49,695 Other long-term receivables 22 3,357 3,526 9,546 537,875 511,613 462,566 Current assets Inventories 23 106,651 82,760 63,628 Receivables from related parties 24 84,714 68,041 82,046 Trade receivables 25 22,759 18,115 26,746 Loans granted to third parties 26 (а) 11,203 8,317 1,804 Other receivables and prepayments 26 (b) 6,001 6,078 7,589 Cash and cash equivalents 27 105,354 4,893 17,188 336,682 188,204 199,001 TOTAL ASSETS 874,557 699,817 661,567 EQUITY AND LIABILITIES EQUITY Share capital 172,591 134,798 134,798 Treasury shares (57,452) (52,203) (50,284) Reserves 445,129 461,603 439,194 Other equity components (reserve for issued warrants) 1,857 12,488 12,512 Retained earnings 14,000 36,269 23,385 28 576,125 592,955 559,605 LIABILITIES Non-current liabilities Long-term bank loans 29 35,698 1,860 9,077 Deferred tax liabilities 30 3,304 5,098 6,777 Government grants 31 4,791 5,996 6,724 Lease liabilities to related parties 32 14,774 14,739 - Lease liabilities to third parties 33 2,250 594 496 Retirement benefit obligations 34 5,274 4,340 4,957 66,091 32,627 28,031 Current liabilities Short-term bank loans 35 44,838 11,734 46,663 Current portion of long-term bank loans 29 854 468 623 Trade payables 36 21,723 40,049 12,706 Payables to related parties 37 100,043 2,632 1,609 Tax payables 38 2,515 892 835 Payables to personnel and for social security 39 10,581 9,804 8,397 Other current liabilities 40 51,787 8,656 3,098 232,341 74,235 73,931 TOTAL LIABILITIES 298,432 106,862 101,962 TOTAL EQUITY AND LIABILITIES 874,557 699,817 661,567 - - - The accompanying notes on pages 5 to 160 form an integral part of these separate financial statements. Executive Director: Ognian Donev, PhD Finance Director: Boris Borisov Chief Accountant (preparer): Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD, № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD * Combined indicators (Note 42) 1 January 2022 BGN'000 Notes 31 December 2022 BGN'000 31 December 2023 BGN'000 The separate financial statements on pages 1 to 160 were approved for issue by the Board of Directors on 28 March 2024 and were signed by: 2 Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:47:52 +02'00' Boris Anchev Borisov Digitally signed by Boris Anchev Borisov Date: 2024.03.29 16:02:11 +02'00' Yordanka Nikolova Petkova Digitally signed by Yordanka Nikolova Petkova Date: 2024.03.29 16:02:47 +02'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 17:00:16 +02'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2024.03.29 17:09:40 +02'00' for the year ended 31 December 2023 2023 2022 BGN'000 BGN'000 restated Cash flows from operating activities Cash receipts from customers 244,819 295,051 Cash paid to suppliers (162,725) (146,838) Cash paid to employees and for social security (64,262) (51,232) Taxes paid (except income taxes) (10,433) (6,999) Taxes refunded (except income taxes) 2,361 4,632 Income taxes paid, net (8,205) (4,921) Interest and bank charges paid on working capital loans (2,222) (898) Foreign currency exchange gains/(losses), net (460) (222) Other proceeds/(payments), net (1,480) (420) Net cash flows (used in)/from operating activities (2,607) 88,153 Cash flows from investing activities Purchases of property, plant and equipment (13,405) (12,766) Proceeds from sales of property, plant and equipment 14,658 540 Purchases of intangible assets (2,089) (762) Purchases of investment property (290) (408) Purchases of shares in associates (27,933) (16,481) Proceeds from sales of shares in associates 2,845 - Purchases of other long-term equity investments (13,440) (675) Proceeds from sales of other long-term equity investments 578 628 Purchases of stocks/shares in subsidiaries (7,606) (10,860) Proceeds from sales of stocks/shares in subsidiaries 218 515 Proceeds from dividends from investments in subsidiaries 197 272 Proceeds from dividends from investments in associates 1,488 1,215 Proceeds from dividends from other long-term equity investments 26 33 Loans granted to related parties (25,704) (58,500) Loan repayments by related parties 39,039 45,684 Loans granted to other companies (2,740) - Interest received on loans granted 2,393 975 Interest received on deposits 946 - Granted recoverable additional capital contributions to subsidiaries (9,134) - Proceeds from charges on guarantor contracts 424 243 Net cash flows used in investing activities (39,529) (50,347) Cash flows from financing activities Proceeds from capital issue 156,084 - Proceeds from long-term bank loans 36,565 - Repayment of long-term bank loans (2,337) (10,303) Proceeds/(Repayment) from short-term bank loans (overdraft), net 33,063 (35,728) Interest and charges paid under investment purpose loans (89) (60) Treasury shares (5,252) (1,919) Dividends paid and unexercised warrant rights (71,889) (11) Lease payments to related parties (1,929) (1,327) Lease payments to third parties (864) (866) Government grants for agricultural land 36 34 Proceeds/(payments), net, related to other equity components (warrants) (791) 79 Net cash flows from/(used in) financing activities 142,597 (50,101) Net increase/(decrease) in cash and cash equivalents 100,461 (12,295) Cash and cash equivalents at 1 January 4,893 17,188 Cash and cash equivalents at 31 December 27 105,354 4,893 The accompanying notes on pages 5 to 160 form an integral part of these separate financial statements. Executive Director: Ognian Donev, PhD Finance Director: Boris Borisov Chief Accountant (preparer): Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD, № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD * Combined indicators (Note 42) SOPHARMA AD SEPARATE STATEMENT OF CASH FLOWS Notes 3 Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:48:08 +02'00' Boris Anchev Borisov Digitally signed by Boris Anchev Borisov Date: 2024.03.29 16:00:56 +02'00' Yordanka Nikolova Petkova Digitally signed by Yordanka Nikolova Petkova Date: 2024.03.29 16:01:34 +02'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 17:01:11 +02'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2024.03.29 17:10:27 +02'00' SOPHARMA AD for the year ended 31 December 2023 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Balance at 1 January 2022 (originally accounted for) 134,798 (50,284) 66,201 28,614 1,644 342,581 12,512 28,137 564,203 Effects of a subsidiary merger 42 - - - 154 - - - (4,752) * (4,598) * Balance at 1 January 2022 (restated) 134,798 (50,284) 66,201 28,768 1,644 342,581 12,512 23,385 559,605 Effects of acquisition of treasury shares - (1,919) - - - - - - (1,919) Effects of rights sold under issued warrants - - - - - - - 103 103 Other equity components, including: - - - - - - (24) - (24) - transaction costs - - - - - - (24) - (24) Distribution of profit for: - - 2,427 - - 22,574 - (25,001) - - reserves - - 2,427 - - 22,574 - (25,001) - Total comprehensive income for the year (originally accounted for), including: - - - (892) (1,047) - - 39,951 38,012 - net profit for the year - - - - - - - 39,429 39,429 - other comprehensive income, net of taxes - - - (892) (1,047) - - 522 (1,417) Effects of a subsidiary merger 28,42 - - - - - - - (2,822) (2,822) Total comprehensive income for the year (restated), including: - - - (892) (1,047) - - 37,129 35,190 - net profit for the year - - - - - - - 36,581 36,581 - other comprehensive income, net of taxes - - - (892) (1,047) - - 548 (1,391) Transfer to retained earnings - - - (616) (37) - 653 - Balance at 31 December 2022 (originally accounted for) 28 134,798 (52,203) 68,628 27,106 560 365,155 12,488 43,843 600,375 Effects of a subsidiary merger 42 - - - 154 - - - (7,574) * (7,420) Balance at 31 December 2022 (restated) 28,42 134,798 (52,203) 68,628 27,260 560 365,155 12,488 36,269 592,955 Capital issue 37,793 - 128,131 - - - (9,840) - 156,084 Effects of a subsidiary merger 28 - 3 - (131) - - - 128 - Effects of treasury shares, including: - (5,252) - - - - - - (5,252) - acquisition of treasury shares - (5,252) - - - - - - (5,252) Other equity components, including: - - - - - - (791) - (791) - transaction costs - - - - - - (791) - (791) Distribution of reserves for: - - - - - (138,625) - - (138,625) - dividends from profit for 2022 - - - - - (32,604) - - (32,604) - advance six-month dividends - - - - - (106,021) - - (106,021) Distribution of profit for: - - - - - - - (77,308) (77,308) - dividends from profit for 2022 - - - - - - - (40,187) (40,187) - advance six-month dividends from profit for 2023 - - - - - - - (37,121) (37,121) Total comprehensive income for the year, including: - - - 30 1,766 - - 47,266 49,062 - net profit for the year - - - - - - - 48,121 48,121 - other comprehensive income, net of taxes - - - 30 1,766 - - (855) 941 Transfer to retained earnings - - - (5,825) (1,820) - - 7,645 - Balance at 31 December 2023 28 172,591 (57,452) 196,759 21,334 506 226,530 1,857 14,000 576,125 The accompanying notes on pages 5 to 160 form an integral part of these separate financial statements. Executive Director: Finance Director: Chief Accountant (preparer): Ognian Donev, PhD Boris Borisov Yordanka Petkova Audit company Baker Tilly Klitou and Partners EOOD, № 129: Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD * Combined indicators (Note 42) SEPARATE STATEMENT OF CHANGES IN EQUITY Total equity Share capital Treasury shares Additional reserves Retained earnings Other equity components (reserve for issued warrants) Changes in equity for 2022 Reserve of financial assets at fair value through other comprehensive income Changes in equity for 2023 Statutory reserves Revaluation reserve - property, plant and equipment Notes 4 Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:48:35 +02'00' Yordanka Nikolova Petkova Digitally signed by Yordanka Nikolova Petkova Date: 2024.03.29 15:59:38 +02'00' Boris Anchev Borisov Digitally signed by Boris Anchev Borisov Date: 2024.03.29 16:00:21 +02'00' IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 17:02:09 +02'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva- Nedkova Date: 2024.03.29 17:11:16 +02'00' SOPHARMA AD SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 SEPARATE STATEMENT OF COMPREHENSIVE INCOME 1 SEPARATE STATEMENT OF FINANCIAL POSITION 2 SEPARATE STATEMENT OF CASH FLOWS 3 SEPARATE STATEMENT OF CHANGES IN EQUITY 4 NOTES TO THE SEPARATE FINANCIAL STATEMENTS 1. BACKGROUND CORPORATE INFORMATION 5 2. SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY 7 3. REVENUE 53 4. OTHER OPERATING INCOME AND LOSSES 56 5. RAW MATERIALS AND CONSUMABLES USED 58 6. HIRED SERVICES EXPENSE 59 7. EMPLOYEE BENEFITS EXPENSE 60 8. OTHER OPERATING EXPENSES 61 9. IMPAIRMENT OF CURRENT ASSETS 61 10. IMPAIRMENT OF NON-CURRENT ASSETS, OUTSIDE THE SCOPE OF IFRS 9 62 11. FINANCE INCOME 62 12. FINANCE COSTS 63 13. INCOME TAX EXPENSE 63 14. OTHER COMPREHENSIVE INCOME 65 15. PROPERTY, PLANT AND EQUIPMENT 66 16. INTANGIBLE ASSETS 70 17. INVESTMENT PROPERTY 72 18. INVESTMENTS IN SUBSIDIARIES 76 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 79 20. OTHER LONG-TERM EQUITY INVESTMENTS 82 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES 84 22. OTHER LONG-TERM RECEIVABLES 86 23. INVENTORIES 87 24. RECEIVABLES FROM RELATED PARTIES 89 25. TRADE RECEIVABLES 95 26(A). LOANS GRANTED TO THIRD PARTIES 98 26(B). OTHER RECEIVABLES AND PREPAYMENTS 100 27. CASH AND CASH EQUIVALENTS 102 28. EQUITY 103 29. LONG-TERM BANK LOANS 108 30. DEFERRED TAX LIABILITIES 110 31. GOVERNMENT GRANTS 112 32. LEASE LIABILITIES TO RELATED PARTIES 113 33. LEASE LIABILITIES TO THIRD PARTIES 114 34. RETIREMENT BENEFIT OBLIGATIONS 115 35. SHORT-TERM BANK LOANS 119 36. TRADE PAYABLES 120 37. PAYABLES TO RELATED PARTIES 122 38. TAX PAYABLES 123 39. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 124 40. OTHER CURRENT LIABILITIES 124 41. CONTINGENT LIABILITIES AND COMMITMENTS 125 42. RESTATEMENT RESULTING FROM MERGER 127 43. FINANCIAL RISK MANAGEMENT 134 44. SEGMENT REPORTING 153 45. RELATED PARTY TRANSACTIONS 155 46. EVENTS AFTER THE REPORTING PERIOD 159 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 5 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 2023, the structure of Company's joint-stock capital was as follows: % Donev Investments Holding AD 38.57 Telecomplect Invest AD 16.15 Sopharma AD (treasury shares) 8.30 Other legal persons 22.81 Natural persons 14.17 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 2023 as follows: Ognian Donev, PhD Chairperson Vessela Stoeva Deputy Chairperson Bisera Lazarova Member Alexander Chaushev Member Ivan Badinski Member 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 Tsvetanka Zlateva Member Kristina Atanasova - Elliot Member Pursuant to a business management contract dated 9 June 2020, the Company’s Procurator is Simeon Donev. The average number of Company's personnel for 2023 is 1,720 workers and employees (2022: 1,760). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 6 1.2. Principal activities The principal activities of the Company include the following types of transactions and deals: • 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; • production and trade in veterinary medical products and lab services related to lab tests of animal blood samples. The Company holds manufacturing / import authorisation for medicinal products No BG / MIA -0402 dated 10 November 2023, 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 2019 – 2023 are presented in the table below: Indicator 2019 2020 2021 2022 2023 GDP in million levs 120 342 120 492 138 979 167 809 131 895 Actual growth of GDP 4.0 % - 4.0 % 7.6 % 3.4 % 1.5 % Year-end inflation (HICP) 3.1 % 0.0 % 6.6 % 14.3 % 4.7 % Average exchange rate of USD for the year 1.75 1.72 1.65 1.86 1.81 Exchange rate of the USD at year-end 1.74 1.59 1.73 1.83 1.77 Basic interest rate at year-end 0.00 0.00 0.00 1.30 3.80 Unemployment rate at year-end 5.9 % 6.7 % 4.8 % 5.4 % 5.5 % Credit rating of Republic of Bulgaria according to Standard&Poors (long-term) BBB BBB BBB BBB BBB Credit rating of Republic of Bulgaria according to Moody’s (long-term) Baa2 Baa1 Baa1 Baa1 Baa1 Credit rating of Republic of Bulgaria according to Fitch (long-term) BBB BBB BBB BBB BBB Credit rating of Republic of Bulgaria according to Scope Ratings (long-term) BBB BBB BBB+ BBB+ BBB+ * Preliminary BNB data for Q1, Q2 and Q3 2023 as at 10 January 2024 ** Preliminary BNB data for Q3 2023 as at 10 January 2024 NSI data as at 31 December 2023 Preliminary BNB data as at 30 November 2023 Preliminary BNB data as at 31 December 2023 1.4. Macroeconomic situation The Company operates in the conditions of inflation. The management manages to maintain the Company’s good financial position by indexing its revenue and expenses within reasonable limits. The Company maintains a stable capital base and debt ratio. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 7 1.5. War in Ukraine – impact and effects On 24 February 2022, a military conflict commenced between Russia and Ukraine. As a result, a number of countries imposed sanctions against certain natural persons and legal entities in Russia, as well as against the country itself. The Russia-Ukraine conflict and the economic sanctions and other measures related thereto as taken by governments around the world have had a significant impact, both on the countries’ local economies, and on the global economy. Usually in such conflicts pharmaceuticals are not subject to sanctions or other restrictions, in order to avoid a humanitarian crisis. Therefore, the Company’s operations on the territory of the two countries is and could be restricted mainly due to reasons such as difficulties in logistics and restrictions in the free movement of cash. The Company holds investments in two subsidiaries in Ukraine. As at 31 December 2023, the amount of the investment in the subsidiary Sopharma Ukraine is BGN 9,669 thousand, and the amount of the investment in Vitamini is BGN 1,283 thousand. At the date of approval of these separate financial statements, the assets of these subsidiaries have not been physically affected by the military actions, but in the future it may be necessary to review the amounts of these investments, depending on the development of the war and its impact on the companies’ operations. In 2023, the Company registered a 19% growth in sales in Russia compared to 2022, and a 21% drop in sales in Ukraine compared to 2022. Despite the potential adverse economic effects of the war and the probability of its turning into a long and continued conflict, the Company has sufficient current assets and financing to continue as a going concern. 1.6. Climate issues Environmental protection and fighting climate change is part of the Company’s corporate social responsibility policy, and it therefore develops its activities in accordance with environmental protection requirements. The Company applies measures for: separate waste collection; minimizing, utilizing, and recycling manufacturing and domestic waste; relevant staff training on matters related to environmental protection and pollution prevention. The Company actively invests in renewable energy sourced for own use. As of December 31, 2023, the Company has not identified significant risks caused by climate change that would affect the Company's assets and liabilities. The Company is monitoring changes in legislation resulting from climate issues and at this stage has not identified a possible direct impact on the Company's future cash flows, financial results and financial position. 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 8 Standards Committee (IASC), which are effectively in force on 1 January 2023 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 2023, 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: • Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). These amendments provide guidelines and examples regarding the application of the materiality concept upon judgements and decisions makings related to disclosures of the accounting policy, such as a) they introduce the requirement for disclosing material accounting policies information instead of significant accounting policies; b) they provide clarifications on how the entities can identify material accounting policy information and to give examples of when accounting policy information is likely to be material; c) clarify that accounting policy information may be material because of its nature, even if the related amounts are immaterial; d) clarify that accounting policy information is material if users of the entity’s financial statements would need it to understand certain material information in the financial statements; and d) clarify that the entity needn’t disclose immaterial or blank accounting policy information, this shall not result in omitting or concealing material accounting information. • Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). These amendments are related to clarifications aimed at a more accurate distinction between changes to the accounting policy, error adjustments and changes to accounting estimates, such as: a) “the definition of a change in accounting estimates” is replaced with a “definition of accounting estimates” – under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”; b) the entity develops and applies accounting estimates if the accounting policies require items in the financial statements to be measured in a way that involves measurement uncertainty; с) a clarification is made that a change in accounting estimate may result from a change in input or valuation technique and models, as well as from new information or new developments, unless it is the correction of a prior-year error; d) a change in an accounting estimate may affect only the current’s period profit or loss, or the profit or loss of both the current period and future periods. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 9 • Amendments to IAS 12 Income Taxes (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). Amendments to IAS 12 – Income Taxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction. The amendments restrict the scope of exemption from recognition of deferred tax liabilities, as a result of which it is not applied for transactions in which equal taxable and deductible temporary differences may arise upon initial recognition. Such transactions are the recognition of a right-of-use asset and lease liability by the lessee at the commencement date of a lease, as well as in the accrual of liabilities for dismantling, removing or restoring included as part of the cost of an asset. Upon the amendments coming into force, the entities should recognize each deferred tax asset (to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized) and a deferred tax liability (for all deductible temporary differences) in accordance with the IAS 12 criteria for transactions related to assets and liabilities arising from a single transaction on or after the beginning of the earliest comparative period presented in the financial statements. • Amendments to IAS 12 Income Taxes – International Tax Reform – Pillar Two Model Rules (effective immediately after the amendments are issued, as well as for annual periods beginning on or after 1 January 2023, endorsed by EC). The amendments specify that IAS 12 applies to income (profit) taxes arising from ta law enacted or substantively enacted to implement the Pillar Two model rules issued by Organization for Economic Co-operation and Development (OECD), including tax law that implements qualified domestic minimum top-up taxes described in those rules, referred to as Pillar Two legislative acts or Pillar Two income taxes. The amendments introduce a temporary exception from the standard’s requirements that allows an entity to neither recognise nor disclose information about deferred tax assets and liabilities related to the legislative adoption of the Pillar Two model rules. The entity should disclose the fact that it has applied the exception for non-recognition of deferred tax assets and liabilities related to Pillar Two income taxes, and for non-disclosure of information related thereto. With regard to the stated below new standards, amended/revised standards and new interpretations that have been issued but not yet in force for annual periods beginning on 1 January 2023, the management has judged that they are unlikely to have a potential impact resulting in changes in the accounting policies and the financial statements of the Company: • Amendments to IAS 1 “Presentation of Financial Statements” (in force for annual periods beginning on or after 1 January 2024, endorsed by EC). These amendments address the criteria for classification of liabilities as current or non-current. According to them, an entity classifies its liabilities as current or non-current depending on the rights thereof that are in existence at the end of the reporting period, and the classification is unaffected by expectations about whether it will exercise its right to defer settlement of the liabilities. The classification shall not be impacted by the entity’s expectations for or events after the reporting period. The amendments made clear that “settlement” refers to the transfer to a counterparty of cash, equity instruments, other assets or services. The classification does not address derivatives of convertible liabilities, which constitute equity instruments. The SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 10 amendments are applied retrospectively. Earlier application is permitted, but simultaneously with applying the amendments to IAS 1 Presentation of Financial Statements, Non-current Liabilities with Covenants. • Amendments to IAS 1 “Presentation of Financial Statements, Non-Current Liabilities with Covenants” (in force for annual periods beginning on or after 1 January 2024, endorsed by EC). These amendments specify that only covenants with which an entity is required to comply on or before the reporting date affect the entity’s right to defer the respective liabilities for at least twelve months after the reporting date and respectively, only these are to be considered upon assessing the classification of liabilities as current or non-current. These covenants have an impact on whether the right exists at the reporting date, even if compliance with the conditions is determined thereafter (for instance, a covenant based on the entity’s financial position at the reporting date but assessed thereafter). Covenants calculated based on the entity’s financial position after the reporting date (for instance, based on the entity’s financial position six months after the reporting date) shall not be considered upon determining the classification od liabilities and the right of deferral thereof. Nevertheless, entities shall disclose information about the covenants comprising an observable period within 12 months from the end of the reporting period, in order to assess the risk of whether the liabilities would become due. The amendments are applied retrospectively. Earlier application is permitted, but simultaneously with the application of amendments to IAS 1 Presentation of Financial Statements regarding the classification of liabilities as current and non-current. • Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures: Supplier Finance Arrangements (effective for annual periods beginning on or after 1 January 2024, not endorsed by EC). The amendments are intended to enhance the transparency of accounting from supplier finance arrangements and to enable users of financial statements to assess the effect of those arrangements on an entity’s liabilities, cash flows, and liquidity risk, by adding additional disclosures relating to such arrangements. The amendments are related to the requirements to add information to assess the effects of such arrangements on liabilities and cash flows, as follows: a) the terms and conditions of each arrangement; b) the carrying amount of financial liabilities recognised in the entity’s statement of financial position that are part of the arrangement and the line item(s) in which those financial liabilities are presented; c) the carrying amount and line item(s) in the statement of financial position of the payments already received from the finance providers (finance institutions); d) the range of payment due dates of financial liabilities under supplier finance arrangements and the comparable range of payment due dates for financial liabilities that are not part of a supplier finance arrangement. e) the type and effect of non-cash changes in the carrying amount of financial liabilities that are part of supplier finance arrangements. Requirements have been added to IFRS 7 to disclose assessment of an entity’s exposure to liquidity risk and the potential effect of terminating the arrangements on the entity. The amendments are applied retrospectively; there are exemptions for the non-disclosure of information for periods before the initial application of the amendments, as well as some qualitative disclosures referring to the starting date of the initial application period. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 11 • Amendments to IFRS 16 “Leases” – Lease Liability in a Sale and Leaseback (in force for annual periods beginning on or after 1 January 2024, endorsed by EC). The amendments aim to elaborate requirements to the seller-lessee in measuring lease liabilities in sale and leaseback transactions. They require a seller-lessee to subsequently (after the date of providing the underlying asset) determine lease payments and revised leased payments in a way that it does not recognize any amount of the gain or loss that relates to the right of use it retains. The amendments do not apply to the recognition of gains or losses in relation to partial or full termination of a lease. The amendments are applied retrospectively and in particular with respect to sale and leaseback transactions where the lease payments include variable payments not dependent on an index or percentage. Earlier application is permitted. • Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates: Lack of Exchangeability (in force for annual periods beginning on or after 1 January 2025, not endorsed by EC). These amendments specify and require entities to apply a consistent approach when determining: а) when a currency is exchangeable or not, by introducing definitions thereof. A currency is exchangeable into another currency when an entity is able to obtain the other currency within a time frame that allows for a normal administrative delay and through a market or exchange mechanism in which an exchange transaction would create enforceable rights and obligations. If an entity is able to obtain no more than an insignificant amount of the other currency at the measurement date for the specified purpose, the currency is not exchangeable into the other currency; b) estimating the spot exchange rate when a currency is not exchangeable, by identifying two mechanisms: 1) the first one is using an observable exchange rate without adjustment, such as a spot exchange rate for a purpose other than that for which an entity assesses exchangeability or the first exchange rate at which an entity is able to obtain the other currency; 2) the second one is through using another estimation technique; c) the information that the entity should disclose when a currency is not exchangeable, in order to allow users of the financial statements to understand the impact thereof on the entity’s financial results, financial position, and cash flows. The amendments are applied retrospectively. Earlier application is permitted. • 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. IASB postponed the initial date of application of these amendments for an indefinite period. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 12 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. 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 2.33. 2.2. Consolidated financial statements of the Company The Company has started the process of preparation of its consolidated annual financial statements for year 2023 in accordance with IFRS effective for year 2023 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 29 April 2024 and after this date the financial statements will be publicly made available to third parties. 2.3. Merger of Biopharm Engineering AD into Sopharma AD а) legal form of the merger The merger of Biopharm Engineering AD (transforming company) into Sopharma AD (receiving company) was carried out by means of the legal form of transformation as regulated in the Commercial Act. The merger was entered in the Trade Registry at the Registry Agency on 23 August 2023. As a result of the transaction, the entire property of Biopharm Engineering AD was transferred to Sopharma AD, and Biopharm Engineering AD was terminated without liquidation. On 23 January 2023, a merger transformation agreement was concluded between Sopharma AD (receiving company) and Biopharm Engineering AD (transforming company) laying out the transformation procedure. The fair value of shares of the entities involved in the transformation was determined based on generally accepted valuation methods, based on which an exchange ratio was set of 2.17. The transformation agreement and the reviewer’s report were approved by the General Meeting of the receiving company on 4 August 2023. The aim of the transformation transaction between the two entities was as follows: SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 13 • restructuring of Sopharma Group entities to eliminate overlapping activities; • focusing efforts on manufacturing and trade activities, respectively – optimization of administrative costs; • enhancing efficiency and achieving a synergy for both management and manufacturing and trade, and for cost optimization. b) accounting for the merger For accounting purposes, the merger date was stated as 1 January 2023. Until this point, Biopharm Engineering AD was a subsidiary of Sopharma AD. The transaction was treated as restructuring of the activities of the two entities. The merger was accounted for by applying the “pooling of interest” approach. According to the requirements and rules of this approach, the activities and property of the entities are carried to these financial statements as if they had been combined from the beginning of the earliest period presented in the financial statements (1 January 2022), irrespective of the legal events and procedures and effects thereof on the legal status and life cycle of the receiving and transforming companies. The effects of all business transactions between the receiving company and the transforming company were eliminated, including the balances between the two, irrespective of whether they originated before or after the restructuring date. All differences from the merger transaction were carried to equity – “retained earnings” component and “revaluation reserve on property, plant and equipment” component (Note 42). 2.4. 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. The comparative information for year 2022 presented in the statement of financial position, statement of comprehensive income and statement of cash flows was prepared based on the combined data from the separate annual financial statements of Sopharma AD (receiving company) and Biopharm Engineering AD (transforming company) in relation to the merger executed, in accordance with the common accounting policies and eliminated balances, transactions and payments between the two. The statement of financial position includes two comparable periods – 31 December 2022 and 1 January 2022, as far as the combination of data from the financial statements of the two entities results in indicators that deviate significantly from the separate indicators of Sopharma AD for these periods (Note 42). The comparative information for year 2022 in the statement of changes in equity also presents the combined indicators for the balance and change in each equity component (share capital, reserves, retained earnings) compared to the separate financial statements for year 2022 of the receiving and transforming companies, irrespective of the fact that the merger was legally effected on 23 August 2023. Information about the content of components of the equity of the receiving and transforming companies is disclosed in Note 28. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 14 2.5. 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. 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 presented net. 2.6. Revenue Revenue from contracts with customers The Company’s usual revenue is from the activities disclosed in Note 3.1. 2.6.1. Recognition of revenue from contracts with customers The Company’s revenue is recognised when control over the goods 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 essence 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 15 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 recoverable. 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). Each promise to transfer goods 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. 2.6.2. Measurement of revenue under contracts with customers Revenue is measured based on the transaction price determined for each contract. The transaction price is the amount of consideration to which 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 16 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 and, therefore, form part of a single performance obligation that is partially satisfied. 2.6.3. 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 the physical ownership of the customer thereof, when the customer may dispose of the finished goods 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 17 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 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). 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 transportation conditions agreed with the customer, it may be carried out also after control over the products sold has been transferred to the customer. Until the transfer of control over the products, the sales of products and the transportation service are accounted for as a single performance obligation, since they constitute parts of an integrated service. The transportation service following transfer of control over the 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 18 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: 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. o 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. o 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 Compensations due to the customer: in case of inaccurate performance of contractual obligations by the Company, usually in relation of failure to meet the negotiated delivery deadline. These are included within a decrease of the transaction price only if the payment is very likely. The Company’s experience shows that historically, contract terms are complied with, and the Company has not charged payables for payment of compensations. o 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 19 “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 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. 2.6.4. 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. 2.6.5. 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 to pay 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 20 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 difference performance obligations in 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. 2.6.6. 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. It is stated within the statement of comprehensive income (within profit or loss for the year) in the “revenue” item. 2.7. Expenses Company’s expenses are recognised upon incurrence 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)”. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 21 Losses from remeasurement of agricultural produce (yellow acacia) 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)”. 2.8. Finance income Finance income is included in the statement of comprehensive income (within profit or loss for the year) when earned, and comprises: interest revenue from loans granted and term deposits, interest revenue from receivables under special contracts, interest income from receivables under cession agreements, interest income on recoverable shares, net foreign exchange gain on sale of subsidiaries, dividends on equity investments, net giants from exchange differences under loans denominated in a foreign currency, net foreign exchange gain on recoverable shares, revenue from guarantees, revenue from debt settlement transactions, gains from fair value measurements of investments in securities at fair value through profit or loss, or through other comprehensive income, gains from the fair value of long-term equity investments which constitute part of stage-by-stage acquisition of a subsidiary. 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). 2.9. Finance costs Finance income is 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, expenses related to payment of dividends, interest expenses on leases, bank charges and guarantees, net foreign exchange loss from loans in a foreign currency, net loss on recoverable shares, net foreign exchange loss on receivables from sale of subsidiaries, 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). 2.10. Property, plant and equipment Property, plant and equipment, including biological assets (carriers) are presented at revalued amount less the accumulated depreciation and impairment losses in value. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 22 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 directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, and professional fees for people involved in the project, non-refundable taxes, expenses on capitalised interest for qualifying assets, etc. 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. 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 (except land with the right of use) 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: • for buildings – from 20 to 70 years; • for facilities and transmitter devices – from 5 to 30 years; SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 23 • 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: • for land – from 4 to 5 years; • for buildings – from 2 to 10 years; • for facilities and transmission devices – from 2 to 10 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. 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 24 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 thereon. 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. 2.11. 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 (yellow acacia crops) is measured at fair value as at the date of acquisition, less the sales costs. The fair value of agricultural produce is determined with the support of an independent appraiser. The agricultural produce – yellow acacia seeds – is presented within the Company’s inventories, on line “herbs”, and is subsequently measured according to the requirements of IAS 2 Inventories. Gains on 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”. 2.12. 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, Unipharm AD and Biopharm Engineering 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 in value. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 25 The Company applies the straight-line amortisation method for the intangible assets. The useful life per group of assets is as follows: • 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 thereon. 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). 2.13. 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 2.32). 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 income gained on 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 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 thereon. 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 26 2.14. 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 carried to the statement of comprehensive income (within profit or loss for the year) within “finance income”. 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). 2.15. 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 2.26). 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 2.32) determined with support by an independent licensed valuator. The effects from subsequent remeasurement to fair value are carried within a separate component of the statement of comprehensive income (in other comprehensive income), respectively in the reserve for financial assets at fair value through other comprehensive income. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 27 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 financial position (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. 2.16. Inventories Inventories are valued in the financial statements as follows: • 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; • agricultural produce – at the lower of fair value at initial acquisition and net realisable value. Expenses incurred in bringing a certain product within inventories to its present condition and location, are included in the acquisition cost (cost) as follows: • raw materials, materials and goods – all delivery costs, including the purchase price, import customs duties and charges, transportation expenses, non-refundable taxes and other expenses, incurred for rendering the materials and goods ready for usage/sale; • 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 28 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 2.33). Non-production inventories are currently expensed upon use thereof (application and sale) 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. 2.17. 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). 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 2.26). 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 2.26 and Note 2.33). 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). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 29 2.18. 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 stated 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 in accordance with the stage in which the respective loan or other receivables has been classified based on the effective interest method. Interest-bearing loans and other financial resources granted are classified as current ones unless (and for the relevant portion thereof) the 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 2.26). 2.19. Cash and cash equivalents Cash includes cash in hand and cash in current accounts, and cash equivalents – bank deposits with original maturity up to three months, and funds in deposits with longer maturity which are readily available to the 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 2.26). For the purposes of the statement of cash flows: • cash proceeds from customers and cash paid to suppliers are presented at gross amount, including value added tax (20%); • interest on 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; • 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; • overdraft proceeds and payments are stated net by the Company; SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 30 • permanently blocked funds for a period of more than 3 months are not treated as cash and cash equivalents. • proceeds under factoring agreements are stated within cash flows from financing activities. 2.20. 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 2.26). 2.21. 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 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 № 2.26). Interest costs are recognised for the term of the financial instrument based on the effective interest method. Interest-bearing loans and other borrowings are classified as current, except from 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. 2.22. 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 31 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. 2.23. 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. The Company as 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 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: • 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: • fixed lease payments less any lease inceptives receivable; • variable lease payments that depend on an index or rate; • the exercise price of the purchase options, if the lessee is reasonably certain to exercise this option; • payments of penalties for terminating the lease; • 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 32 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 presented 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 depreciation accumulated, impairment losses and adjustments from restatement and adjustments to the lease liability. The Company subsequently measures the lease liability by: • increasing the carrying amount to reflect the interest on the lease liability; • reducing the carrying amount to reflect the lease payments made; • remeasuring the carrying amount to reflect any reassessment or lease modifications of the lease. Accounting for remeasurement and modifications to leases As a result of remeasurement, the lessee recognises the amount of remeasurement 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 remeasurements is recognised within profit or loss. The Company remeasures the lease liabilities whenever: • the modification increases the scope of the lease by adding another right-of-use of one or more additional underlying assets; • 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 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 to the asset’s 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 33 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) in the inception of the lease term (when the asset is delivered) as assets sales income. 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. 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. 2.24. 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'. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 34 Long-term retirement benefits Defined contribution plans The 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 defined 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). 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 occurred and are presented to 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 35 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. 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 more than 12 months are discounted and presented in the statement of financial position at their present value. 2.25. 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 capital share held by each of them and may claim returning 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: • at least one tenth of the profit, which should be allocated to the Fund until its amount reaches one tenth of the share capital or any larger amount as may be decided by the General Meeting of Shareholders; • any premium received in excess of the nominal value of shares upon their issue (share premium reserve); • other sources as provided for by a decision of the General Meeting. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 36 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: • the revaluation surplus between the carrying amount of property, plant and equipment and their fair values at the date of each revaluation; and • 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'. Deferred tax effect on the revaluation reserve is directly carried at the account of this reserve. Revaluation reserve is transferred to the 'accumulated profits' 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 form is transferred to ‘retained earnings’. The other equity components constitute a reserve on warrants issued, which is formed by the difference between the issue value of the registered warrants and the transaction costs related to the issue. The warrants are issued and registered at a fixed price, denominated in BGN, and grant future rights to conversion into a fixed number of ordinary, dematerialised, registered, freely transferrable Company shares, and are therefore classified as an equity instrument. 2.26. Financial instruments A financial instrument is any contract that simultaneously gives rise to a financial asset at one entity and a financial liability or equity instrument at another entity. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 37 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 2.6.1.). 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. 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: • 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: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 38 • 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 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 parties, receivables under cession agreements, receivables under recoverable capital contributions, and loans to 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. 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 aren’t. 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: • 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 39 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 and guarantees 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 versus the initial recognition of the credit quality of the financial instrument (asset). 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 services 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 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 2.33. In the cases when the credit risk of a financial instrument increases to a level that indicates default, the financial asset is considered to be impaired, and is classified in Stage 3. At this stage, the losses incurred for the lifetime of the respective asset are identified and calculated. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 40 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 in consideration of all loan collaterals and reliefs held by the Company. The main aspects of the policy and the set of criteria are disclosed in Note 2.33. The Company adjusts 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 43). Derecognition Impaired financial assets are derecognised when no reasonable expectation exists to collect 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 41 Classification groups Loans and borrowing Following their initial recognition, the Company measures interest-bearing loans and borrowings at amortised cost, applying the effective interest method. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) when the respective financial liability is derecognised, as well as through amortisation based on the effective interest rate. The amortised cost is calculated by taking into consideration any discounts or premiums at acquisition, as well as fees or costs that constitute an integral part of the effective interest rate. Amortisation is 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. 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 and obligation resulting from these financial instruments – in all cases to only receive or pay the net amount. If the two conditions are not simultaneously met, it is assumed that the 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: • lack of dependence on a future event, i.e. it should not only be applicable upon the occurrence of a future event; • the offsetting should be enforceable and legally defendable during (cumulatively): - the Company’s usual business operations; - in case of default/delay, and SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 42 - in case of insolvency. The applicability of criteria is measured against the requirements of the Bulgarian legislation and the contractual relations between the parties. The condition of “presence of current and legally enforceable right to offsetting” is always and mandatorily assessed together with the second condition – for “mandatory settling of these instruments on a net basis”. 2.27. 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 a financial liabilities at guarantee issuance. The liability is initially measured at fair value, and subsequently – at the higher of the following: • 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”. 2.28. 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 2023 is 10% (2022: 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 43 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 tax liabilities of the Company as at 31 December 2023 were assessed at a rate valid for 2024, at the amount of 10% (31 December 2022: 10%). 2.29. 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. 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. Government grants constitute different forms of provision of state grants (local and central bodies and institutions) and/or intragovernmental agreements and organisations. 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. 2.30. Net earnings or loss per share The base 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 during at the beginning of the period, adjusted by the number of ordinary shares bought SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 44 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 calculated because dilutive potential ordinary shares (warrants) have been issued. Upon the calculation of diluted net earnings or loss per share, adjustment is made to the net profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares, and the average weighted number of shares in circulation, with the effect of all dilutive potential ordinary shares. The profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares is increased by adding the amount of dividends and post-tax interest recognized in the period in relation to the dilutive potential ordinary shares, and is adjusted for any other changes to profit or loss that might arise as a result of the conversion of dilutive potential ordinary shares. The average weighted number of ordinary shares in circulation in the period is increased by adding the average weighted number of the additional ordinary shares that would be in circulation upon conversion of all dilutive potential ordinary shares. 2.31. 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 various products and bears various 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. 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 45 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 of 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. 2.32. Fair value measurement Some of Company's assets and liabilities are measured and presented and/or just 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 use at a maximum the publicly observable information, and respectively, to minimize the use of unobservable information. It uses the three acceptable approaches – the market approach, the income approach and the cost approach – whereas the most frequently applied valuation techniques include directly quoted and/or adjusted quoted market prices, market comparables (analogues) and discounted cash flows, including based on capitalised rental income. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 46 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: • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities; • Level 2 — Valuation techniques that use inputs other than directly quoted prices but are observable, either directly or indirectly, including where the quoted prices are subject to certain adjustments; and • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised at fair value in the 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, organised 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 and level 3, 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. 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 47 2.33. Critical accounting judgments on 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 positions cannot be obtained based on quoted prices on active markets, their fair value is determined by using other valuation models and techniques, including the discounted cash flows model. The input used in these models is obtained from observable markets, where possible, but when this cannot be done, significant judgement is applied to determine fair values. Such judgement involves the review, analysis and assessment of input, for instance regarding liquidity risk, credit risk, and volatility. The changes in assumptions for these factors may impact the amount of the fair value of financial instruments stated. The main key assumptions and components of the model are disclosed in Note 20. Calculation of expected credit losses for loans and guarantees granted, guarantorships, 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, guarantees, contract receivables and 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 43). Regarding trade receivables, including from related parties The Company uses provisioning matrixes calculate expected credit losses from trade receivables and contract assets. The provision rates are based on days past due for groups from different customer segments (portfolios) sharing similar loss models (type of client sector). Each provisioning matrix is initially based on detailed historical observation of default rates in the 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 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 48 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 closes and the forecast economic conditions may deviate from actual collection rates in the future. Information about the accumulated expected credit losses on trade receivables, incl. from related parties is disclosed in Note 21, Note 22, Note 24, Note 25 and Note 26b. In 2023, the recognized impairment of trade receivables, incl. trade receivables from related parties, is at the amount of BGN 957 thousand, net of impairment reversal (2022: recognized impairment of trade receivables, incl. from related parties, at the amount of BGN 6,650 thousand, net of reversal) (Note 8, Note 9, Note 22, Note 24, Note 25 and Note 26b). Regarding loans and guarantees granted: The Company has adopted the general approach for calculating impairment based expected credit losses of 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 of the entity. Second, by using statistical models including historical default probability data (PD), transfer between ratings, macro-economic data and forecast, the relevant marginal PD are calculated by year for each rating. Third, based on this analysis and the determined rating, and based on a set of indicators for the instrument’s characteristics at the date of each financial statements, the following parameters are determined: instrument stage (Stage 1, Stage 2 or Stage 3), PD needed for the instrument’s lifetime, as well as loss given default (LGD). The main formula used to calculate expected credit losses is: ЕCL=EADxPDxLGD, where: ECL is the expected credit losses indicator; ЕAD is the exposure at default indicator; PD is the probability of default indicator; LGD is the loss given default indicator. Upon determining losses, all guarantees and/or collaterals and/or insurances are taken into consideration. Thus, in the final step, by using all these parameters and following discount, the expected credit loss for the respective period of the respective financial assets is calculated. Stage 1 includes loans granted which are classified as “regular” according to the internal risk classification scheme developed. These are loans granted to debtors with low default rates, regular servicing, without considerable aggravation of key indicators (financial and non-financial), and without amounts past due. The expected impairment loss for such loans is calculated based on default probability for the next 12 months and the Company’s expectation for loss amount upon exposure default over the next 12 months. Stage 2 includes granted loans classified as “renegotiated”. These are loans with respect to which (based on a set of indicators) a significant aggravation of the credit risk related to the debtor has been established as SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 49 compared to the exposure’s initial recognition. The expected impairment loss for these loans is calculated based on the default probability for the lifetime of the loan which is considered to be credit-unimpaired, and the Company’s expectations for loss amount upon exposure default over the lifetime. Stage 3 includes granted loans which are classified as “underperforming”. These are loans for which evidence exists that the asset is credit-impaired, i.e. a credit event has occurred (according to the policy on default event eligibility). Therefore, an analysis is performed of a system of indicators used to identify the occurrence of credit losses. Impairment losses for such loans are calculated based on probability-weighted scenarios for the Company’s expectations for the loss amount of the non-performing credit-impaired exposure throughout its lifetime. A granted loan, respectively financial assets, is credit-impaired when one or more events have occurred which have an adverse effect on expected future cash flows from this loan, accordingly financial assets. The Company applies the same model with respect to expected credit losses from guarantees granted and certain individual receivables. The main matters related to the policy and set of criteria to assess the Company’s exposure to credit risk related to loans granted are disclosed in Note 43. Information about expected credit losses from loans and guarantee agreement charges and financial guarantee contracts are disclosed in Note 21, Note 24, Note 26a and Note 40. In 2023, an impairment for expected credit losses on loans granted was accrued at the amount of BGN 808 thousand, net of reversal (in 2022: an impairment for expected credit losses was accrued at the amount of BGN 1,359 thousand, net of reversal) ( Note 12, Note 21, Note 24 and Note 26a). In 2023, the reversal of expected credit losses on financial guarantee contracts amounts to BGN 1,284 thousand, net of accrual (in 2022, there was an impairment for expected credit losses on financial guarantee contracts at the amount of BGN 1,292 thousand, net of reversal) (Note 11, Note 12 and Note 40). In 2023, expected credit losses were accrued on guarantor contract charges at the amount of BGN 2 thousand, net of reversal (2022: there is a reversal of expected credit losses on guarantor contract charges at the amount of BGN 57 thousand, net of accrual) (Note 11, Note 12 and Note 24). 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 50 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 assessments 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 revenue and expenses stated (Note 32, Note 33, Note 37 and Note 40). 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, assets and liabilities accounted for and the respective disclosures thereto. As a result of the uncertainty regarding these assumptions and estimates, significant adjustments may occur in the carrying amount of the assets and liabilities concerned in the future, respectively the costs and revenue stated. 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 2.6.1.). 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. 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 2023, impairment of inventories was recognized at the amount of BGN 3,458 thousand (2022: BGN 1,480 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 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 51 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 recognized revaluation, and has recognized new revaluation reserve at the amount of BGN 8,338 thousand, net of impairment. As a result of the reviews and analyses carried out in 2023, an impairment loss on property, plant and equipment at the amount of BGN 1,890 thousand has been recognized (2022: BGN 1,306 thousand) (Note 10 and Note 15). 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 made, in 2023 it was determined that no goodwill impairment had to be recognised (2022: none) (Note 10 and Note 16). 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 made in 2023, the Company has not found a need to recognise impairment of particular investments in subsidiaries (2022: none) (Note 10 and Note 18). 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 calculations are made by the management with the assistance of independent certified appraisers. As a result of the calculations made in 2023, the Company found it was necessary to recognise an impairment loss on investments in joint ventures at the amount of BGN 101 thousand (2022: BGN 1,593 thousand) (Note 10 and Note 19). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 52 Actuarial calculations Calculations of certified actuaries have been used when determining present value of long-term payables to personnel upon retirement on the basis of assumptions for mortality rate, staff turnover rate, future salaries level and discount factor. They are disclosed in Note 34. Long-term retirement benefit obligations to personnel at the amount of BGN 5,043 thousand (31 December 2022: BGN 4,137 thousand) have been recognized as a result of these calculations (Note 34). Deferred tax assets There are unrecognised deferred tax assets at the amount of BGN 3,598 thousand (31 December 2022: BGN 3,605 thousand), because the management 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 35,977 thousand (31 December 2022: BGN 36,045 thousand) (Note 30). Litigation provisions With regard to the pending litigations against the Company, the management, jointly with Company's lawyers, has decided that at this stage the probability and risks of a negative outcome therefrom is still minimal and therefore, it has not included provisions for litigation payables in the statement of financial position as at 31 December 2023. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 53 3. REVENUE Company’s revenue includes: 2023 2022 BGN '000 BGN '000 Revenue from contracts with customers 247,717 228,358 Other revenue 2,303 2,474 Total 250,020 230,832 3.1. The revenue from contracts with customers is from sales of medication produced and includes: 2023 2022 BGN '000 BGN '000 Export 157,437 141,467 Domestic market 90,280 86,891 Total 247,717 228,358 Revenue from export sales by product includes: 2023 2022 BGN '000 BGN '000 Tablet dosage forms 118,917 110,452 Ampoule dosage forms 16,424 14,023 Syrup dosage forms 11,057 7,759 Ointments 6,406 5,558 Lyophilic products 1,586 911 Medical cosmetics 1,030 678 Drops 760 663 Plasters 406 402 Wound dressings 361 353 Sachets 250 127 Veterinary vaccines 96 81 Suppositories 73 459 Substances 69 - Sanitary and hygienic products 2 1 Total 157,437 141,467 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 54 Revenue from domestic sales by product: 2023 2022 BGN '000 BGN '000 Tablet dosage forms 47,589 47,570 Ampoule dosage forms 15,830 14,562 Wound dressings 6,490 6,446 Syrup dosage forms 4,256 3,249 Ointments 3,472 2,527 Lyophilic products 3,318 5,565 Plasters 3,161 3,156 Veterinary vaccines 2,230 23 Sachets 1,014 1,038 Drops 1,011 718 Haemodialysis concentrates 651 725 Sanitary and hygienic products 621 658 Suppositories 432 386 Medical cosmetics 205 164 Infusion solutions - 67 Inhalers - 37 Total 90,280 86,891 The breakdown of sales by geographic region is as follows: 2023 BGN ‘000 Relative share 2022 BGN ‘000 Relative share Europe 126,119 51% 117,284 51% Bulgaria 90,280 36% 86,891 38% Other countries 31,318 13% 24,183 11% Total 247,717 100% 228,358 100% The total revenue from transaction with the largest clients of the Company is as follows: 2023 BGN ‘000 % of revenue 2022 BGN ‘000 % of revenue Client 1 87,919 35% 86,627 38% Client 2 52,918 21% 55,730 24% Client 3 21,613 9% 27,863 12% Client 4 - 0% 6,009 3% SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 55 Contract balances are as follows: 31.12.2023 31.12.2022 BGN ‘000 BGN ‘000 Receivables under contracts with customers – related parties, net of impairment (Note 24) 71,760 55,334 Receivables under contracts with customers – third parties, net of impairment (Note 25) 13,950 10,555 85,710 65,889 The increase in trade receivables under contracts with customers, including receivables from related parties, is the result of an increase in operating volumes. Reimbursement obligations as at 31 December 2023 are BGN 4,885 thousand (31 December 2022: BGN 4,896 thousand). These include liabilities under retrospective trade volume discounts payable under contracts with customers which will be reimbursed over the next reporting period. (Note 40). 3.2. The Company’s other revenue is from leased assets and amounts to BGN 2,303 thousand (2022: BGN 2,474 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 56 4. OTHER OPERATING INCOME AND LOSSES The Company’s other operating income and losses include: 2023 2022 BGN '000 BGN '000 Services rendered 7,114 3,141 Revenue from sale of non-current assets 15,728 128 Carrying amount of non-current assets sold (11,439) (78) Gains on sale of non-current assets 4,289 50 Sales of goods 7,211 1,757 Carrying amount of goods sold (4,763) (1,501) Gain on sale of goods 2,448 256 Income from government grants under European projects 1,356 727 Payables written off 765 330 Sales of materials 1,792 1,463 Carrying amount of materials sold (1,582) (1,331) Gain on sale of materials 210 132 Gain on revaluation of investment property to fair value (Note 17) 194 1,566 Assets surplus 79 148 Lease liabilities written-off 264 259 Carrying amount of right of use assets written-off (214) (218) Gain on leases 50 41 Income from grants for agricultural land 36 34 Gains on revaluation of agricultural produce (yellow acacia) to fair value (Note 23) 5 - Awarded amounts 1 12 Revenue from liquidation of non-current assets 15 - Costs for liquidation of non-current assets (26) - (Losses)/Gains on liquidation of non-current assets (11) - Net gain/(loss) on exchange differences under trade receivables and payables and current accounts (549) (87) Other income 146 140 Total 16,133 6,490 The sales of materials comprise mainly: sales of substances, chemical products and packaging materials. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 57 Services rendered include: 2023 2022 BGN '000 BGN '000 Manufacturing services 5,937 2,097 Gamma irradiation 272 301 Social activities 229 239 Disinfection, disinsectization, deratization services 158 100 Regulatory services 128 53 Laboratory analyses 117 237 Transport services 39 46 Other 234 68 Total 7,114 3,141 Sales of goods include: 2023 2022 BGN '000 BGN '000 Medical products 5,280 79 Foodstuffs 1,564 1,658 Nutritional supplements 342 - Goods with technical designation 25 20 Total 7,211 1,757 The carrying amount of goods sold by types of goods is as follows: 2023 2022 BGN '000 BGN '000 Medical products 3,196 68 Foodstuffs 1,302 1,397 Nutritional supplements 240 - Goods with technical designation 25 36 Total 4,763 1,501 The payables written-off are as follows: 2023 2022 BGN '000 BGN '000 Tantieme 665 172 Dividends 85 43 Trade payables 6 100 Payables to personnel 9 15 Total 765 330 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 58 5. RAW MATERIALS AND CONSUMABLES USED The raw materials and consumables used include: 2023 2022 BGN '000 BGN '000 Basic materials 64,195 57,600 Electricity 5,648 7,588 Heating 4,474 6,792 Laboratory materials 4,011 3,072 Technical materials 2,232 1,530 Spare parts 1,264 1,151 Auxiliary materials 1,008 840 Working clothes and personal protective equipment for labour 932 977 Fuels and lubricating materials 632 732 Water 497 417 Impairment of materials (Note 9) 282 343 Scrapped materials 217 160 Total 85,392 81,202 Expenses on basic materials include: 2023 2022 BGN '000 BGN '000 Substances 25,028 25,348 Packaging materials 12,207 11,564 Liquid and solid chemicals 11,844 9,081 Sanitary-hygienic and dressing material 3,071 2,959 Aluminium and PVC foil 3,048 2,402 Herbs 2,946 1,065 Vials 2,278 1,946 Ampoules 2,277 2,347 Tubes 1,151 862 Materials for manufacturing veterinary vaccines 345 23 Materials for manufacturing infusion solutions - 3 Total 64,195 57,600 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 59 6. HIRED SERVICES EXPENSE Hired services expense includes: 2023 2022 BGN '000 BGN '000 Advertising and marketing services 13,349 7,119 Manufacturing of medical products 6,418 4,509 Transportation and shipping services 4,071 3,603 Consulting services 3,949 4,518 Building and equipment maintenance 3,289 2,652 Subscription fees 2,713 2,013 Local taxes and charges 1,349 1,362 Security 1,311 1,296 Logistic services – domestic market 1,237 2,101 State and regulatory charges 1,185 892 Services under civil contracts 914 598 Medical services 707 711 License fees 651 593 Translation of documentation 616 446 Logistic services (export) 550 446 Insurances 503 561 Vehicle repair and maintenance 459 425 Communications 381 578 Taxes on expenses 352 310 Rentals 320 101 Patent fees 256 41 Commissions 256 33 Courier services 208 123 Destruction of medicines 160 216 Registration of medicines 134 254 Fees and charges on current bank accounts 133 133 Repair of leased assets 74 182 Agricultural land processing 53 9 Clinical trial services 37 28 Other 486 571 Total 46,121 36,424 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 60 Rental costs comprise: 2023 2022 BGN '000 BGN '000 Rentals related to short-term leases 215 95 Rentals related to variable consideration on long-term leases 99 - Rentals related to leases of low-value assets 6 6 Total 320 101 The expenses recognised in the current year for statutory audit of the separate annual financial statements amount to BGN 97 thousand (2022: BGN 100 thousand). During 2023 and 2022, the statutory auditors did not render other services. 7. EMPLOYEE BENEFITS EXPENSE Employee benefits expense includes: 2023 2022 BGN '000 BGN '000 Current wages and salaries 50,333 40,524 Social security/health insurance contributions 9,307 7,674 Social benefits and payments 3,436 2,306 Accruals for unused paid leaves 2,002 1,672 Tantieme 1,171 732 Accruals for long-term retirement benefit obligations (Note 34) 657 464 Social security/health insurance contributions on unused paid leaves 333 295 Total 67,239 53,667 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 61 8. OTHER OPERATING EXPENSES Other expenses include: 2023 2022 BGN '000 BGN '000 Impairment of finished products and work in progress (Note 9) 2,739 1,130 Entertainment allowance 1,933 1,666 Accrued/(reversed) impairment for credit losses on receivables, incl. from related parties, net (Note 9) 957 6,650 Business trips 799 382 Donations 612 321 Impairment of goods (Note 9) 437 7 Scrapped finished products and work in progress 224 216 Unrecognised input tax under VATA 212 356 Trainings 175 134 Scrapped goods 133 7 Other taxes and payments to the state budget 58 99 Awarded amounts 46 3 Costs related to the transformation of a subsidiary 43 14 Interest on trade payables 28 36 Scrapped non-current assets 24 746 Receivables written-off - 10 Return claims - 63 Other 350 269 Total 8,770 12,109 9. IMPAIRMENT OF CURRENT ASSETS Impairments of current assets comprise: 2023 2022 BGN '000 BGN '000 Impairment for expected credit losses on receivables 8,101 10,535 Reversed impairment for expected credit losses on receivables (7,144) (3,885) Net change in the impairment for expected credit losses (Note 8) 957 6,650 Impairment of finished products and work in progress (Note 8) 2,739 1,130 Impairment of goods (Note 8) 437 7 Impairment of materials (Note 5) 282 343 Total 4,415 8,130 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 62 10. IMPAIRMENT OF NON-CURRENT ASSETS, OUTSIDE THE SCOPE OF IFRS 9 Impairment losses on non-current assets include: 2023 2022 BGN '000 BGN '000 Impairment of property, plant and equipment (Note 15) 1,890 1,306 Impairment of investments in joint ventures (Note 19) 101 1,593 Total 1,991 2,899 11. FINANCE INCOME Finance income includes: 2023 2022 BGN'000 BGN'000 Interest income on loans granted 2,642 2,344 Dividend income 1,711 1,520 Reversed provision on financial guarantees 1,284 - Interest income on term deposits 954 - Income from charges on guarantor contracts 799 462 Net foreign exchange gain on receivable under recoverable capital contributions from a subsidiary 212 - Interest income on cession agreements (Note 21) 127 71 Interest income on recoverable capital contributions (Note 21) 60 - Net gain on foreign exchange differences on leases 6 10 Net foreign exchange gain on sale of subsidiary - 214 Reversed impairment for credit losses on provided guarantees - 59 Impairment for credit losses on receivables under provided guarantees - (2) Net change in the impairment on provided guarantees - 57 Total 7,795 4,678 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 63 12. FINANCE COSTS Finance costs include: 2023 2022 BGN'000 BGN'000 Interest expenses on loans payable 1,966 461 Impairment for credit losses on trade loans granted 848 1,362 Reversed impairment for credit losses on trade loans granted (40) (3) Net change in the impairment on loans granted 808 1,359 Bank charges on loans and guarantees 425 485 Interest expenses on leases 300 116 Net foreign exchange loss on receivable from subsidiary sale 128 - Costs related to dividend payment 6 - Impairment for credit losses on receivables under provided guarantees 4 - Reversed impairment for credit losses on provided guarantees (2) - Net change in the impairment on provided guarantees 2 - Accrued provision on financial guarantees - 1,316 Reversed provision on financial guarantees - (24) Net provision on financial guarantees - 1,292 Total 3,635 3,713 13. INCOME TAX EXPENSE The Company’s income tax expense includes: Statement of comprehensive income (profit or loss for the year) 2023 2022 BGN '000 BGN '000 Taxable profit for the year under tax return 78,768 62,034 Revaluation reserve included as an increase in the annual tax return (1,512) (1,299) Taxable profit for the year 77,256 60,735 Current income tax expense for the year - 10% (2022: 10%) 7,726 6,074 Deferred income taxes related to: Origination and reversal of temporary differences (1,646) (1,450) Tax expense from past periods 1 143 Total income tax expense carried to the statement of comprehensive income (within profit or loss for the year) 6,081 4,767 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 64 Pillar Two income taxes The Pillar Two legislation that introduces a minimum global tax rate at 15% on multinational entities with consolidated revenues over €750 million (top up tax) has been enacted in Bulgaria effective as of 1 January 2024. The current nominal corporate tax rate (CIT ) in Bulgaria is 10% and the Pillar Two effective tax rate is 15%. The Company is an ultimate parent company of a multinational Group with consolidated revenues over €750 million and falls under the scope of Pillar Two top up tax requirement. The Company applies the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments to IAS 12 issued in May 2023 and endorsed by the EU in November 2023. Since the legislation was not effective at 31.12.2023, the Company has no related current tax exposure as of the reporting date. The Company is in process of evaluating the potential impact of Pillar Two income taxes. If the top-up tax had been applied in 2023, then the estimated effective tax rate (ETR) during 2023 would have been over 10% and the top up tax rate addition would have been the difference to 15%. Furthermore, the proportion of profit before tax and the effective tax rates in the financial year beginning 1 January 2024 will depend on factors such as revenues/expenses of the Company and the provisions of the Bulgarian Corporate Income Tax Code. Reconciliation of income tax expense calculated based on the accounting profit or loss 2023 2022 BGN '000 BGN '000 Accounting profit for the year 54,202 41,348 Income tax – 10% (2022: 10%) 5,420 4,135 From unrecognised amounts as per tax returns related to: increases – BGN 12,849 thousand (2022: BGN 3,494 thousand) 1,285 349 decreases – BGN 7,038 thousand (2022: BGN 345 thousand) (704) (34) Recognised deferred taxes originated in prior years 79 (102) Tax expense from past periods 1 143 Current year tax loss on which no deferred tax asset is recognised - 276 Total income tax expense carried to the statement of comprehensive income (within profit or loss for the year) 6,081 4,767 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 65 The tax effects related to other components of comprehensive income are as follows: 2023 2022 BGN '000 BGN '000 Pre-tax amount Tax effects recognised in equity Amount net of tax Pre-tax amount Tax effects recognised in equity Amount net of tax Items that will not be reclassified to profit or loss Net change in the fair value of equity investments at FVOCI 1,766 - 1,766 (1,047) - (1,047) Gains/(losses) on revaluation of property, plant and equipment 33 (3) 30 (991) 99 (892) Remeasurement of liabilities under defined benefit pension plans (855) - (855) 548 - 548 Total other comprehensive income for the year 944 (3) 941 (1,490) 99 (1,391) 14. OTHER COMPREHENSIVE INCOME Other comprehensive income includes: 2023 2022 BGN '000 BGN '000 Net change in the fair value of equity investments measured at FVOCI 1,766 (1,047) Revaluation of property, plant and equipment 33 (991) Remeasurement of liabilities under defined benefit pension plans (855) 548 Total comprehensive income for the year 944 (1,490) Income tax relating to items of other comprehensive income (3) 99 Total comprehensive income for the year, net of taxes 941 (1,391) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 66 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 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 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 193,737 178,558 227,962 219,300 22,755 22,908 4,527 4,170 448,981 424,936 Additions 888 17,327 2,424 1,161 3,116 1,449 7,212 14,024 13,640 33,961 Transfer to property, plant and equipment 1,355 3,198 6,346 9,045 310 753 (8,011) (12,996) - - Transfer to investment property (353) - (108) - (86) - - (547) - Effect from revaluation to fair value - - 20 - 13 - - - 33 - Impairment - (1,306) (34) - - - - - (34) (1,306) Disposals (15,200) (4,040) (7,722) (1,544) (3,857) (2,355) - (671) (26,779) (8,610) Balance at 31 December 180,427 193,737 228,888 227,962 22,251 22,755 3,728 4,527 435,294 448,981 Accumulated depreciation Balance at 1 January 52,766 49,734 148,069 138,808 18,246 18,373 - - 219,081 206,915 Depreciation charge for the year 6,265 5,921 12,209 10,691 1,851 2,080 - - 20,325 18,692 Transfer to investment property (204) - (87) - (72) - - - (363) - Impairment 1,726 991 130 - - - - - 1,856 991 Depreciation written-off (4,172) (3,880) (7,389) (1,430) (3,500) (2,207) - - (15,061) (7,517) Balance at 31 December 56,381 52,766 152,932 148,069 16,525 18,246 - - 225,838 219,081 Carrying amount at 31 December 124,046 140,971 75,956 79,893 5,726 4,509 3,728 4,527 209,456 229,900 Carrying amount at 1 January 140,971 128,824 79,893 80,492 4,509 4,535 4,527 4,170 229,900 218,021 The Company’s land and buildings as at 31 December include: • buildings of carrying amount BGN 84,327 thousand (31 December 2022: BGN 92,240 thousand); • land amounting to BGN 39,719 thousand (31 December 2022: BGN 48,731 thousand). The Company’s other PPE as at 31 December includes: • Motor vehicles with carrying amount BGN 3,962 thousand (31 December 2022: BGN 2,665 thousand); • Fixtures and fittings with carrying amount BGN 1,292 thousand (31 December 2022: BGN 1,320 thousand); • Biological assets (carriers) with carrying amount BGN 472 thousand (31 December 2022: BGN 524 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 67 Tangible fixed assets in progress as at 31 December include: • advances for the purchase of machines and equipment – BGN 2,567 thousand (31 December 2022: BGN 2,468 thousand); • expenditures for construction of new buildings - BGN 1,116 thousand (31 December 2022: BGN 1,503 thousand); • buildings reconstruction – BGN 25 thousand (31 December 2022: BGN 511 thousand); • other – BGN 20 thousand (31 December 2022: BGN 45 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, Operational Programme “Innovations and Competitiveness” 2014 – 2020, and Operational Programme “Energy Efficiency” (Note 31) as follows: • for a tablet production facility at the amount of BGN 5,267 thousand (31 December 2022: BGN 6,021 thousand); • compact line for insulated phial filling at the amount of BGN 3,562 thousand (31 December 2022: BGN 3,895 thousand); • for ampoule production at the amount of BGN 2,627 thousand (31 December 2022: BGN 3,032 thousand); • machinery and equipment for manufacturing of infusion solutions: none (31 December 2022: BGN 916 thousand); • combined exchange ventilation and air conditioning installation for the production of medical products at the amount of BGN 413 thousand (31 December 2022: BGN 474 thousand). • for the production of innovative eye drops, “artificial tears” type, at the amount of BGN 107 thousand (31 December 2022: BGN 133 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 68 Leases The Company’s right-of-use assets are as follows: Land and buildings Machinery, equipment and facilities Other Total 2023 2022 2023 2022 2023 2022 2023 2022 BGN‘000 BGN ‘000 BGN‘000 BGN ‘000 BGN ‘000 BGN ‘000 BGN ‘000 BGN ‘000 Book value Balance at 1 January 17,248 3,886 88 - 2,295 2,781 19,631 6,667 Additions 873 17,327 1,124 88 2,877 1,022 4,874 18,437 Disposals (744) (3,965) (88) - (1,421) (1,508) (2,253) (5,473) Balance at 31 December 17,377 17,248 1,124 88 3,751 2,295 22,252 19,631 Accumulated depreciation Balance at 1 January 747 3,145 28 - 1,199 1,782 1,974 4,927 Depreciation charge for the year 1,886 1,423 171 28 798 852 2,855 2,303 Depreciation written- off (729) (3,821) (58) - (1,252) (1,435) (2,039) (5,256) Balance at 31 December 1,904 747 141 28 745 1,199 2,790 1,974 Carrying amount on 31 December 15,473 16,501 983 60 3,006 1,096 19,462 17,657 Carrying amount on 1 January 16,501 741 60 - 1,096 999 17,657 1,740 The Company’s right-of-use land and buildings as at 31 December are as follows: • Buildings with carrying amount of BGN 15,472 thousand (31 December 2022: BGN 16,498 thousand); • Land with carrying amount of BGN 1 thousand (31 December 2022: BGN 3 thousand). The other non-current tangible right-of-use assets of the Company as at 31 December include: • Vehicles with carrying amount of BGN 2,965 thousand (31 December 2022: BGN 1,021 thousand); • Furniture and fixtures with carrying amount of BGN 41 thousand (31 December 2022: BGN 75 thousand). The Company has included its right-of-use assets within the same item in which the assets would have been included if they were the Company’s own. The Company has leased property, plant and equipment to related parties with carrying amount as at 31 December 2023: BGN 72 thousand (31 December 2022 – zero carrying amount). It has also leased to third parties property, plant and equipment with carrying amount as at 31 December 2023: BGN 1,103 thousand (31 December 2022: BGN 1,185 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 69 Other data The book value of fully depreciated tangible fixed assets, used in the Company's activities by group, is as follows: • Buildings – BGN 7,174 thousand (31 December 2022: BGN 7,736 thousand); • Plant and equipment – BGN 68,018 thousand (31 December 2022: BGN 62,457 thousand); • Other – BGN 11,384 thousand. (31 December 2022: BGN 10,473 thousand). The following encumbrances were constituted on Company's tangible fixed assets as at 31 December 2023: • Land and buildings with a carrying amount of BGN 21,380 thousand and BGN 38,949 thousand, respectively (31 December 2022: respectively, BGN 21,370 thousand and BGN 43,008 thousand) (Note 29, Note 35 and Note 41); • Pledges on equipment – BGN 18,325 thousand (31 December 2022: BGN 25,621 thousand) (Note 29, Note 35 and Note 41). Periodical 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. During this revaluation, the following main approaches and valuation methods were applied to measure the fair value of the different types of tangible assets: • ‘market approach’ and ‘market comparables’ approach – for regulated land plots and agricultural land for which an actual market exists, there are market comparables and transactions therewith and there is basis for comparison – the fair value adopted is the market value determined using the comparative method; • ‘cost approach’ through ‘amortised recoverable amount’ method and ‘method based on the cost to create or replace the asset’ – for specialized buildings, machinery, equipment, facilities and other assets for which there is no actual market and comparable sales of comparable assets – the fair value adopted is the amortised recoverable amount based on the indexed historical value of the asset and based on current costs to create or replace the asset. • ‘income approach’ through ‘capitalized income on use/production of biological assets’ – for permanent yellow acacia crops in fruit-bearing stage. The effects of remeasurement as at 31 December 2021 are as follows: • Measurement to fair value, carried to the statement of comprehensive income (within profit or loss for the year) at the negative amount of BGN 6,596 thousand; • Measurement to fair value carried to the statement of comprehensive income (within other comprehensive income) at the positive amount of BGN 8,338 thousand. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 70 16. INTANGIBLE ASSETS The Company’s intangible assets are as follows: Goodwill Intellectual property rights Software Assets in progress Total 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Book value Balance at 1 January 9,406 9,406 9,046 9,212 4,602 4,453 1,356 771 24,410 23,842 Additions - - 19 3 19 64 2,340 723 2,378 790 Transfer - - 485 51 68 87 (553) (138) - - Written-off - - (84) (220) (216) (2) - - (300) (222) Balance at 31 December 9,406 9,406 9,466 9,046 4,473 4,602 3,143 1,356 26,488 24,410 Accumulated amortisation and impairment Balance at 1 January 8,638 8,638 7,277 6,923 4,248 3,957 - - 20,163 19,518 Amortisation charge for the year - - 488 574 244 293 - - 732 867 Amortisation written-off - - (84) (220) (216) (2) - - (300) (222) Balance at 31 December 8,638 8,638 7,681 7,277 4,276 4,248 - - 20,595 20,163 Carrying amount at 31 December 768 768 1,785 1,769 197 354 3,143 1,356 5,893 4,247 Carrying amount at 1 January 768 768 1,769 2,289 354 496 1,356 771 4,247 4,324 The Company’s intellectual property rights as at 31 December include: • Trademarks with carrying amount of BGN 1,027 thousand (31 December 2022: BGN 1,269 thousand); • Licenses with carrying amount of BGN 434 thousand (31 December 2022: BGN 480 thousand); • Copyright with carrying amount of BGN 322 thousand (31 December 2022: BGN 12 thousand); • Medical registrations with carrying amount of BGN 2 thousand (31 December 2022: BGN 8 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 71 The expenditures for acquisition of non-current intangible assets as at 31 December include: • Software implementation expenses – BGN 1,820 thousand (31 December 2022: BGN 611 thousand); • Expenses for acquisition of licenses and use permits for medicinal products – BGN 1,153 thousand (31 December 2022: BGN 745 thousand); • Expenses for acquisition of copyright – BGN 162 thousand (31 December 2022: none); • Other – BGN 8 thousand (31 December 2022: none). Goodwill impairment The goodwill which results from the merger of subsidiaries (Bulgarian Rose – Sevtopolis AD, Medica AD, Unipharm AD and Biopharm Engineering AD) into the parent and is recognised in the Company’s separate statement of financial position (Note 2.12). 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 2023 are: • growth rate – 1,35%; • growth in the post-forecast period at terminal value calculation – 2,02%; • discount rate (CAPM-based) – 12,06%. For 2022 and 2023 it was assessed that there is no need to recognise impairment of the goodwill. The book value of fully amortised intangible fixed assets, used in the Company's activities according to their groups, is as follows: • intellectual property rights – BGN 5,317 thousand (31 December 2022: BGN 4,576 thousand); • software – BGN 4,087 thousand (31 December 2022: BGN 1,986 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 72 17. INVESTMENT PROPERTY Investment property represents buildings and the land they stand on, differentiated parts of buildings for independent use, intended for long-term lease to subsidiaries and third parties. 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 49,267 47,302 Additions 241 405 Transfer from property, plant and equipment 184 - Net profit/(loss) on remeasurement to fair value included in profit or loss (Note 4) 194 1,566 Disposals - (6) Balance at 31 December 49,886 49,267 The investment property per groups of assets is as follows: Group of assets 31.12.2023 31.12.2022 BGN '000 BGN '000 Warehouse premises 46,250 45,902 Offices 1,686 1,662 Production buildings 1,252 1,193 Social sites 513 510 Retail sites 185 - Total 49,886 49,267 There are established encumbrances as at 31 December 2023 on investment property as follows: • mortgage of warehouse premises – BGN 15,244 thousand (31 December 2022: BGN 13,892 thousand) (Note 35 and Note 41); • pledges on attached equipment – BGN 4,950 thousand (31 December 2022: BGN 4,428 thousand) (Note 35). Fair value measurement Fair value hierarchy The fair values of the groups of investment properties are categorised as Level 2 and Level 3 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 73 The table below shows reconciliation between the opening and closing balances of the fair values of investment properties measured at Level 2 and Level 3: Warehouse premises Offices Production buildings Social sites Retail sites Assets in progress Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN'000 Balance at 1 January 2022 44,354 1,457 1,036 455 - - 47,302 Additions 58 - - - - 347 405 Transfer 347 - - - - (347) - Disposals (6) - - - - - (6) Remeasurement to fair value through profit or loss – unrealised 1,149 205 157 55 - - 1,566 Balance at 31 December 2022 45,902 1,662 1,193 510 - - 49,267 Additions - - - - - 241 241 Transfer from PPE - - - - 184 - 184 Transfer 241 - - - (241) - Remeasurement to fair value through profit or loss – unrealised 107 24 59 3 1 - 194 Balance at 31 December 2023 46,250 1,686 1,252 513 185 - 49,886 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 tables below shows a description of the valuation techniques, used in measuring the fair value of all groups of Level 2 and Level 3 investment properties as well as the used significant unobservable inputs: SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 74 Groups of assets Level 2 Valuation approaches and techniques Significant unobservable inputs Offices, production buildings and social sites Valuation approach: Income approach Valuation technique: Valuation based on the present value, corresponding to a methodology related to meeting the requirements of BVS 2018, including valuation based on capitalized rental income, as a scheme to apply the discounted cash flows method, using data, parameters, and calculation results from applying the market comparative approach and the costs for creation/replacement approach. а) comparative rental income for market analogues b) rate of return c) realization term of rental transactions Warehouse premises Valuation approach: Income approach Valuation technique: Valuation based on the present value, corresponding to a methodology related to meeting the requirements of BVS 2018, including valuation based on capitalized rental income, as a scheme to apply the discounted cash flows method, using data, parameters, and calculation results from applying the market comparative approach and the costs for creation/replacement approach. а) comparative rental income for market analogues b) rate of return c) realization term of rental transactions SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 75 Groups of assets Level 3 Valuation approaches and techniques Significant unobservable inputs Retail sites and production and warehouse bases (including land, buildings and building facilities) Valuation approach: Income approach Valuation technique: Valuation based on the present value, corresponding to a methodology related to meeting the requirements of BVS 2018, including valuation based on capitalized rental income, as a scheme to apply the discounted cash flows method, using data, parameters, and calculation results from applying the market comparative approach and the costs for creation/replacement approach. a) comparative rental income for market analogues b) rate of return c) realization term of rental transactions Facilities, installations, equipment and furniture adjacent to real estate Valuation approach: Cost approach Valuation technique: Valuation based on the present value, corresponding to a methodology related to meeting the requirements of BVS 2018, including valuation based on a need-to-know basis, the inherent cost of acquiring or replacing (acquiring an alternative asset of equivalent utility) of a related asset at the measurement date, ie forming the replacement cost of the asset in its status as new, using data, parameters and calculative results arising from valuation techniques related to the market comparison approach. а) comparative values for new analogues б) consumer price change indices based on NSI data Key assumptions used in the calculation of the fair value of investment properties as at 31 December 2023: • rate of return – from 3,75% to 10,25%; • term to entrance into rental deals – from 3 to 12 months; As a result of the calculations made in 2023, it was established that gains on remeasurement to fair value, at the amount of BGN 194 thousand need to be recognised (2022: gain of BGN 1,566 thousand) (Note 4). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 76 18. INVESTMENTS IN SUBSIDIARIES The carrying amount of the investments by company is as follows: 31.12.2023 Interest 31.12.2022 Interest BGN '000 % BGN '000 % Sopharma Trading AD Bulgaria 64,295 87.68 63,248 87.25 Sopharma Ukraine EOOD Ukraine 9,669 100.00 9,669 100.00 Sopharma Warsaw EOOD Poland 6,807 100.00 323 100.00 Veta Pharma AD Bulgaria 6,754 99.98 6,754 99.98 Vitamini AD Ukraine 1,283 100.00 1,283 100.00 Pharmalogistica AD Bulgaria 961 89.39 961 89.39 TOO Sopharma Kazakhstan Kazakhstan 502 100.00 502 100.00 Electroncommerce EOOD Bulgaria 384 100.00 384 100.00 Phyto Palausovo AD Bulgaria - 95.00 - 95.00 Pharmachim EOOD Serbia - 100.00 - 100.00 Sopharma Rus OOO Russia - 100.00 - - Total 90,655 83,124 As at 31 December 2023, the composition of investments in the subsidiaries includes the investments in Sopharma Poland OOD – in liquidation, Poland and in Phyto Palausovo AD, Bulgaria, which are fully impaired (31 December 2022: fully impaired investments in Sopharma Poland OOD – in liquidation, Poland and Phyto Palausovo AD, Bulgaria). In 2023, there is a newly established company, Sopharma Rus OOO, Russia (31 December 2022: no newly established companies). 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: • 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 a procedure of liquidation. • 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. • Sopharma Trading AD – Scope of activities: trade in pharmaceuticals. Date of acquisition – 8 June 2006. • Vitamina AD – Scope of activities: production and trade in pharmaceuticals. Date of acquisition – 18 January 2008. • Sopharma Warsaw EOOD – Scope of activities: market and public opinion research. Date of acquisition – 23 November 2010. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 77 • 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. • Pharmachim EOOD – Scope of activities: consulting services. Date of acquisition: 14 April 2020. • Sopharma Rus OOO – scope of activities: wholesale trade in pharmaceuticals, market and public opinion surveys. Date of acquisition – 13 October 2023. The shares of Sopharma Trading AD are traded on the stock exchange, the average monthly price of realised transactions for December 2023 being BGN 6,05 per share (December 2022: BGN 6,02). The book value per share based on accounting net assets for 2023 is BGN 4,89 (2022: BGN 3,91). The movement of investments in subsidiaries is presented below: Investments in subsidiaries 31.12.2023 31.12.2022 BGN '000 BGN '000 Acquisition price Balance at 1 January (originally accounted for) 110,480 114,376 Effect of merger of a subsidiary - (13,533) Balance at 1 January (adjusted) 110,480 100,843 Additional interest acquired 1,122 10,859 Additional capital contributions 6,484 - Interest sold without loss of control (75) - Interest sold with loss of control - (1,222) Balance at 31 December 118,011 110,480 Impairment accrual Balance at 1 January (originally accounted for) 27,356 33,778 Effect of merger of a subsidiary - (6,422) Balance at 1 January (adjusted) 27,356 27,356 Impairment accrued - - Balance at 31 December 27,356 27,356 Carrying amount at 31 December 90,655 83,124 Carrying amount at 1 January 83,124 73,487 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 78 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 ratios 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 2023 are as follows: • growth rate of revenues – from 0,76% to 13,22%; • growth after the projected period upon calculation of terminal value – 2,02% to 6%; • interest rate (cost of debt) – from 8,20% to 20%; • discount rate (based on WACC) – from 9,30% to 24,70%; • discount rate (based on CAPM) – from 8,70% to 28,20%. 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 position in the Bulgarian and in foreign markets, expectations for future sales, etc. The calculations are performed with the assistance of independent certified appraisers. As a result of the calculations made in 2023, the Company did not find a need to recognise impairment of particular investments in subsidiaries (2022: none). Net gain/(loss) on sale of investments in subsidiaries The Company has recognized the following result from sale of investments in subsidiaries: 2023 2022 BGN '000 BGN '000 Gain on sale of investments in subsidiaries 142 - Loss on sale of investments in subsidiaries - (1,124) Net gain/(loss) on sale of investments in subsidiaries 142 (1,124) The Company holds investments in two subsidiaries in Ukraine. As at 31 December 2023 the carrying amount of the investment in the subsidiary Sopharma Ukraine is BGN 9,669 thousand, and the carrying amount of the investment in Vitamini is BGN 1,283 thousand. At the date of approval of these separate financial statements, the assets of these subsidiaries have not been physically affected by the military actions in Ukraine. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 79 The Company has placed in favour of a creditor bank in relation to a loan from a related party special pledge on shares in the capital of a subsidiary with carrying amount as at 31 December 2023 of BGN 10,050 thousand (31 December 2022: none) (Note 41). 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES The investments in associates are as follows: 31.12.2023 Interest 31.12.2022 Interest BGN '000 % BGN '000 % Sopharma Properties REIT 69,912 45.65 60,028 41.05 Sopharma Buildings REIT 28,734 31.47 - - Doverie Obedinen Holding AD 8,689 23.46 9,243 24.998 Pharmanova DOO, Serbia 4,759 25.00 - - Momina Krepost AD - 37.46 101 37.46 Total 112,094 69,372 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 Properties REIT is an associate whose principal activities include investment of cash raised by issue of securities, in real estate by means of purchasing right of ownership and other rights in rem over real estate, carrying out construction and enhancements thereon, for the purpose of providing them for management, lease and/or sale. Sopharma Buildings REIT is an associate as from 8 September 2023when it has been transferred from other long-term equity investments. Its principal activities are investing of cash generated through securities issue into real estate through the purchase of ownership rights and other rights in rem over real estate, carrying out construction and enhancements thereon, for the purpose of providing them for management, lease and/or sale. Pharmanova OOD, Serbia is an associate whose principal activities include manufacturing of pharmaceuticals. On 10 November 2023 the Company acquired 25% of the capital of Pharmanova OOD, Serbia. The movement in investments in associates is presented below: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 69,271 52,791 Acquired shares in associates 27,933 16,480 Transfer from other long-term equity investments 15,463 - Sold shares in associates (573) - Balance at 31 December 112,094 69,271 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 80 The shares of Doverie Obedinen Holding AD are traded on the stock exchange, the average monthly price of realised transactions for December 2023 being BGN 8,56 per share (December 2022: BGN 7,94). The accounting value per share based on accounting net assets in 2023 is BGN 2,19 (2022: BGN 2,14). The shares of Sopharma Properties REIT are traded on the stock exchange, the average monthly price of realised transactions for December 2023 being BGN 8,87 per share (December 2022: BGN 9,42 per share). The accounting value per share based on accounting net assets in 2023 is BGN 4,04 (2022: BGN 3,66). The shares of Sopharma Buildings REIT are traded on the stock exchange, the average monthly price of realised transactions for December 2023 being BGN 19,45 per share (December 2022: BGN 3,08). The accounting value per share based on accounting net assets in 2023 is BGN 1,86 (2022: BGN 2,15). Net gain on sale of investments in associates The Company has recognised a net gain on sale of investments in associates, as follows: 2023 2022 BGN '000 BGN '000 Gain on sale of investments in associates 2,258 - Net gain on sale of investments in associates 2,258 - Impairment of investments in associates At each reporting date, the management makes an assessment about whether indicators for impairment exist in respect of its investments in associates. 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, including trade and industrial experience, ensuring position in the Bulgarian and in 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 in the recoverable amount at 31 December 2023 are: • growth rate of revenues – from 2,29% to 345,24%; • growth in the post-forecast period at terminal value calculation – from 2,02% to 11,70%; • discount rate (WACC-based) – from 6,70% to 10,70%; • discount rate (CAMP-based) – from 9,11% to 16,91%. Momina Krepost AD is a joint venture whose principal activities include development, implementation and production of medicinal products for human and veterinary medicine. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 81 The movement of investments in joint ventures is presented below: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 101 1,694 Impairment (101) (1,593) Balance at 31 December - 101 The shares of Momina Krepost AD were not traded on the stock exchange in December 2023 (December 2022: no trade). The accounting value per share based on accounting net assets in 2023 is BGN 0,88 (2022: BGN 1,62). Impairment of investments in joint ventures At each reporting date, the management makes an assessment about whether indicators for impairment exist in respect of its investments in 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 joint ventures, including trade and industrial experience, ensuring position in the Bulgarian and in 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 for joint ventures at 31 December 2023 are: • growth rate of revenues – 6,36%; • growth in the post-forecast period at terminal value calculation - 2,02 % ; • interest rate /cost of debt/ - 4,30%; • discount rate (WACC-based) – 9,40%. In 2023, it was determined that there is a need to recognise impairment of the investments in joint ventures at the amount of BGN 101 thousand (2022: BGN 1,593 thousand) (Note 10). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 82 20. OTHER LONG-TERM EQUITY INVESTMENTS The other long-term equity investments include the interest (shares) in the following companies: 31.12.2023 Interest 31.12.2022 Interest BGN '000 % BGN '000 % Lavena AD 3,638 13.14 3,788 13.22 MFG Invest AD 148 0.46 169 0.46 Imventure 1 KDS 50 1.36 50 1.36 Achieve Life Science Inc. – USA 13 0.01 8 0.01 Chimimport AD 11 0.01 367 0.19 Ecobulpack AD 7 0.37 7 0.37 UniCredit Bulbank AD 3 0.001 3 0.001 Bulgarian Stock Exchange AD - - 202 0.34 Sopharma Buildings REIT - - 111 10.25 Expo Group AD - 1 1.04 Total 3,870 4,706 All above companies except for Achieve Life Science Inc. – USA, have their seat and operations in Bulgaria. The fair value per share at 31 December is as follows: 31.12.2023 31.12.2022 Equity investments Number of shares Fair value per share Fair value as per the statement of financial position Number of shares Fair value per share Fair value as per the statement of financial position Lavena AD 1,303,390 2.79 3,638 1,311,183 2.89 3,788 MFG Invest AD 50,000 2.96 148 50,000 3.38 169 Achieve Life Science Inc. – USA 1,796 7.52 13 1,796 4.70 8 Chimimport AD 16,656 0.66 11 463,476 0.79 367 Bulgarian Stock Exchange AD - - - 22,300 9.04 202 Sopharma Buildings REIT - - - 66,627 1.67 111 Total 3,810 4,645 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 83 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 value Level 1 Level 2 31.12.2023 BGN'000 BGN'000 BGN'000 Lavena AD 3,638 - 3,638 MFG Invest AD 148 148 - Achieve Life Science Inc. – USA 13 13 - Chimimport AD 11 11 - Total 3,810 172 3,638 Equity investments Fair value Level 1 Level 2 31.12.2022 BGN'000 BGN'000 BGN'000 Lavena AD 3,788 - 3,788 Chimimport AD 367 367 - Bulgarian Stock Exchange AD 202 202 - MFG Invest AD 169 169 - Sopharma Buildings REIT 111 - 111 Achieve Life Science Inc. – USA 8 8 - Total 4,645 746 3,899 The table below shows reconciliation between the opening and closing balances of the fair values at Level 1 and Level 2: Equity investments Level 1 Level 2 Total BGN '000 BGN '000 BGN '000 Balance at 1 January 2022 641 5,004 5,645 Purchases 674 1 675 Sales (624) (4) (628) Unrealised gain/(loss), net, included in other comprehensive income (Note 14) 55 (1,102) (1,047) Balance at 31 December 2022 746 3,899 4,645 Purchases 38 12,782 12,820 Capital issue - 620 620 Transfer to associates - (15,463) (15,463) Sales (557) (21) (578) Unrealised gain/(loss), net, included in other comprehensive income (Note 14) (55) 1,821 1,766 Balance at 31 December 2023 172 3,638 3,810 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 84 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 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 by Company’s specialists. Upon the analysis of the companies subject to these internal assessments the Company has determined that the fair value of these equity investments does not materially deviate from their carrying amounts. 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES The long-term receivables from related parties include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Long-term loans granted 49,070 63,354 Impairment of expected credit losses (117) (156) 48,953 63,198 Receivables under recoverable additional capital contributions in a subsidiary 9,311 - Receivables under cession agreements 3,884 3,757 Deposits under leases (Note 32) 516 516 Total 62,664 67,471 The terms and conditions of the long-term loans granted to related parties as at 31 December 2023 are as follows: Company UIC Relation type Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2023 '000 BGN'000 BGN'000 BGN’000 incl. interest Doverie Invest EAD 205426924 company controlled by an associate BGN 83,400 113/2019 18.03.2022 31.12.2025 3.00% - 40,901 484 Industrial Holding Doverie AD 121683066 company controlled by an associate BGN 14,939 409/2022 04.12.2023 31.12.2025 4.36% 26,918 8,052 152 26,918 48,953 636 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 85 The terms and conditions of the long-term loans granted to related parties as at 31 December 2022 are as follows: Company UIC Relation type Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2022 '000 BGN'000 BGN'000 BGN'000 incl. interest Doverie Invest EAD 205426924 company controlled by an associate BGN 83,400 113/2019 18.03.2022 31.12.2025 3.00% - 51,147 731 Industrial Holding Doverie AD 121683066 company controlled by an associate BGN 10,000 409/2022 25.11.2022 31.12.2024 4.36% 17,781 10,040 40 Doverie Obedinen Holding AD 121575489 associate BGN 2,000 344/2022 26.10.2022 31.12.2024 3.09% 3,133 2,011 11 20,914 63,198 782 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 of securities (shares) and promissory notes. The movement in the allowance for impairment of receivables from related parties under long-term loans granted is as follows: 2023 2022 BGN '000 BGN '000 Balance on 1 January 156 97 Decrease in the credit loss allowance recognised in profit or loss for the year (39) - Increase in the credit loss allowance recognised in profit or loss for the year - 59 Balance at 31 December 117 156 The receivables under recoverable additional capital contributions in a subsidiary are denominated in PLN. They are interest-bearing, with maturity of 31 December 2030. The receivables under cession agreements with maturity on 6 July 2025 have an interest incorporated therein. They were acquired in 2022 in relation to the repayment of bank loans of a joint venture under which Sopharma AD is a co-debtor. They are secured with a mortgage of land and buildings, and with a pledge on machinery and equipment. The deposits placed are under leases. They are denominated in EUR, with maturity on 1 August 2032. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 86 22. OTHER LONG-TERM RECEIVABLES Company's other long-term receivables include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables under transactions in securities 3,540 3,668 Impairment for ex credit losses (183) (142) Receivables under transactions in securities, net 3,357 3,526 Total 3,357 3,526 Receivables under transactions in securities comprise receivables from sale of an investment in a subsidiary with maturity 30 September 2025 related to the completion of legal actions for registration of medical product permits. The movement in the allowance for impairment of receivables under transactions in securities is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 142 216 Increase in the allowance for credit losses recognized in profit or loss for the year 41 - Decrease in the allowance for credit losses recognized in profit or loss for the year - (74) Balance at 31 December 183 142 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 87 23. INVENTORIES Company's inventories include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Materials 53,887 42,302 Finished products 33,817 27,832 Work in progress 13,422 10,524 Goods 3,349 120 Semi-finished products 2,176 1,982 Total 106,651 82,760 Materials by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Basic materials 49,127 39,980 Materials in transit 3,846 1,257 Technical materials 400 413 Auxiliary materials 398 376 Spare parts 90 222 Other 26 54 Total 53,887 42,302 Basic materials by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Substances 24,930 19,800 Chemicals 9,289 7,689 PVC and aluminium foil 4,102 3,222 Ampoules 3,719 2,834 Herbs 2,169 1,875 Incl. own production 72 5 Packaging materials 1,657 2,206 Sanitary hygienic and dressing materials 1,423 1,785 Tubes 1,187 199 Vials 641 361 Materials for veterinary vaccines 10 5 Materials for infusion solutions - 4 Total 49,127 39,980 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 88 The movement in herbs – own production (agricultural produce including yellow acacia seeds) is as follows: 2023 2022 BGN '000 BGN '000 Agricultural produce at 1 January 5 26 Cost of produce yield in the year 62 - Gain on fair value measurement 5 - Used in production - (21) Agricultural produce at 31 December 72 5 Finished products include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Tablet dosage forms 19,412 14,464 Ampoule dosage forms 4,839 5,446 Ointments 3,278 1,382 Syrups 1,929 1,654 Dressing products 1,285 1,342 Lyophilic products 1,149 2,450 Sanitary-hygienic products 253 156 Plasters 449 317 Sachets 408 99 Drops 390 289 Medical cosmetics 271 95 Suppositories 97 82 Haemodialysis concentrates 57 56 Total 33,817 27,832 Goods by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Medicinal products 3,228 46 Foodstuffs 79 74 Nutritional supplements 42 - Total 3,349 120 As at 31 December 2023 there are pledges established on Company's inventories with carrying amount of BGN 33,817 thousand as collateral to bank loans (31 December 2022: BGN 27,832 thousand) (Note 35 and Note 41). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 89 24. RECEIVABLES FROM RELATED PARTIES Receivables from related parties include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables from subsidiaries 73,994 59,149 Impairment for expected credit losses (4,063) (3,767) Receivables from subsidiaries, net 69,931 55,382 Receivables from companies controlled by an associate 12,823 12,713 Impairment for expected credit losses (16) (57) Receivables from companies controlled by an associate, net 12,807 12,656 Receivables from associates 2,085 - Impairment for expected credit losses (135) - Receivables from associates, net 1,950 - Receivables from joint ventures 2,181 1,343 Impairment for expected credit losses (2,155) (1,340) Receivables from joint ventures, net 26 3 Receivables from consortia registered under the Contracts and Obligations Act 160 158 Impairment for expected credit losses (160) (158) Receivables from consortia registered under the Contracts and Obligations Act, net - - Total 84,714 68,041 The receivables from related parties by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables under contracts with customers 75,954 59,156 Impairment for expected credit losses (4,194) (3,822) Receivables under contracts with customers, net 71,760 55,334 Trade loans granted 14,976 13,996 Impairment for expected credit losses (2,169) (1,340) Trade loans granted, net 12,807 12,656 Receivables under guarantor contracts and guarantees 81 53 Impairment for expected credit losses (4) (2) Receivables under guarantor contracts and guarantees, net 77 51 Advances granted 70 - Other receivables 160 158 Impairment for expected credit losses (160) (158) Other receivables, net - - Total 84,714 68,041 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 90 The receivables under contracts with customers – related parties are interest-free and BGN 57,536 thousand of them are denominated in BGN (31 December 2022: BGN 42,037 thousand) and in EUR – BGN 14,224 thousand (31 December 2022: BGN 13,297 thousand). The receivables from a subsidiary with principal activities in the field of trade in pharmaceuticals are the most significant and amount to BGN 55,585 thousand as at 31 December 2023 or 77,46% of all receivables under contracts with customers - related parties (31 December 2022: BGN 42,037 thousand – 75,97%). 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: 2023 2022 BGN '000 BGN '000 Balance at 1 January 3,822 1,366 Increase in the credit loss allowance recognised within profit or loss for the year 4,194 3,822 Decrease in the credit loss allowance recognised within profit or loss for the year (3,822) (1,366) Balance at 31 December 4,194 3,822 The age structure of non-matured (regular) trade receivables from related parties is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 up to 30 days 12,138 13,654 from 31 to 90 days 25,811 22,419 from 91 to 180 days 28,769 17,746 from 181 to 365 days 2,085 - Gross amount of non-matured (regular) receivables from related parties 68,803 53,819 Impairment for expected credit losses (1,525) (1,120) Non-matured (regular) receivables from related parties, net 67,278 52,699 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 91 The impairment for expected credit losses of non-matured (regular) trade receivables from related parties is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 up to 30 days 253 284 from 31 to 90 days 538 467 from 91 to 180 days 599 369 from 181 to 365 days 135 - Total 1,525 1,120 The age structure based on the invoice date of past due trade receivables from related parties is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 from 31 to 90 days 1 - from 91 to 180 days 920 116 from 181 to 365 days 3,206 1,687 over 365 days 3,024 3,534 Gross amount of past due receivables from related parties 7,151 5,337 Impairment for expected credit losses (2,669) (2,702) Past due receivables from related parties, net 4,482 2,635 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 2.17). Based on that, the credit loss allowance as at 31 December is determined as follows: 31 December 2023 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% 10% 33% 60% 100% Trade receivables from related parties (gross carrying amount) BGN '000 68,803 3,110 1,017 2,498 526 75,954 Expected credit loss (Impairment allowance) BGN '000 (1,525) (297) (340) (1,506) (526) (4,194) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 92 31 December 2022 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% 5% 8% 52% 97% Trade receivables from related parties (gross carrying amount) BGN '000 53,819 1,419 401 1,811 1,706 59,156 Expected credit loss (Impairment allowance) BGN '000 (1,120) (73) (31) (945) (1,653) (3,822) Special pledges have been established as at 31 December 2023 on receivables from related parties at the amount of BGN 62,085 thousand as collateral under bank loans received (31 December 2022: BGN 48,531 thousand) (Note 35). Loans granted to related parties by type of related party are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Companies controlled by an associate 12,810 12,656 Impairment for expected credit losses (3) - Companies controlled by an associate, net 12,807 12,656 Joint ventures 2,151 1,340 Impairment for expected credit losses (2,151) (1,340) Joint ventures, net - - Subsidiaries 15 - Impairment for expected credit losses (15) - Subsidiaries, net - - Total 12,807 12,656 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 93 The terms and conditions of the loans by types of related parties as at 31 December 2023 are as follows: Company UIC Relation type Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2023 '000 BGN'000 BGN'000 BGN'000 incl. interest Doverie Grizha EAD 204956297 company controlled by an associate BGN 10,997 265а/2017 04.12.2023 31.12.2024 3.10% 11,453 8,740 692 Doverie Capital AD 130362127 company controlled by an associate BGN 4,000 319/2021 04.12.2023 31.12.2024 3.33% 6,700 4,067 67 18,153 12,807 759 The terms and conditions of the loans by types of related parties as at 31 December 2022 are as follows: Company UIC Relation type Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2022 '000 BGN'000 BGN'000 BGN'000 incl. interest Doverie Grizha EAD 204956297 company controlled by an associate BGN 10,997 265а/2017 15.11.2022 31.12.2023 3.10% 11,296 8,512 463 Doverie Capital AD 130362127 company controlled by an associate BGN 4,000 319/2021 15.11.2022 31.12.2023 3.33% 6,213 4,144 144 17,509 12,656 607 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 securities (shares). The movement in the allowance for impairment of loans granted to related parties is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 1,340 - Increase in the credit loss allowance recognised within profit or loss for the year 829 1,340 Balance at 31 December 2,169 1,340 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 94 Receivables under guarantor contracts by type of related parties are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables from subsidiaries 77 49 Impairment for expected credit losses - (1) Receivables from subsidiaries, net 77 48 Receivables from joint ventures 4 4 Impairment for expected credit losses (4) (1) Receivables from joint ventures, net - 3 Total 77 51 Receivables under guarantor contracts are interest-free, in EUR – BGN 77 thousand (31 December 2022: BGN 48 thousand), and in BGN – none (31 December 2022: BGN 3 thousand). The movement in the allowance for impairment of receivables under guarantor contracts from related parties is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 2 59 Increase in the credit loss allowance recognized within profit or loss for the year 4 2 Decrease in the credit loss allowance recognized within profit or loss for the year (2) (59) Balance at 31 December 4 2 The other receivables are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables from consortia registered under the Contracts and Obligations Act 160 158 Impairment for expected credit losses (160) (158) Total - - SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 95 The other receivables are BGN-denominated and interest-free. The movement in the allowance for impairment of other receivables is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 158 - Increase in the credit loss allowance recognized within profit or loss for the year 2 158 Balance at 31 December 160 158 25. TRADE RECEIVABLES Trade receivables include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables under contracts with customers 17,431 14,606 Impairment for expected credit losses (3,481) (4,051) Receivables under contracts with customers, net 13,950 10,555 Receivables under cession agreements 4,890 4,890 Impairment for expected credit losses (56) - Receivables under cession agreements, net 4,834 4,890 Advances granted 3,975 2,670 Total 22,759 18,115 The receivables under contracts with customers are interest-free and BGN 1,670 thousand of them are denominated in BGN (31 December 2022: BGN 908 thousand), in EUR – BGN 7,794 thousand (31 December 2022: BGN 6,827 thousand), in USD – BGN 4,486 thousand (31 December 2022: BGN 2,820 thousand). One main counterpart of the Company is accountable for about 32,14% of the receivables from clients (31 December 2022: one main counterpart accountable for 26,71% of trade receivables). 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 96 The movement in the allowance for impairment of trade receivables from third parties is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 4,051 1,877 Increase in the credit loss allowance recognised within profit or loss for the year 3,481 4,047 Decrease in the credit loss allowance recognised within profit or loss for the year (4,051) (1,873) Balance at 31 December 3,481 4,051 The age structure of non-matured (regular) trade receivables is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 up to 30 days 3,676 4,238 from 31 to 90 days 2,698 2,929 from 91 to 180 days 2,443 1,647 Gross amount of non-matured (regular) trade receivables 8,817 8,814 Impairment for expected credit losses (100) (127) Non-matured (regular) trade receivables, net 8,717 8,687 The impairment for expected credit losses of non-matured (regular) trade receivables is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 up to 30 days 41 58 from 31 to 90 days 31 44 from 91 to 180 days 28 25 Total 100 127 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 97 The age structure based on the invoice date of past due trade receivables is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 from 31 to 90 days 2,328 1,288 from 91 to 180 days 1,832 14 from 181 to 365 days 2,924 2,748 over 365 days 1,530 1,742 Gross amount of past due trade receivables 8,614 5,792 Impairment for expected credit losses (3,381) (3,924) Past due trade receivables, net 5,233 1,868 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 2.17). Based on that, the loss allowance as at 31 December is determined as follows: 31 December 2023 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 1% 10% 34% 60% 100% Trade receivables (gross carrying amount) BGN '000 8,817 3,269 2,194 2,107 1,044 17,431 Expected credit loss (Impairment allowance) BGN '000 (100) (326) (746) (1,265) (1,044) (3,481) 31 December 2022 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 1% 3% 55% 87% 100% Trade receivables (gross carrying amount) BGN '000 8,814 1,323 676 2,161 1,632 14,606 Expected credit loss (Impairment allowance) BGN '000 (127) (43) (373) (1,876) (1,632) (4,051) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 98 As at 31 December 2023, there are no special pledges established as collateral of bank loans received on trade receivables (31 December 2022: BGN 283 thousand) (Note 35 and Note 41). The receivables under cession agreements are denominated in EUR, interest-free, with maturity on 31 December 2024. The movement in the allowance for impairment of receivables from cession agreements is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January - - Increase in the credit loss allowance recognised in profit or loss for the year 56 - Balance at 31 December 56 - The advances granted to suppliers as at 31 December are for the purchase of: 31.12.2023 31.12.2022 BGN '000 BGN '000 Services 2,631 2,161 Inventories 1,344 509 Total 3,975 2,670 The advances granted are regular. They include: in BGN – BGN 512 thousand (31 December 2022: BGN 339 thousand), in EUR – BGN 2,299 thousand (31 December 2022: BGN 1,967 thousand), in USD: BGN 928 thousand (31 December 2022: BGN 284 thousand), and in other currency – BGN 236 thousand (31 December 2022: BGN 80 thousand). 26(A). LOANS GRANTED TO THIRD PARTIES The loans granted to third parties are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Trade loans granted to third parties 11,286 8,320 Impairment for expected credit losses (83) (3) Total 11,203 8,317 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 99 The movement in the impairment allowance of loans to third parties is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 3 - Increase in the allowance for credit losses recognized in profit or loss for the year 80 - Decrease in the allowance for credit losses recognized in profit or loss for the year - (3) Transfer from other non-current receivables - 6 Balance at 31 December 83 3 Conditions under which loans to third parties are granted as at 31 December 2023: Company UIC Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2023 BGN'000 BGN'000 BGN'000 incl. interest Sopharmacy MC 101760002375 4 EUR 3,000 330/2018 21.12.2023 31.12.2024 3.05% 8,055 6,667 800 Alliance Energy Companies AD 206936182 BGN 2,740 52/2023 28.07.2023 31.12.2024 4.37% - 2,691 - Sopharmacy MC 101760002375 4 EUR 695 470/2017 21.12.2023 31.12.2024 3.05% 2,140 1,610 250 Pharmaplant AD 201837643 BGN 4,184 95а/2012 04.12.2023 31.12.2024 4.30% 385 187 - Pharmaplant AD 201837643 BGN 949 396/2014 04.12.2023 31.12.2024 4.70% 171 48 - 10,751 11,203 1,050 Conditions under which loans to third parties are granted as at 31 December 2022: Company UIC Currency Contracted amount Contract No/year Date of latest supplementary agreement to the contract Maturity Interest % Market value of collaterals 31.12.2022 '000 BGN'000 BGN'000 BGN'000 incl. interest Sopharmacy MC 1017600023754 EUR 3,000 330/2018 22.12.2022 31.12.2023 3.05% 7,704 6,490 622 Sopharmacy MC 1017600023754 EUR 695 470/2017 07.10.2022 31.12.2023 3.05% 1,985 1,568 209 Pharmaplant AD 201837643 BGN 4,184 95а/2012 16.11.2021 31.12.2023 4.30% 357 187 - Pharmaplant AD 201837643 BGN 949 396/2014 16.11.2021 31.12.2023 4.70% 159 72 - 10,205 8,317 831 The loans granted to third parties are intended to provide support for financing of activities, performed by these entities, but having common strategic objectives. They are secured through pledges on securities (shares). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 100 26(B). OTHER RECEIVABLES AND PREPAYMENTS Other receivables and prepayments include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Taxes refundable 4,171 4,697 Prepayments 1,009 1,188 Cash provided for dividend payment 424 - Receivables under deposits granted as guarantees 289 69 Receivables under litigation guarantees 25 25 Funds provided to an investment intermediary - 46 Awarded receivables 481 160 Impairment for credit losses on awarded receivables (481) (160) Awarded receivables, net - - Other 83 53 Total 6,001 6,078 Taxes refundable include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Excise duties 4,048 4,249 Corporate tax 123 - VAT - 448 Total 4,171 4,697 Prepayments include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Subscriptions 392 630 Insurance 371 232 Licence and patent fees 89 126 Bank charges and fees 83 72 Advertisement 45 83 Rentals 6 9 Vouchers 3 10 Consulting services - 4 Other 20 22 Total 1,009 1,188 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 101 Deposits placed as guarantees include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Guarantees under contracts for supply of veterinary vaccines 188 - Guarantees under system implementation contracts 40 - Guarantees under rental agreements 31 20 Guarantees under leases 13 15 Guarantees under contracts for fuel 6 6 Guarantees under construction contracts 4 4 Guarantees under contracts for electricity supply 3 3 Guarantees under insurance contracts 1 1 Guarantees under contracts for supply of medicinal products - 19 Other 3 1 Total 289 69 The deposits placed as guarantees are: in BGN – BGN 230 thousand (31 December 2022: BGN 40 thousand), in EUR – BGN 43 thousand (31 December 2022: BGN 17 thousand); in USD – BGN 11 thousand (31 December 2022: BGN 12 thousand), and in other currencies – BGN 5 thousand (31 December 2022: none). The guarantees placed under litigations are in BGN – BGN 25 thousand (31 December 2022: BGN 25 thousand). The movement in the allowance for impairment of court and awarded receivables is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 160 148 Increase in the credit loss allowance recognised within profit or loss for the year 327 12 Decrease in the credit loss allowance recognised within profit or loss for the year (6) - Balance at 31 December 481 160 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 102 27. CASH AND CASH EQUIVALENTS Cash includes: 31.12.2023 31.12.2022 BGN '000 BGN '000 Cash at current bank accounts 5,088 4,585 Cash in hand 86 123 Blocked cash 100,180 185 Cash and cash equivalents 105,354 4,893 Cash structure at current bank accounts is as follows: in BGN: BGN 748 thousand (31 December 2022: BGN 2,105 thousand), in EUR – BGN 3,324 thousand (31 December 2022: BGN 2,348 thousand), in USD – BGN 958 thousand (31 December 2022: BGN 74 thousand) and in other currency – BGN 58 thousand (31 December 2022: BGN 58 thousand). Cash in hand is denominated in: BGN: BGN 86 thousand (31 December 2022: BGN 123 thousand). The blocked cash includes: 31.12.2023 31.12.2022 BGN '000 BGN '000 Short-term deposits abroad 100,110 124 Bank guarantees issued 70 61 100,180 185 The issued bank guarantees are: in BGN – BGN 54 thousand (31 December 2022: BGN 54 thousand), in EUR – BGN 16 thousand (31 December 2022: BGN 7 thousand). Short-term deposits abroad are in EUR, and mature on 10 January 2024 (31 December 2022: in RUB, maturing on 5 January 2023). 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 the impairment of expected credit losses on cash and cash equivalents as at 31 December 2023. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 103 28. EQUITY Share capital As at 31 December 2023, the registered share capital of Sopharma AD amounts to BGN 172,591 thousand distributed in 172,590,578 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 2022 121,742,899 84,514 Treasury shares bought (424,188) (1,909) Expense for treasury shares purchase - (10) Balance at 31 December 2022 121,318,711 82,595 Capital issue 37,792,679 37,793 Effects of a subsidiary merger 852 3 Treasury shares bought (850,000) (5,226) Expense on treasury shares purchase - (26) Balance at 31 December 2023 158,262,242 115,139 On 6 October 2023, an increase to the Company’s capital was registered with the Trade Registry, by means of issue of 37,792,679 ordinary registered dematerialized voting shares with nominal value of BGN 1 each and issue value BGN 4,13 per share. The shares from the capital increase were registered by the warrant holders. The new shares from the Company’s capital increase were admitted for trade on the Bulgarian Stock Exchange on 18 October 2023. The table below presents the paid in joint-stock capital of the Company at 31 December: 31.12.2023 31.12.2022 BGN '000 BGN '000 Share capital (registered), nominal 172,591 134,798 Share premium 136,916 8,785 Total paid capital 309,507 143,583 Company's shares are ordinary, non-cash, with right of dividend and liquidation share and are registered for trade in the Bulgarian Stock Exchange – Sofia AD and Warsaw Stock Exchange. The treasury shares are 14,328,336 at the amount of BGN 57,452 thousand as at 31 December 2023 (31 December 2022: 13,479,188 shares at the amount of BGN 52,203 thousand). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 104 The number of shares purchased in the current year is 850,000 (2022: 424,188 shares). The effect of the subsidiary merger is 852 shares for BGN 3 thousand. Company's reserves are summarised in the table below: 31.12.2023 31.12.2022 BGN '000 BGN '000 Statutory reserves 196,759 68,628 Property, plant and equipment revaluation reserve 21,334 27,260 Reserve for financial assets at fair value through other comprehensive income 506 560 Additional reserves 226,530 365,155 Total 445,129 461,603 Statutory reserves at the amount of BGN 196,759 thousand (31 December 2022: BGN 68,628 thousand) constitute 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 59,843 thousand (31 December 2022: BGN 59,843 thousand), and (b) share premium reserve representing the excess of the issue value over the nominal value of the issued shares on the merger of subsidiaries into Sopharma AD, as well as of the registered and paid for shares and exercised warrants’ rights by warrant holders at the amount of BGN 136,916 thousand (31 December 2022: BGN 8,785 thousand). The movements of statutory reserves is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 68,628 66,201 Positive difference between issue and nominal value upon capital issue 118,291 - Transfer from Other equity components (warrants issue) upon exercise of warrants’ rights 9,840 - Distribution of profit - 2,427 Balance at 31 December 196,759 68,628 The property, plant and equipment revaluation reserve, amounting to BGN 21,334 thousand (31 December 2022: BGN 27,260 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 was directly carried to this reserve. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 105 The movements of property, plant and equipment revaluation reserve are as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January (originally accounted for) 27,106 28,614 Effect of a subsidiary merger 154 154 Balance at 1 January (restated) 27,260 28,768 Gain/(Loss) on revaluation of property, plant and equipment, net 33 (991) Effect of a subsidiary merger (131) - Transfer to retained earnings (5,825) (616) Deferred tax relating to revaluations (3) 99 Balance at 31 December 21,334 27,260 The reserve of financial assets at fair value through other comprehensive income, amounting to BGN 506 thousand (31 December 2022: BGN 560 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: 2023 2022 BGN '000 BGN '000 Balance at 1 January 560 1,644 Net change in the fair value of other long-term equity investments 1,766 (1,047) Transfer to retained earnings (1,820) (37) Balance at 31 December 506 560 Additional reserves at the amount of BGN 226,530 thousand (31 December 2022: BGN 365,155 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 106 The movements of additional reserves are as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 365,155 342,581 Dividend distributed from 2022 profit (32,604) - Advance six-month dividends from 2023 profit (106,021) - Distributed profit in the year - 22,574 Balance at 31 December 226,530 365,155 Other equity components (warrant issue) Pursuant to Art. 25 of the Company’s Statute dated 21 May 2021, the Board of Directors approved parameters and made a decision for issuing initial public offering of warrants. By means of Decision No 804 – Е dated 4 November 2021, 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. 112b, Para 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 was registered with Central Depository AD – 16 November 2021. The warrants were admitted to trade on the main BSE market of Bulgarian Stock Exchange – Sofia AD, as from 17 November 2021. The table below presents the funds raised from the warrant issue, net of issue costs: Warrants issued and fully paid Warrants Other equity components number BGN '000 Balance at 1 January 2022 44,925,943 12,512 Transaction costs - (24) Balance at 31 December 2022 44,925,943 12,488 Transaction costs - (791) Transfer to Share premium reserve upon exercise of warrants’ rights (37,792,679) (9,840) Balance at 31 December 2023 7,133,264 1,857 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 107 Basic net earnings per share 31.12.2023 31.12.2022 Weighted average number of shares 130,696,402 121,495,503 Net profit for the year (BGN '000) 48,121 36,581 Basic net earnings per share (BGN) 0.37 0.30 Diluted net earnings per share 31.12.2023 31.12.2022 Weighted average number of shares 130,696,402 121,495,503 Cumulative effect of warrants 7,501,448 3,417,186 Shares in circulation with warrants 138,197,850 124,912,689 Net profit for the year (BGN '000) 48,121 36,581 Diluted net earnings per share 0.35 0.29 As at 31 December 2023, retained earnings amount at BGN 14,000 thousand (31.12.2022: BGN 36,269 thousand). The movement in retained earnings is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January (originally accounted for) 43,843 28,137 Effect of a subsidiary merger (7,574) (4,752) Balance at 1 January (restated) 36,269 23,385 Net profit for the year 48,121 39,429 Transfer from revaluation reserve of property, plant and equipment 5,825 616 Transfer from reserve of financial assets at fair value through other comprehensive income 1,820 37 Effects of a subsidiary merger 128 (2,848) Actuarial gains/(losses) on remeasurement (855) 522 Effects of rights sold on issued warrants - 103 Advance six-month dividends (37,121) - Profit distribution for dividends (40,187) - Effects of actuarial gains/(losses) on revaluations upon subsidiary merger - 26 Profit distribution to reserves - (25,001) Balance at 31 December 14,000 36,269 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 108 29. LONG-TERM BANK LOANS 31.12.2023 31.12.2022 Currency Contracted loan amount Maturity Non-current portion Current portion Total Non- current portion Current portion Total '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Extended credit lines EUR 15,000 31.08.2025 27,021 - 27,021 - - - Investment loans BGN 9,544 25.12.2029 8,677 854 9,531 - - - BGN 4,330 10.07.2028 - - - 1,860 416 2,276 BGN 4,250 16.04.2023 - - - - 52 52 35,698 854 36,552 1,860 468 2,328 The bank loans received in BGN are contracted at an interest rate based on short-term interest rate plus a mark-up of 1,9 points, but not less than 1,9 points, and those in EUR – one-month EURIBOR plus a mark- up of 1,1 points, but not less than 1,1 points (2022: one-month EURIBOR plus a mark-up of up to 1,1 points but not less than 1,1 points, and those in BGN – from 1,75% to 2,80%). The following were established under the loans payable: • Mortgages of real estate with a carrying amount of BGN 41,659 thousand as at 31 December 2023 (31 December 2022: BGN 12,795 thousand) (Note 15); • Special pledges on machinery and equipment with a carrying amount of BGN 10,644 thousand as at 31 December 2023 (31 December 2022: BGN 16,716 thousand) (Note 15); • Special pledges on inventories with a carrying amount of BGN 11,735 thousand as at 31 December 2023 (31 December 2022: none) (Note 23). The long-term bank loan contracts include clauses with covenants for maintaining certain financial ratios. Company's management currently controls the observance of these financial ratios in communication with the respective creditor bank. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 109 Reconciliation of the movement of liabilities from financing activities The table below shows changes in 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. 01.01.2023 Changes in cash flows from financing activities Newly arising liabilities over the year Other non- cash changes 31.12.2023 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Bank loans 14,062 67,202 80 46 81,390 Lease liabilities to related parties 16,376 (1,929) 1,841 219 16,507 Lease liabilities to third parties 1,396 (864) 3,033 (370) 3,195 Dividends and unexercised warrant rights 215 (71,889) 215,933 (1,810) 142,449 Totals 32,049 (7,480) 220,887 (1,915) 243,541 Proceeds from capital issue - 156,084 - (146,244) 9,840 Treasury shares (52,203) (5,252) - 3 (57,452) Government grants for agricultural land - 36 - (36) - Reserve for warrants issued 12,488 (791) - (9,840) 1,857 Net cash flows from financing activities (7,666) 142,597 220,887 (158,032) 197,786 01.01.2022 Changes in cash flows from financing activities Newly arising liabilities over the year Other non- cash changes 31.12.2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Bank loans 56,363 (46,091) 3,686 104 14,062 Lease liabilities to related parties 587 (1,327) 17,327 (211) 16,376 Lease liabilities to third parties 1,198 (866) 1,110 (46) 1,396 Dividends and unexercised warrant rights 269 (11) - (43) 215 Total 55,417 (48,295) 22,123 (196) 32,049 Treasury shares (50,284) (1,919) - - (52,203) Rights sold under warrants - 103 - (103) - Government grants for agricultural land - 34 - (34) - Reserve for warrants issued 12,512 (24) - - 12,488 Net cash flows used in financing activities 20,645 (50,101) 22,123 (333) (7,666) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 110 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 31.12.2023 31.12.2023 31.12.2022 31.12.2022 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment 54,834 5,483 64,226 6,422 including revaluation reserve 19,520 1,952 26,138 2,614 Investment property 16,409 1,641 14,475 1,448 including revaluation reserve 534 53 501 50 Intangible assets - - 97 10 Total deferred tax liabilities 71,243 7,124 78,798 7,880 Payables to personnel (9,996) (1,000) (9,082) (908) Receivables (17,969) (1,797) (10,379) (1,038) Accrued liabilities (6,074) (607) (6,604) (660) Inventories (4,124) (412) (1,745) (175) Intangible assets (36) (4) - - Transformation costs - - (14) (1) Total deferred tax assets (38,199) (3,820) (27,824) (2,782) Deferred income tax liabilities, net 33,044 3,304 50,974 5,098 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 111 The change in the balance of deferred taxes for 2023 is as follows: Deferred tax (liabilities)/ assets Balance at 1 January 2023 Recognised in the statement of comprehensive income Recognised in equity Recognised in the statement of changes in equity and the current tax return Balance at 31 December 2023 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment (6,422) 800 (12) 151 (5,483) Investment property (1,448) (202) 9 - (1,641) Payables to personnel 908 92 - - 1,000 Receivables 1,038 759 - - 1,797 Inventories 175 237 - - 412 Accrued liabilities 660 (53) - - 607 Intangible assets (10) 14 - - 4 Costs for subsidiary transformation 1 (1) - - - Total (5,098) 1,646 (3) 151 (3,304) The change in the balance of deferred taxes for 2022 is as follows: Deferred tax (liabilities)/ assets Balance at 1 January 2022 Recognised in the statement of comprehensive income Recognised in equity Recognised in the statement of changes in equity and the current tax return Balance at 31 December 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment (7,326) 674 99 131 (6,422) Investment property (1,110) (338) - - (1,448) Intangible assets (62) 52 - - (10) Payables to personnel 841 67 - - 908 Receivables 436 602 - - 1,038 Inventories 333 (158) - - 175 Accrued liabilities 110 550 - - 660 Costs for subsidiary transformation - 1 - - 1 Total (6,777) 1,450 99 131 (5,098) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 112 Unrecognised deferred tax assets are as follows: Unrecognised deferred tax assets temporary difference tax temporary difference tax 31.12.2023 31.12.2023 31.12.2022 31.12.2022 BGN '000 BGN '000 BGN '000 BGN '000 Impairment of investments in subsidiaries (27,996) (2,800) (27,996) (2,800) Impairment of investments in associates (5,036) (504) (5,205) (521) Impairment of investments in joint ventures (2,945) (294) (2,844) (284) Total (35,977) (3,598) (36,045) (3,605) 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, under Operational Programme "Innovations and Competitiveness" 2014 – 2020 and Operational Programme "Energy Efficiency". The table below presents the non-current and the current portion of the grants received by type: 31.12.2023 31.12.2022 Non-current portion Current portion Total Non-current portion Current portion Total BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Acquisition of machinery and equipment for a new tablets production line 1,742 179 1,921 1,921 179 2,100 Acquisition of a compact line for insulated vial filling 1,613 167 1,780 1,779 167 1,946 Implementation of innovative products in the production of ampoule dosage forms 1,100 200 1,300 1,300 200 1,500 Acquisition on non-current assets and building reconstruction 279 8 287 287 8 295 Acquisition of combined exchange ventilation and air conditioning installation 57 9 66 65 9 74 Implementation of innovative “artificial tears” eye drops production - 14 14 14 24 38 Acquisition of machinery and equipment for infusion solutions - - - 630 140 770 Total 4,791 577 5,368 5,996 727 6,723 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 113 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 40). 32. LEASE LIABILITIES TO RELATED PARTIES The lease liabilities to related parties originate in relation to the lease of buildings and are presented net of the interest due in the future, and are as follows: Term 31.12.2023 31.12.2022 BGN '000 BGN '000 Up to one year 1,733 1,637 Over one year 14,774 14,739 Total 16,507 16,376 The minimum lease payments to related parties are due, as follows: Term 31.12.2023 31.12.2022 BGN '000 BGN '000 Up to one year 1,929 1,657 Over one year 15,511 14,916 17,440 16,573 Future finance cost on leases (933) (197) Present value of lease liabilities 16,507 16,376 The term of leases to related parties is until 1 August 2032. The Company has provided deposits under the leases as collateral of lease liabilities, at the amount of BGN 516 thousand (31 December 2022: BGN 516 thousand) (Note 21). The lease liabilities to related parties are denominated in EUR. The lease payments due in the next 12 months are presented in the statement of financial position as “payables to related parties” (Note 37). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 114 33. 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, and are as follows: Term 31.12.2023 31.12.2022 BGN '000 BGN '000 Up to one year 945 802 Over one year 2,250 594 Total 3,195 1,396 The minimum lease payments to third parties are due, as follows: Term 31.12.2023 31.12.2022 BGN '000 BGN '000 Up to one year 1,018 880 Over one year 2,309 700 3,327 1,580 Future finance costs on leases (132) (184) Present value of lease liabilities 3,195 1,396 The table below presents liabilities per types of leases to third parties: 31.12.2023 31.12.2022 Long-term portion Short-term portion Total Long-term portion Short-term portion Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Leases of motor vehicles 2,182 793 2,975 436 650 1,086 Leases of buildings 57 87 144 81 83 164 Leases of apparatuses 9 33 42 46 34 80 Leases of transmitters 2 25 27 30 30 60 Leases of land - 7 7 1 5 6 Total 2,250 945 3,195 594 802 1,396 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 115 Lease liabilities to third parties in BGN amount to BGN 76 thousand (31 December 2022: BGN 172 thousand), in EUR – BGN 2,647 thousand (31 December 2022: BGN 786 thousand), in USD – BGN 297 thousand (31 December 2022: BGN 371 thousand), and in other currencies – BGN 175 thousand (31 December 2022: BGN 67 thousand). The Company has provided deposits under leases as collateral of lease liabilities at the amount of BGN 13 thousand (31 December 2022: BGN 15 thousand) (Note 26b). The lease payments due over the next 12 months are presented in the statement of financial position as “other current payables” (Note 40). 34. RETIREMENT BENEFIT OBLIGATIONS Long-term payables to personnel include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Long-term retirement benefit obligations 5,043 4,137 Long-term benefit obligations for tantieme 231 203 Total 5,274 4,340 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 2.24). For the purpose of establishing the amount of these obligations to personnel, the Company has assigned an actuarial valuation as at 31 December 2023 by using the services of a certified actuary. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 116 Movements in the present value of retirement benefit obligations to personnel are as follows: 2023 2022 BGN '000 BGN '000 Present value of the obligation at 1 January 4,137 4,695 Current service cost 391 472 Interest cost 258 30 Net actuarial (gain)/loss recognised for the period 8 (38) Payments made in the year (606) (474) Remeasurement gains or losses on the retirement benefit obligations, including: 855 (548) Actuarial (gains)/losses arising from changes in demographic assumptions (46) (48) Actuarial (gains)/losses arising from changes in financial assumptions 337 (833) Actuarial losses arising from past experience adjustments 564 333 Present value of the obligation at 31 December 5,043 4,137 The amounts of long-term retirement benefits of personnel accrued in the statement of comprehensive income are as follows: 2023 2022 BGN '000 BGN '000 Current service cost 391 472 Interest cost 258 30 Net actuarial (gain)/loss recognised for the period 8 (38) Components of defined benefit plan costs recognised in profit or loss (Note 7) 657 464 Remeasurement gains or losses on the retirement benefit obligations, including: Actuarial (gains)/losses arising from changes in demographic assumptions (46) (48) Actuarial (gains)/losses arising from changes in financial assumptions 337 (833) Actuarial losses arising from past experience adjustments 564 333 Components of defined benefit plans cost recognised in other comprehensive income (Note 14) 855 (548) Total 1,512 (84) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 117 The following actuarial assumptions were used in calculating the present value of the liabilities as at 31 December 2023: • The discount factor is calculated by using as basis of 4,50% (2022: 4,50% for Biopharm Engineering AD and 6% for Sopharma AD). The assumption is based on yield data for long-term government securities with 10-year maturity; • The assumption for the future level of the salaries is based on the information provided by the Company's management and amounts to 4% annual growth compared to the prior reporting period (2022: 5%); • 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 2020-2022 (2022: 2019 - 2021); • Staff turnover rate – from 1% to 16% for the five age groups formed (2022: between 1% and 16%); • Early retirement due to illness – between 0,03% and 0,32% for the five age groups formed (2022: between 0,03% and 0,32%). 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: • 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; • interest risk – any increase in the yield of government securities with similar term will increase the plan liability; • longevity risk – the present value of the retirement benefit liability is calculated by reference to the best estimate and updated information about the mortality of plan participants. An increase in life expectancy would result in a possible increase in the liability. A relative stability of this indicator has been observed in the recent years; and • salary growth related risk – the present value of the retirement benefit liability is calculated by reference to the best estimate of the future increase in plan participants' salaries. Such an increase would increase the plan liability. The sensitivity analysis of the main actuarial assumptions is based on the reasonably possible changes of these assumptions at the end of the reporting period, assuming that all other assumptions are held constant. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 118 The effects of the change (increase or decrease) by 1% of: a. salary growth b. discount rate c. staff turnover rate on the current service cost and interest expenses, and respectively on the present value of the obligation for payment of defined retirement benefits, are assessed as follows: • Impact on the amount of the present value of the obligation: 2023 2022 Increase Decrease Increase Decrease BGN '000 BGN '000 BGN '000 BGN '000 Change in salary growth 333 (301) 270 (245) Change in discount rate (296) 334 (240) 269 Change in staff turnover rate (329) 369 (269) 300 • Impact on the current service cost and interest expenses 2023 2022 Increase Decrease Increase Decrease BGN '000 BGN '000 BGN '000 BGN '000 Change in salary growth 58 (51) 49 (44) Change in discount rate (5) 5 (6) 6 Change in staff turnover rate (56) 64 (48) 54 The expected indemnity payments upon retirement under the defined benefit plan for the following five years are as follows: Forecast payments Old age and length of service retirement Poor health retirement Total BGN '000 BGN '000 BGN '000 Payments in 2024 1,078 18 1,096 Payments in 2025 444 17 461 Payments in 2026 473 17 490 Payments in 2027 317 17 334 Payments in 2028 396 16 412 2,708 85 2,793 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 119 The weighted average duration of defined benefit obligations is 6,4 years (31 December 2022: 6,9 years for Sopharma AD and 4,1 years for Biopharm Engineering AD). Long-term obligations for tantieme 31.12.2023 31.12.2022 BGN '000 BGN '000 Long-term obligations for tantieme with maturity in 2026 137 - Long-term obligations for tantieme with maturity in 2025 94 95 Long-term obligations for tantieme with maturity in 2024 - 108 231 203 35. SHORT-TERM BANK LOANS Short-term bank loans include: Currency Contracted amount Maturity 31.12.2023 31.12.2022 '000 BGN '000 BGN '000 Extended bank loans (overdrafts) BGN 19,558 05.09.2024 19,574 - BGN 20,000 05.09.2024 15,536 5 BGN 9,779 05.09.2024 9,678 - EUR 10,000 01.04.2024 44 - BGN 20,000 31.07.2024 6 - 44,838 5 Extended credit lines BGN 20,000 31.03.2024 - 11,729 - 11,729 Total 44,838 11,734 The bank loans received in EUR have been agreed at interest rate based on one-month EURIBOR plus a mark-up of 1,25 points, and those in BGN – from 1,3% to 2,65% and basic interest rate plus 1 point (2022: loans in EUR – interest rate based on one-month EURIBOR plus a mark-up of 1 point, and those in BGN – from 1,3% to 1,45%, and average deposit index plus 1 point). The loans are for working capital. The following collateral has been established in favour of the creditor banks: • Mortgages of real estate with a carrying amount of BGN 19,807 thousand as at 31 December 2023 (31 December 2022: BGN 18,876 thousand) (Note 15 and Note 17); SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 120 • Special pledges on: - machinery and equipment with a carrying amount of BGN 12,631 thousand as at 31 December 2023 (31 December 2022: BGN 13,333 thousand) (Note 15 and Note 17); - inventories with a carrying amount of BGN 22,082 thousand as at 31 December 2023 (31 December 2022: BGN 27,832 thousand) (Note 23); - receivables from related parties with a carrying amount of BGN 62,085 thousand as at 31 December 2023 (31 December 2022: BGN 48,531 thousand) (Note 24); - trade receivables: none as at 31 December 2023 (31 December 2022: BGN 283 thousand) (Note 25); - trade receivables from third parties of a subsidiary with a carrying amount of BGN 7,823 thousand as at 31 December 2023 (31 December 2022: BGN 7,823 thousand). Some of the loans drawn as at 31 December, amounting to BGN 13 thousand (31 December 2022: BGN 13 thousand) are in the form of bank guarantees issued to the National Health Insurance Institute to cover payables. The short-term bank loan contracts include clauses with covenants for maintaining certain financial ratios. Company's management currently controls the observance of these financial ratios in communication with the respective creditor bank. 36. TRADE PAYABLES Trade payables include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Payables to suppliers 21,269 17,040 Advances received 454 23,009 Total 21,723 40,049 Payables to suppliers by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Payables for supply of inventories 12,090 7,103 Payables for supply for services 6,445 3,317 Payables for supply of non-current assets 2,734 6,620 Total 21,269 17,040 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 121 Payables to suppliers are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Payables to foreign suppliers 13,911 5,181 Payables to local suppliers 7,358 11,859 Total 21,269 17,040 The payables to suppliers are regular and interest-free. The payables in BGN amount to BGN 6,787 thousand (31 December 2022: BGN 10,671 thousand), in EUR – BGN 8,385 thousand (31 December 2022: BGN 3,744 thousand), in USD – BGN 4,672 thousand (31 December 2022: BGN 2,593 thousand), and in other currency – BGN 1,425 thousand (31 December 2022: BGN 32 thousand). The usual 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: 31.12.2023 31.12.2022 BGN '000 BGN '000 Finished products 387 22,504 Services 67 43 Non-current assets - 462 Total 454 23,009 The advances from clients as at 31 December are current. Of them, BGN 151 thousand (31 December 2022: BGN 541 thousand) are denominated in BGN, and BGN 303 thousand are denominated in EUR (31 December 2022: BGN 22,468 thousand). The Company has placed deposits as security for payables to suppliers under commercial transactions at the amount of BGN 359 thousand (31 December 2022: 153 thousand) (Note 26b, Note 27 and Note 35). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 122 37. PAYABLES TO RELATED PARTIES The payables to related parties include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Payables to shareholders with significant influence 84,982 59 Payables to key management personnel 12,991 - Payables to associates 1,749 1,655 Payables to companies related through key management personnel 209 900 Payables to subsidiaries 104 10 Payables to companies controlled by an associate 8 8 Total 100,043 2,632 The payables to related parties by type are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Dividend payables 97,898 - Payables under leases (Note 32) 1,733 1,637 Payables for supply of inventories 279 917 Service supply 133 78 Total 100,043 2,632 The trade payables to related parties are regular. The payables in Bulgarian Levs amount to BGN 98,227 thousand (31 December 2022: BGN 989 thousand), in EUR – BGN 1,814 thousand (31 December 2022: 1,643 thousand), and in PLN – BGN 2 thousand (31 December 2022: none). The usual 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 123 38. TAX PAYABLES Tax payables include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Tax on dividend 1,240 - Individual income tax 462 350 VAT 422 - Taxes on expenses 391 339 Corporate tax - 203 Total 2,515 892 The following tax audits have been carried out of the Company and of the subsidiaries merged into it: Sopharma AD: • under VAT Act – until 31 December 2011; • full-scope tax audit – until 31 December 2011; • National Social Security Institute – until 30 September 2013. Bulgarian Rose Sevtopolis (transforming company) • 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) • 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) • under VAT Act – until 31 August 2018; • full-scope tax audit – until 31 December 2017; • National Social Security Institute – until 31 December 2017. Biopharm Engineering AD (transforming company) • Under VAT Act – until 31 October 2022; • full-scope tax audit – until 31 December 2014; • National Social Security Institute – until 30 April 2009. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 124 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 person except in the cases explicitly stated by law. 39. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY Payables to personnel and for social security are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Payables to personnel, including: 8,840 8,275 tantieme 3,430 3,531 current liabilities 3,145 2,499 accruals on unused compensated leaves 2,265 2,245 Payables for social security/health insurance, including: 1,741 1,529 current liabilities 1,353 1,162 accruals on unused compensated leaves 388 367 Total 10,581 9,804 40. OTHER CURRENT LIABILITIES Other current liabilities are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Dividend payables and unexercised warrant rights 44,551 215 Refund obligations under contracts with customers (Note 2.6.6) 4,885 4,896 Lease liabilities to third parties (Note 33) 945 802 Provision for financial guarantees granted (Note 2.26) 674 1958 Government grants (Note 31) 577 727 Deductions from work salaries 154 49 Liabilities under deposits received as guarantees 1 9 Total 51,787 8,656 The provision for financial guarantees granted, at the amount of BGN 674 thousand (31 December 2022: BGN 1,958 thousand), arises as a result of commitments undertaken by the Company to perform payments for a debtor which fails to make payment in accordance with a debt instrument (Note 2.27). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 125 The movement in the provision for financial guarantees is as follows: 2023 2022 BGN '000 BGN '000 Balance at 1 January 1,958 666 Increase in provision for financial guarantees recognised within profit or loss for the year - 1,316 Decrease in provision for financial guarantees recognised within profit or loss for the year (1,284) (24) Balance at 31 December 674 1,958 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: 2023 2022 BGN '000 BGN '000 Commitments to banks – creditors of debt instruments to related parties 674 1,943 Commitments to banks – creditors of debt instruments to third parties - 15 Total 674 1,958 41. 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, Operational Programme "Innovations and Competitiveness" 2014 – 2020, and Operational Programme "Energy Efficiency" (Note 31 and Note 40), related to acquisition of non-current assets, buildings reconstruction and technological renovation and modernisation of tablet production facilities, implementation of innovative products in the ampoule production section, for acquisition of compact line for insulated phial filling, for machinery and equipment for manufacturing of infusion solutions, 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 126 Issued and granted guarantees The Company has provided the following collateral in favour of banks under loans received by related parties: (a) under loans of subsidiaries: • Mortgages of real estate with a carrying amount of BGN 37,392 thousand as at 31 December 2023 (31 December 2022: BGN 40,563 thousand) (Note 15); • Special pledges on: - machinery and equipment with a carrying amount of BGN 10,644 thousand as at 31 December 2023 (31 December 2022: BGN 11,760 thousand) (Note 15); - inventories with a carrying amount of BGN 7,000 thousand as at 31 December 2023 (31 December 2022: BGN 7,000 thousand) (Note 23); - trade receivables as at 31 December 2023: none (31 December 2022: BGN 283 thousand) (Note 25). - special pledge on shares in the capital of a subsidiary with carrying amount as at 31 December 2023 of BGN 10,050 thousand (31 December 2022: none) (Note 18). (b) under loans to associates • Mortgage of real estate with a carrying amount of BGN 14,107 as at 31 December 2023 (31 December 2022: BGN 14,491 thousand) (Note 15). 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 31.12.2023 currency BGN'000 BGN'000 Sopharma Trading AD 2024 BGN 137,125 137,125 100,816 Sopharma Trading AD 2024-2025 EUR 65,000 127,129 51,491 Sopharma Trading doo, Belgrade 2025-2026 EUR 35,010 68,474 50,456 Doverie Obedinen Holding AD 2027 BGN 30,000 30,000 16,250 Energoinvestment AD 2024 BGN 2,000 2,000 1,600 Total 220,613 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 127 42. RESTATEMENT RESULTING FROM MERGER In its financial statements for 2023 Sopharma AD presents comparative data for 2022 based on the combined financial statements of the transforming (Biopharm Engineering AD) and receiving (Sopharma AD) companies (Note 2.3.), as follows: 42.1. Opening statement of financial position as at the date of merger – 1 January 2023 The opening statement of financial position of Sopharma AD resulting from the merger dated 1 January 2023 is prepared based on the carrying amount of the two companies’ assets and liabilities, as per their separate statements of financial position as at 31 December 2022. As far as the date of accounting for the merger is 1 January 2023, the data in the statement of financial position at this date coincide with the comparative data as at 31 December 2022. The assets and liabilities of the two companies, combined as at the date of accounting for the merger, 1 January 2023, have the following structure and amounts: STATEMENT OF FINANCIAL POSITION Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of financial position 31 December 2022 BGN'000 31 December 2022 BGN'000 31 December 2022 BGN'000 31 December 2022 BGN'000 ASSETS Non-current assets Property, plant and equipment 217,894 11,738 268 229,900 Intangible assets 4,247 - - 4,247 Investment property 49,267 - - 49,267 Investments in subsidiaries 90,235 - (7,111) 83,124 Investments in associates and joint ventures 69,372 - - 69,372 Other long-term equity investments 4,706 - - 4,706 Long-term receivables from related parties 67,471 - - 67,471 Other long-term receivables 3,526 - - 3,526 506,718 11,738 (6,843) 511,613 Current assets Inventories 82,618 142 - 82,760 Receivables from related parties 74,682 6 (6,647) 68,041 Trade receivables 18,095 26 (6) 18,115 Loans granted to third parties 8,317 - - 8,317 Other receivables and prepayments 6,057 21 - 6,078 Cash and cash equivalents 4,761 132 - 4,893 194,530 327 (6,653) 188,204 TOTAL ASSETS 701,248 12,065 (13,496) 699,817 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 128 STATEMENT OF FINANCIAL POSITION Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of financial position 31 December 2022 BGN'000 31 December 2022 BGN'000 31 December 2022 BGN'000 31 December 2022 BGN'000 EQUITY AND LIABILITIES EQUITY Share capital 134,798 5,540 (5,540) 134,798 Premium reserve - 1,091 (1,091) - Treasury shares (52,203) - - (52,203) Reserves 461,449 788 (634) 461,603 Other equity components 12,488 - - 12,488 Retained earnings 43,843 (8,596) 1,022 36,269 600,375 (1,177) (6,243) 592,955 LIABILITIES Non-current liabilities Long-term bank loans - 1,860 - 1,860 Deferred tax liabilities 4,728 375 (5) 5,098 Government grants 3,587 2,409 - 5,996 Lease liabilities to related parties 14,739 - - 14,739 Lease liabilities to third parties 594 - - 594 Retirement benefit obligations 4,192 148 - 4,340 27,840 4,792 (5) 32,627 Current liabilities Short-term bank loans 11,734 - - 11,734 Current portion of long-term bank loans - 468 - 468 Trade payables 40,031 18 - 40,049 Payables to related parties 2,632 7,248 (7,248) 2,632 Tax payables 885 7 - 892 Payables to personnel and for social security 9,410 394 - 9,804 Other current liabilities 8,341 8 307 8,656 Government grants - 307 (307) - 73,033 8,450 (7,248) 74,235 TOTAL LIABILITIES 100,873 13,242 (7,253) 106,862 TOTAL EQUITY AND LIABILITIES 701,248 12,065 (13,496) 699,817 The adjustments made to the statements of financial position of the two companies for the purpose of combining them are mainly the result of: a) unification of the accounting policy and b) elimination of the investments in a subsidiary and of intra-group accounts and balances between the companies, including the effects on deferred taxes related thereto. The net effect on retained earnings as at 1 January 2023 is a loss of BGN 7,574 thousand. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 129 42.2.Comparatives The financial statements of Sopharma AD (receiving company) for year 2023 contains restatement of the comparative data for 2022 and the earliest comparable period – 1 January 2022, solely for the purpose of comparability. These restatements were made in order to combine the data in: a) statement of financial position as at 31 December 2022; b) statement of comprehensive income for the year ended 31 December 2022; c) statement of cash flow for the year ended 31 December 2022 and d) statement of financial position as at 1 January 2022 of the two companies, as if the transforming and receiving company were always combined. The effects of the merger in the respective statements are presented as follows: a) statement of financial position as at 31 December 2022 The data from the opening statement of financial position as at 1 January 2023 is presented as comparative data as at 31 December 2022 in the current financial statements (Note 42.1). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 130 b)statement of comprehensive income for the year ended 31 December 2022: STATEMENT OF COMPREHENSIVE INCOME Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of comprehensive income 2022 BGN'000 2022 BGN'000 2022 BGN'000 2022 BGN'000 Revenue 230,658 475 (301) 230,832 Other operating income/(losses), net 5,958 408 124 6,490 Changes in inventories of finished goods and work in progress 10,094 (179) - 9,915 Raw materials and consumables used (80,885) (367) 50 (81,202) Hired services expense (36,147) (303) 26 (36,424) Employee benefits expense (52,459) (1,208) - (53,667) Depreciation and amortisation expense (18,217) (1,192) (20) (19,429) Cost of goods sold - (66) 66 - Other operating expenses (12,012) (247) 150 (12,109) Profit from operations 46,990 (2,679) 95 44,406 Net gain/(loss) on investments in subsidiaries and associates (1,124) - - (1,124) Impairment of non-current assets outside the scope of IFRS 9 (2,899) - - (2,899) Finance income 4,901 - (223) 4,678 Finance costs (3,654) (288) 229 (3,713) Finance income/(costs), net 1,247 (288) 6 965 - Profit before income tax 44,214 (2,967) 101 41,348 Income tax expense (4,785) 3 15 (4,767) Net profit for the year 39,429 (2,964) 116 36,581 Other comprehensive income: Items that will not be reclassified to profit or loss: Revaluation of property, plant and equipment (991) - - (991) Net change in the fair value of other long-term equity investments (1,047) - (1,047) Remeasurement of defined benefit pension plans liabilities 522 26 - 548 Income tax relating to items of other comprehensive income that will not be reclassified 99 - - 99 Other comprehensive income for the year, net of tax (1,417) 26 - (1,391) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 38,012 (2,938) 116 35,190 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 131 The effect on the total comprehensive income for 2022 as a result from the merger of the subsidiary amounts to BGN 2,822 thousand, formed as follows: а) the total comprehensive income for the year of Biopharm Engineering AD is a loss of BGN 2,938 thousand; b) the effects of the eliminations of intragroup transactions between the two companies and the deferred tax related thereto amount to a profit of BGN 116 thousand. c)statement of cash flows for the year ended 31 December 2022: STATEMENT OF CASH FLOWS Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of cash flows 2022 BGN'000 2022 BGN'000 2022 BGN'000 2022 BGN'000 Cash flows from operating activities Cash receipts from customers 294,490 561 - 295,051 Cash paid to suppliers (146,042) (796) - (146,838) Cash paid to employees and for social security (50,198) (1,034) - (51,232) Taxes paid (except income taxes) (6,743) (256) - (6,999) Taxes refunded (except income taxes) 4,544 88 - 4,632 Income taxes (paid)/refunded, net (4,921) - - (4,921) Interest and bank charges paid on working capital loans (898) - - (898) Foreign currency exchange gains/(losses), net (222) - - (222) Other proceeds/(payments), net (577) 157 - (420) Net cash flows from operating activities 89,433 (1,280) - 88,153 Cash flows from investing activities Purchases of property, plant and equipment (12,522) (244) - (12,766) Proceeds from sales of property, plant and equipment 540 - - 540 Purchases of intangible assets (762) - - (762) Purchase of investment property (408) - - (408) Purchases of shares in associates (16,481) - - (16,481) Purchase of equity investments (675) - - (675) Proceeds from sale of equity investments 628 - - 628 Purchases of shares in subsidiaries (10,860) - - (10,860) Proceeds from sales of shares in subsidiaries 515 - - 515 Proceeds from dividends from investments in subsidiaries 272 - - 272 Proceeds from dividends from investments in associates 1,215 - - 1,215 Proceeds from dividends from other equity investments 33 - - 33 Loans granted to related parties (59,272) - 772 (58,500) Loan repayments by related parties 45,684 - - 45,684 Interest received on loans granted 975 - - 975 Proceeds from guarantor contract fees 243 - - 243 Net cash flows from/(used in) investing activities (50,875) (244) 772 (50,347) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 132 STATEMENT OF CASH FLOWS Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of cash flows 2022 BGN'000 2022 BGN'000 2022 BGN'000 2022 BGN'000 Cash flows from financing activities Repayment of long-term bank loans (9,677) (626) - (10,303) (Repayment) / Proceeds from short-term bank loans (overdraft), net (35,728) - - (35,728) Loans from related parties - 772 (772) - Interest and charges on investment loans - (60) - (60) Treasury shares (1,919) - - (1,919) Dividend payments and unexercised warrant rights (11) - - (11) Lease payments to related parties (1,327) - - (1,327) Lease payments to third parties (866) - - (866) Government grants for agricultural land 34 - - 34 Proceeds/(payments), net, related to other equity components (warrants) 79 - - 79 Net cash flows used in financing activities (49,415) 86 (772) (50,101) Net increase/(decrease) in cash and cash equivalents (10,857) (1,438) - (12,295) Cash and cash equivalents at 1 January 15,618 1,570 - 17,188 Cash and cash equivalents at 31 December 4,761 132 - 4,893 The adjustments made in the statement of cash flows are primarily the result of the elimination of cash flows related to intragroup transactions between the two companies. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 133 d) statement of financial position at 1 January 2022: The assets and liabilities of the two companies combined as at 1 January 2022, in terms of structure and amount, are as follows: STATEMENT OF FINANCIAL POSITION Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of financial position 1 January 2022 BGN'000 1 January 2022 BGN'000 1 January 2022 BGN'000 1 January 2022 BGN'000 ASSETS Non-current assets Property, plant and equipment 205,090 12,649 282 218,021 Intangible assets 4,324 - - 4,324 Investment property 47,302 - - 47,302 Investments in subsidiaries 80,598 - (7,111) 73,487 Investments in associates and joint ventures 54,485 - - 54,485 Other long-term equity investments 5,706 - - 5,706 Long-term receivables from related parties 49,695 - - 49,695 Other long-term receivables 9,546 - - 9,546 456,746 12,649 (6,829) 462,566 Current assets Inventories 63,222 406 - 63,628 Receivables from related parties 87,706 143 (5,803) 82,046 Trade receivables 26,631 7 108 26,746 Loans granted to third parties 1,804 - - 1,804 Other receivables and prepayments 7,372 182 35 7,589 Cash and cash equivalents 15,618 1,570 - 17,188 202,353 2,308 (5,660) 199,001 TOTAL ASSETS 659,099 14,957 (12,489) 661,567 EQUITY AND LIABILITIES EQUITY Share capital 134,798 5,540 (5,540) 134,798 Premium reserve - 1,091 (1,091) - Treasury shares (50,284) - - (50,284) Reserves 439,040 788 (634) 439,194 Other equity components 12,512 - - 12,512 Retained earnings 28,137 (5,658) 906 23,385 564,203 1,761 (6,359) 559,605 LIABILITIES Non-current liabilities Long-term bank loans 6,750 2,327 - 9,077 Deferred tax liabilities 6,389 378 10 6,777 Government grants 4,007 2,717 - 6,724 Lease liabilities to third parties 496 - - 496 Retirement benefit obligations 4,794 163 - 4,957 22,436 5,585 10 28,031 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 134 STATEMENT OF FINANCIAL POSITION Sopharma AD Biopharm Engineering AD Adjustments at merger Combined statement of financial position 1 January 2022 BGN'000 1 January 2022 BGN'000 1 January 2022 BGN'000 1 January 2022 BGN'000 Current liabilities Short-term bank loans 46,663 - - 46,663 Current portion of long-term bank loans - 623 - 623 Trade payables 12,671 35 - 12,706 Payables to related parties 1,609 6,140 (6,140) 1,609 Tax payables 700 135 - 835 Payables to personnel and for social security 8,034 363 - 8,397 Other current liabilities 2,783 8 307 3,098 Government grants - 307 (307) - 72,460 7,611 (6,140) 73,931 TOTAL LIABILITIES 94,896 13,196 (6,130) 101,962 TOTAL EQUITY AND LIABILITIES 659,099 14,957 (12,489) 661,567 The adjustments made to the statements of financial position of the two companies for the purpose of their combination are mainly the result of: a) unification of the accounting policy and b) elimination of the investment in the subsidiary and of intra-group accounts and balances between the two companies, including the effects on deferred taxes related thereto. The net effect on retained earnings as at 1 January 2022 is a loss of BGN 4,752 thousand. The effect on the revaluation reserve of PPE as at 1 January 2022 is an increase of BGN 154 thousand. 43. 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 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 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 circumstance 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 135 The structure of financial assets and liabilities is as follows: Categories of financial instruments Financial assets 31.12.2023 31.12.2022 BGN '000 BGN '000 Financial assets at fair value through other comprehensive income, incl.: 3,870 4,706 Equity investments 3,870 4,706 Financial assets at amortised cost, incl.: 286,744 167,787 Receivables and loans granted, incl: 181,390 162,894 Long-term receivables from related parties 62,664 67,471 Other long-term receivables 3,357 3,526 Receivables from related parties 84,644 68,041 Trade receivables 18,784 15,445 Loans to third parties 11,203 8,317 Other current receivables 738 94 Cash and cash equivalents 105,354 4,893 Total financial assets 290,614 172,493 Financial liabilities 31.12.2023 31.12.2022 BGN '000 BGN '000 Financial liabilities at amortised cost, incl.: Long-term and short-term bank loans 81,390 14,062 Lease liabilities to related parties 16,507 16,376 Lease liabilities to third parties 3,195 1,396 Other loans and liabilities, incl.: 164,131 18,259 Trade payables 21,269 17,040 Payables to related parties 98,310 995 Other current payables 44,552 224 Total financial liabilities 265,223 50,093 At 31 December 2023, recognised liabilities under financial guarantees amount at BGN 674 thousand (31 December 2022: BGN 1,958 thousand) (Note 40). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 136 The impairment losses/(gains) net of reversed ones, related to financial assets and financial guarantees recognised in the statement of comprehensive income are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Receivables from clients (Note 9) 957 6,650 Loans granted at amortised cost (Note 12) 808 1,359 Receivables under guarantor contracts (Note 12) 2 (57) Financial guarantees granted (Note 11) (1,284) 1,292 Total 483 9,244 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 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 137 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 factors versus past due invoices by days. The Company does not have a practice to request collateral of trade receivables, and does not insure them. Second, the Company makes the impairment provisioning matrixes for each portfolio precise by adjusting certain percentages based on historical data for the behaviour of payments under the invoices issued and historical losses from bad debt, by including scenarios and forecast information about certain macro factors. Historical percentages are adjusted to reflect the effect of the future behaviour of macroeconomic factors for which a statistical dependence has been identified and which are considered to impact the customers’ ability to service and settle their payables. In view of the short-term horizon of receivables, 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 2023. 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, guarantor contracts and financial guarantees granted The assessment of each credit exposure for the management’s purposes is a process that requires the use of models to reflect impact on exposure by changes in market conditions and the debtor’s operation, estimated cash flows and time left to maturity. The assessment of the credit risk of loans and guarantor contracts granted leads to further judgement on the possibility of default, on the loss coefficients related to this judgement and to correlation between counterparts. The Company measures credit risk by using probability of default (PD), exposure at default (EAD) and loss given default (LGD). To determine the credit risk of loans, guarantor contracts and financial guarantees granted, and of certain individual trade 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 PR by year for each rating. With respect to the rating, it uses internal credit ratings of its counterparts based on SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 138 the global methodologies of world’s leading rating agencies. The rating reflects financial indebtedness, liquidity, profitability ratios, etc. quantitative (for instance, sales volumes) and qualitative (for instance, financial policy, diversifications, etc.) criteria depending on the respective methodology and industry. By means of statistical models based on historical global data about probability of default (PD) and transitions between different ratings, as well as forecasts for key macroeconomic indicators (GDP growth, inflation, etc.), the necessary marginal PD are determined by year for each rating. Based on the specific rating established and the analysis of the debtor’s characteristics and the loan/guarantee, incl. changes which have occurred therein compared to the prior period, the instrument’s stage is determined (Stage 1, Stage 2, and Stage 3). The 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: • An increase in the probability of default (PD) for the financial instrument’s lifetime at the reporting date versus the possibility of default for the instrument’s lifetime at the date on which the asset was initially recognised • Payment is past due for over 30 days, but less than 90 days, past due • An actual or expected significant adverse change in the debtor’s operating result, above the permissible change range, measured based on the debtor’s main financial and operating indicators • A significant change in the value of the collateral, which is expected to increase the loss and risk of default. Qualitative criteria: • Significant adverse changes in the business, financial and/or economic conditions of the debtor; • Actual or expected adverse changes in the debtor’s operating results; • A significant change in the collateral quality, which is expected to increase the risk of default; • Early signs of cash flow/liquidity issues, such as delays in servicing trade creditors/bank loans. The criteria used to identify a substantial increase in credit risk are monitored, and their viability is reviewed on a periodic basis by the 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: SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 139 Quantitative criteria • The debtor’s contract payments are over 90 days past due • Significant adverse changes have occurred or are expected in the debtor’s business, financial conditions and economic environment, manifest in a serious decrease in the debtor’s main financial and operational indicators; • The debtor states a number of losses and negative net assets; • Significant adverse changes have occurred or are expected in value of the loan’s key collateral, incl. loss of collateral. Qualitative criteria The debtor is unable to pay due to significant financial difficulties. This includes cases when: • The debtor is in default of the financial contract, for instance with respect to interest payments, collaterals and/or another significant contract, including for financing; • Adverse changes in the debtor’s business, market, environment, and regulations; • Concessions and reliefs have been made in relation to the debtor’s financial difficulties; • There is probability that the debtor declares insolvency. The default definition is subsequently applied to modelling the probability of default (PD), the exposure at default (EAD), and the loss given default (LGD) determined through calculation of the 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: • 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.). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 140 • LGD is the Company’s expectation for the amount of loss from a non-performing exposure. LGD varies depending on the type of counterpart, the type and superiority of the claim and the presence of collateral or other credit support. LGD is measured as a loss percentage for an open exposure at default. • The discount rate used to calculate expected credit losses (ECL) is the instrument’s initial effective interest or in the case of financial guarantees and other instruments without an applicable interest rate – the risk-free rate for the respective period, currency, etc. The 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 141 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 2023: Financial assets Notes Internal credit risk categorisation Expected credit losses (IFRS 9) Gross carrying amount Impairment loss (allowance) Carrying amount at 31 December 2023 BGN '000 BGN '000 BGN '000 Trade receivables from related parties 24 N/A For a 12- month period 75,954 (4,194) 71,760 Long-term loans granted to related parties 21 Regular Stage 1 For a 12- month period 49,070 (117) 48,953 Trade receivables from third parties 22, 25,26(b) N/A For a 12- month period 20,971 (3,664) 17,307 Short-term loans to related parties 24 Regular Stage 1 For a 12- month period 4,067 - 4,067 Short-term loans to related parties 24 Renegotiated Stage 2 Lifetime (credit- impaired) 10,909 (2,169) 8,740 Short-term loans granted to third parties 26(a) Regular Stage 1 For a 12- month period 2,691 - 2,691 Short-term loans granted to third parties 26 (a) Renegotiated Stage 2 Lifetime (credit- impaired) 8,595 (83) 8,512 Receivables from recoverable capital contributions 21 N/A For a 12- month period 9,311 - 9,311 Receivables under cession agreements from third parties 25 N/A For a 12- month period 4,890 (56) 4,834 Receivables under cession agreements from related parties 21 Regular Stage 1 For a 12- month period 3,884 - 3,884 Receivables under deposits for leases 21 N/A For a 12- month period 516 - 516 Receivables under guarantor contracts and guarantees to related parties 24 N/A For a 12- month period 81 (4) 77 Other receivables from related parties 24 N/A For a 12- month period 160 (160) - Total: 191,099 (10,447) 180,652 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 142 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 2022: Financial assets Notes Internal credit risk categorisation Expected credit losses (IFRS 9) Gross carrying amount Impairment loss (allowance) Carrying amount at 31 December 2022 BGN '000 BGN '000 BGN '000 Long-term loans granted to related parties 21 Regular Stage 1 For a 12- month period 63,354 (156) 63,198 Trade receivables from related parties 24 N/A For a 12- month period 59,156 (3,822) 55,334 Trade receivables from third parties 22,25 N/A For a 12- month period 18,441 (4,360) 14,081 Short-term loans granted to related parties 24 Renegotiated Stage 2 Lifetime (credit- impaired) 9,852 (1,340) 8,512 Short-term loans granted to third parties 26(a) Renegotiated Stage 2 Lifetime (credit- impaired) 8,320 (3) 8,317 Receivables under cession agreements from third parties 25 N/A For a 12- month period 4,890 - 4,890 Short-term loans granted to related parties 24 Regular Stage 1 For a 12- month period 4,144 - 4,144 Receivables under cession agreements from related parties 21 Regular Stage 1 For a 12- month period 3,757 - 3,757 Receivables under deposits for leases 21 N/A For a 12- month period 516 - 516 Receivables under guarantor contracts and guarantees to related parties 24 N/A For a 12- month period 53 (2) 51 Other receivables from relater parties 24 N/A For a 12- month period 158 (158) - Total: 172,483 (9,683) 162,800 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 143 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 2023: Category Internal credit risk categorisation Average expected impairment loss % Gross carrying amount at 31 December 2023 Impairment loss (allowance) at 31 December 2023 BGN '000 BGN '000 Regular trade receivables (Stage 1) N/A 8.11% 96,925 (7,858) Regular loans (Stage 1) В3 0.45% 43,788 (196) Renegotiated loans (Stage 2) В3 0.05% 8,282 (4) Receivables from recoverable capital contributions N/A 0.00% 9,311 - Regular loans (Stage 1) Ba3 0.00% 8,052 - Receivables under cession agreements from third parties N/A 1.15% 4,890 (56) Regular loans (Stage 1) Baa3 0.00% 4,067 - Receivables under cession agreements from related parties N/A 0.00% 3,884 - Renegotiated loans (Stage 2) Саа1 19.36% 11,129 (2,155) Receivables under deposits for leases N/A 0.00% 516 - Uncollectable trade receivables (court and awarded receivables) N/A 100.00% 481 (481) Other receivables from related parties N/A 100.00% 160 (160) Receivables under guarantor contracts and guarantees to related parties N/A 4.94% 81 (4) Regular loans (Stage 1) Caa1 100.00% 15 (15) Total: 191,581 (10,929) SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 144 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 2022: Category Internal credit risk categorisation Average expected impairment loss % Gross carrying amount at 31 December 2022 Impairment loss (allowance) at 31 December 2022 BGN '000 BGN '000 Regular trade receivables (Stage 1) N/A 10.36% 77,439 (8,024) Regular loans (Stage 1) В3 0.30% 51,304 (156) Regular loans (Stage 1) Вa3 0.00% 10,039 - Renegotiated loans (Stage 2) Caa1 0.00% 8,771 - Renegotiated loans (Stage 2) B3 0.04% 8,061 (3) Receivables under cession agreements from third parties N/A 0.00% 4,890 - Regular loans (Stage 1) Ba1 0.00% 4,144 - Receivables under cession agreements from related parties В1 0.00% 3,757 - Regular loans (Stage 1) В1 0.00% 2,011 - Renegotiated loans (Stage 2) В1 100.00% 1,340 (1,340) Receivables under deposits for leases N/A 0.00% 516 - Uncollectable trade receivables (court and awarded receivables) N/A 100.00% 151 (151) Other receivables from related parties N/A 100.00% 158 (158) Receivables under guarantor contracts and guarantees to related parties N/A 3.77% 53 (2) Total: 172,634 (9,834) The Company has concentration of receivables from related parties (trade receivables and loans), as follows: 31.12.2023 31.12.2022 Client 1 42% 56% Client 2 39% 32% 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 one client which is not a related party, at the amount of 32% of all trade receivables (31 December 2022: trade receivables from one client which is not a related party – 27%). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 145 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 146 The assets and liabilities denominated in BGN and foreign currency are presented as follows: 31 December 2023 in USD in EUR in BGN in other currency Total BGN '000 BGN '000 BGN '000 BGN'000 BGN '000 Equity investments 13 - 3,857 - 3,870 Receivables and loans granted 7,854 35,765 128,455 9,316 181,390 Cash and cash equivalents 958 103,450 888 58 105,354 Total financial assets 8,825 139,215 133,200 9,374 290,614 Long-term and short-term bank loans - 27,065 54,325 - 81,390 Lease liabilities to related parties - 16,507 - - 16,507 Lease liabilities to third parties 297 2,647 76 175 3,195 Other loans and payables 4,672 8,466 149,566 1,427 164,131 Total financial liabilities 4,969 54,685 203,967 1,602 265,223 31 December 2022 in USD in EUR in BGN in other currency Total BGN '000 BGN '000 BGN '000 BGN'000 BGN '000 Equity investments 8 - 4,698 - 4,706 Receivables and loans granted 6,358 33,653 122,883 - 162,894 Cash and cash equivalents 74 2,355 2,282 182 4,893 Total financial assets 6,440 36,008 129,863 182 172,493 Long-term and short- term bank loans - - 14,062 - 14,062 Lease liabilities to related parties - 16,376 - - 16,376 Lease liabilities to third parties 371 786 172 67 1,396 Other loans and payables 2,593 3,750 11,884 32 18,259 Total financial liabilities 2,964 20,912 26,118 99 50,093 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 147 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. USD 31.12.2023 31.12.2022 BGN '000 BGN '000 Financial result + 347 313 Accumulated profits + 347 313 Financial result - (347) (313) Accumulated profits - (347) (313) In case of 10% increase in the exchange rate of USD to BGN, the final effect on post-tax profit of the Company for 2023 would be an increase by BGN 347 thousand (0,72%) (2022: increase at the amount of BGN 313 thousand) (0.86%). 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) in 10 % increase in their exchange rates to BGN on Company’s (post-tax) profit for 2023 is a decrease by BGN 1,735 thousand (-3.61%) (2022: a decrease by BGN 116 thousand (-0,32%). 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 and starting materials, since more than 80% of the raw and starting 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 148 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, because of the economic and financial crisis, 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. 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 149 31 December 2023 up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years over 5 years Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN '000 BGN '000 BGN '000 Long-term and short-term bank loans 300 453 669 45,834 28,060 243 9,535 85,094 Lease liabilities to related parties 161 321 482 965 1,929 5,786 7,796 17,440 Lease liabilities to third parties 82 169 276 491 799 1,510 - 3,327 Other loans and payables 158,363 3,944 1,234 590 - - - 164,131 Total liabilities 158,906 4,887 2,661 47,880 30,788 7,539 17,331 269,992 31 December 2022 up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years Over 5 years Total BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN '000 BGN’000 BGN '000 Long-term and short-term bank loans 80 11,847 130 233 458 1,312 200 14,260 Lease liabilities to related parties 138 276 414 829 1,673 5,119 8,124 16,573 Lease liabilities to third parties 91 174 297 318 449 251 - 1,580 Other loans and payables 14,241 3,669 28 321 - - - 18,259 Total liabilities 14,550 15,966 869 1,701 2,580 6,682 8,324 50,672 Risk of interest-bearing cash flows Interest-bearing assets are presented in the structure of Company's assets by cash which have both variable and fixed interest rate, 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. Operating 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 150 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 2023 interest-free with floating with fixed Total interest % interest % BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 3,870 - - 3,870 Receivables and loans granted 97,935 - 83,455 181,390 Cash and cash equivalents 264 5,088 100,002 105,354 Total financial assets 102,069 5,088 183,457 290,614 Long-term and short-term bank loans 80 81,310 - 81,390 Lease liabilities to related parties - - 16,507 16,507 Lease liabilities to third parties - 62 3,133 3,195 Other loans and liabilities 164,131 - - 164,131 Total financial liabilities 164,211 81,372 19,640 265,223 31 December 2022 interest-free with floating with fixed Total interest % interest % BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 4,706 - - 4,706 Receivables and loans granted 77,257 - 85,637 162,894 Cash and cash equivalents 184 4,709 - 4,893 Total financial assets 82,147 4,709 85,637 172,493 Long-term and short-term bank loans 5 14,057 - 14,062 Lease liabilities to related parties - - 16,376 16,376 Lease liabilities to third parties - 84 1,312 1,396 Other loans and liabilities 18,259 - - 18,259 Total financial liabilities 18,264 14,141 17,688 50,093 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 151 2023 Increase/ Impact on Impact on decrease in post-tax equity interest rate financial result profit/(loss) increase/(decrease) EUR Increase (208) (208) BGN Increase (246) (246) AZN Increase (1) (1) USD Increase (1) (1) EUR Decrease 208 208 BGN Decrease 246 246 AZN Decrease 1 1 USD Decrease 1 1 2022 Increase/ Impact on Impact on decrease in post-tax equity interest rate financial result profit/(loss) increase/(decrease) EUR Increase (77) (77) BGN Increase (66) (66) USD Increase (1) (1) EUR Decrease 77 77 BGN Decrease 66 66 USD Decrease 1 1 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 2023, the strategy of the Company management was to maintain the ratio about 1-5% (2022: 1-5%). SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 152 The table below shows the gearing ratios based on capital structure: 2023 2022 BGN '000 BGN '000 Total borrowings, including: 101,092 31,834 bank loans 81,390 14,062 lease liabilities to related parties 16,507 16,376 lease liabilities to third parties 3,195 1,396 Less: Cash and cash equivalents (105,354) (4,893) Net debt (4,262) 26,941 Total equity 576,125 592,955 Total capital 571,863 619,896 Gearing ratio (0.01) 0.04 The cash and liabilities shown in the table are disclosed in Notes 27, 29, 32, 33, 35, 37 and 40. 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 interest rate) and therefore, their fair value is almost equal to their carrying amount. Therefore, they are presented at acquisition cost (cost). 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. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 153 44. SEGMENT REPORTING Company’s segment reporting is organised on the basis of the production of main groups of finished products: • Tablet dosage forms • Ampoule dosage forms • Medical products • Other dosage forms • Other revenue Medical products include: plasters, sanitary and hygienic products, dressings, and medical cosmetics. The other dosage forms include: lyophilic products, ointments, syrups, drops, suppositories, inhalers, haemodialysis concentrates, sachets, substances, infusion solutions and veterinary vaccines. Other revenue includes revenue from assets leased. Segment revenue, expenses and results include: Tablet dosage forms Ampoule dosage forms Other forms Medical products Other revenue Total 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 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 166,506 158,019 32,254 28,585 36,681 29,661 12,276 11,858 2,303 2,474 250,020 230,597 Segment cost (68,215) (64,417) (24,625) (20,393) (20,109) (17,732) (8,428) (7,698) (175) (146) (121,552) (110,386) Segment result 98,291 93,602 7,629 8,192 16,572 11,929 3,848 4,160 2,128 2,328 128,468 120,211 Non-allocated operating income 16,133 6,725 Non-allocated operating expenses (94,968) (82,530) Profit from operations 49,633 44,406 Net gain/(loss) on sale of investments in subsidiaries and associates 2,400 (1,124) Impairment of non-current assets outside the scope of IFRS 9 (1,991) (2,899) Finance income/(costs), net 4,160 965 Profit before income tax 54,202 41,348 Income tax expense (6,081) (4,767) Net profit for the year 48,121 36,581 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 154 Segment assets include: Tablet dosage forms Ampoule dosage forms Other dosage forms Medical products Other revenue Total 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 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 58,567 63,261 18,566 19,040 31,108 35,114 2,288 2,412 1,175 1,390 111,704 121,217 Investment property - - - - - - - - 49,886 49,267 49,886 49,267 Inventories 55,931 44,463 17,257 16,484 21,010 15,354 4,344 4,017 - - 98,542 80,318 Segment assets 114,498 107,724 35,823 35,524 52,118 50,468 6,632 6,429 51,061 50,657 260,132 250,802 Non-allocated assets 614,425 449,015 Total assets 874,557 699,817 Segment liabilities include: Tablet dosage forms Ampoule dosage forms Other dosage forms Medical products Other revenue Total 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Government grants 2,208 2,395 1,300 1,500 1,794 2,754 66 74 - - 5,368 6,723 Payables to personnel 651 682 384 386 605 495 64 48 - - 1,704 1,611 Social security payables 252 236 200 168 258 187 27 20 - - 737 611 Segment liabilities 3,111 3,313 1,884 2,054 2,657 3,436 157 142 - - 7,809 8,945 Non-allocated liabilities 290,623 97,917 Total liabilities 298,432 106,862 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 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 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 643 667 1,617 3,078 1,779 6,705 35 39 241 347 4,315 10,836 Depreciation and amortisation 4,504 4,799 2,369 2,213 2,487 2,895 297 295 87 66 9,744 10,268 Non-monetary expenses, other than depreciation and amortisation 1,508 756 516 217 2,604 344 78 90 - - 4,706 1,407 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 155 45. 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 Shareholder with significant influence 2022 and 2023 Telecomplect Invest AD Shareholder with significant influence 2022 and 2023 Sopharma Trading AD Subsidiary company 2022 and 2023 Pharmalogistica AD Subsidiary company 2022 and 2023 Sopharma Poland OOD – in liquidation Subsidiary company 2022 and 2023 Electroncommerce EOOD Subsidiary company 2022 and 2023 Vitamina AD Subsidiary company 2022 and 2023 Momina Krepost AD Joint venture 2022 and 2023 Sopharma Warsaw EOOD Subsidiary company 2022 and 2023 Sopharma Ukraine EOOD Subsidiary company 2022 and 2023 TOO Sopharma Kazakhstan Subsidiary company 2022 and 2023 Phyto Palauzovo AD Subsidiary company 2022 and 2023 Veta Pharma AD Subsidiary company 2022 and 2023 Rap Pharma International OOD Subsidiary company until 11.11.2022 Pharmachim EOOD Subsidiary company 2022 and 2023 Sopharma Trading OOD, Serbia Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 2 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 3 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 4 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 5 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 6 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 7 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 8 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 9 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 10 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 11 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 12 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 13 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 14 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 15 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 16 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 17 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 18 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 19 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 20 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 21 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 22 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 23 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 24 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 25 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 156 Sopharmacy 26 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 27 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 28 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 29 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 30 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 31 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 32 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 33 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 34 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 35 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 36 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 37 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 38 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 39 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 40 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 41 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 42 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 43 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 44 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 45 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 46 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 47 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 48 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 49 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 50 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 51 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 52 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 53 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 54 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 55 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 56 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 57 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 58 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 59 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 60 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 61 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 62 EOOD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 63 EAD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharmacy 64 AD Subsidiary company through Sopharma Trading AD 2022 and 2023 Sopharma Properties REIT Associate 2022 and 2023 Doverie Obedinen Holding AD Associate 2022 and 2023 Companies at DOH Group Companies controlled by an associate 2022 and 2023 Sopharma Buildings REIT Associate from 08.09.2023 Pharmanova d.o.o, Serbia Associate from 10.11.2023 Sofprint Group AD Company related through key management personnel 2022 and 2023 Sofconsult Group AD Company related through key management personnel 2022 and 2023 VES Electroinvest Systems EOOD Company related through key management personnel 2022 and 2023 Eco Solar Invest OOD Company related through key management personnel 2022 and 2023 Alpha In EOOD Company related through key management personnel 2022 and 2023 Consumpharm OOD Company related through key management personnel 2022 and 2023 Veterenary Diagnostics DZZD Civil consortia (direct interest) 2022 and 2023 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 157 The sales made by Sopharma AD to the related companies during the year ended 31 December are as follows: Sales to related parties 2023 BGN’000 2022 BGN’000 Sales of finished products to: Subsidiaries 124,046 127,176 124,046 127,176 Sales of goods and materials: Subsidiaries 6,153 479 Companies related through key management personnel 1,219 1,109 7,372 1,588 Sales of services to: Subsidiaries 2,610 2,725 Associates 10 7 Companies related through key management personnel 8 2 2,628 2,734 Interest on loans granted to: Companies controlled by an associate 2,170 1,934 Subsidiaries 104 159 Joint ventures 62 46 Associates 31 11 2,367 2,150 Dividend income from: Associates 1,488 1,215 Subsidiaries 197 272 1,685 1,487 Fees under guarantor contracts and guarantees to: Subsidiaries 799 486 Joint ventures - 7 799 493 Interest under cession agreements to: Joint ventures 127 71 127 71 Interest on recoverable capital contributions to: Subsidiaries 60 - 60 - Sales of non-current assets to: Subsidiaries - 48 - 48 Total sales to related parties: 139,084 135,747 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 158 The purchases made by Sopharma AD from its related companies for the year ended 31 December are as follows: Purchases from related parties 2023 2022 BGN '000 BGN '000 Purchases of inventories from: Companies related through key management personnel 10,319 10,576 Subsidiaries 1,969 24 Joint ventures 224 44 Associates 102 89 Companies controlled by an associate 33 4 12,647 10,737 Supply of services from: Subsidiaries 3,574 4,026 Companies controlled by an associate 738 747 Shareholding companies with significant influence 581 424 Associates 417 422 Companies related through key managing personnel 190 243 5,500 5,862 Purchases related to lease agreements from: Associates 1,929 1,327 1,929 1,327 Dividends accrued to: Shareholding companies with significant influence 130,136 - Key management personnel 17,971 - 148,107 - Other supplies from: Companies controlled by an associate 20 14 Subsidiaries 19 5 Associates 16 1 Shareholding companies with significant influence 9 9 Companies related through key managing personnel 1 - 65 29 Costs for acquisition of investment property from: Companies controlled by an associate - 334 Subsidiaries - 64 - 398 Costs for acquisition of non-current assets from: Companies controlled by an associate - 3 - 3 Supplies of non-current assets from: Subsidiaries - 1 - 1 Total purchases from related parties 168,248 18,357 SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 159 The stocks/shares sold and acquired in the capital of entities related to Sopharma AD as at 31 December are as follows: Income from sales of investments in: 2023 BGN’000 2022 BGN’000 Associates 2,845 - Subsidiaries 218 98 3,063 98 Acquired investments in: 2023 BGN’000 2022 BGN’000 Associates 27,933 16,480 Subsidiaries 7,606 10,859 35,539 27,339 The accounts and balances with related parties are presented in Notes 21, 24, 32 and 37. Salaries and other short-term benefits of key managing personnel (including: the members of the board of directors, the procurators, and the members of the board of directors of the merged entity Biopharm Engineering AD) at the amount of BGN 1,857 thousand (2022: BGN 1,927 thousand) are as follows: • current wages and salaries – BGN 1,463 thousand (2022: BGN 1,684 thousand); • tantieme – BGN 394 thousand (2022: BGN 243 thousand). 46. EVENTS AFTER THE REPORTING PERIOD On 10 January 2024 liquidation proceedings were registered for Phyto Palauzovo AD, and the invitation to creditors was registered on 16 January 2024. On 22 January 2024, payment commenced of the accrued advance dividend from 2023 profit, which amounts to BGN 141,896 thousand. On 23 January 2024 the Company submitted documentation to the Financial Supervision Commission in relation to the merger of Veta Pharma AD, which is a subsidiary of Sopharma AD. On 20 February 2024 the Financial Supervision Commission, by means of letter No РГ-05-684-2 on the grounds of Art. 125, in relation to Art. 89, Para 2 of CPOSA requested additional information and data, as well as documents in relation to the merger application. On 26 January 2024, a General Meeting was held of the holders of warrants from issue ISIN BG9200001212, at which a decision was made to exercise rights thereunder by registering shares from the future capital increase of Sopharma AD through the issue of up to 7,133,264 ordinary, registered, dematerialized voting shares with nominal value BGN 1 each and issue value BGN 4,13 per share, under the condition that the capital increase shares be registered by the warrant holders. SOPHARMA AD NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 160 The warrant holders requested the Board of Directors to make a decision for conditional capital increase to be carried out on the grounds of the Company’s Statute, Art. 195 of the CA, respectively Art. 113, Para 2, item 2 of CPOSA, whereby the warrant holders may exercise their rights pursuant to item 2 of the agenda, under the terms and conditions of the Prospectus for public offering of warrants, approved by means of FSC Decision No 804 – E/04.11.2021. The capital increase commenced by means of the publication of a notice pursuant to Art.89t of CPOSA on 26 January 2024. After the deadline for warrant exercise expired, 6,509,485 shares of the Company capital were registered. The issue value thereof is BGN 26,884,173.05. The registration of the capital increase in the Trade Registry was done on 5 March 2024. On 7 March 2024 the Company acquired 1,090,512 shares of the capital of Achieve Life Sciences, Inc., USA (3,18 %) at the amount of USD 4,864 thousand and 1,090,512 warrants at the amount of USD 136 thousand. On 20.03.2024, the company paid 84,132 bonds issued by Doverie Obedinen Holding AD with a total issue value of BGN 8,413,200. The bonds are issued based on a decision of the Board of Directors of Doverie Obedinen Holding AD, in accordance with the terms and conditions described in the Prospectus for public offering of 200 000 registered, dematerialized, interest-bearing, unsecured, freely transferable, convertible bonds, with a nominal and issue value of one bond BGN 100, with a floating interest rate equal to the amount of 6-month EURIBOR, increased by a margin of up to 2.00% per annum and not more than 6.00% per annum, payable on a six-month period, with a maturity of five years from the issue date. No other significant events have occurred after the reporting period date that would require additional adjustments and/or disclosures in the Company's separate financial statements for the year ended 31 December 2023. “SOPHARMA” AD March 28, 2024 MANAGEMENT REPORT 2023 Management report – “Sopharma” AD 2023 1 Content Contents I. General information about “Sopharma” AD ................................................................................ 4 1. Registration and activity of the Company ................................................................................. 4 2. Shareholder structure as of 31 December 2023 ........................................................................ 4 3. Board of directors ................................................................................................................... 4 II. Recent developments ............................................................................................................. 5 1. Industrial activity .................................................................................................................... 5 2. Products ................................................................................................................................. 5 III. Information under Article 39 of the Accountancy Act .............................................................. 6 1. 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/ ................................................................. 7 Sales revenues ................................................................................................................................... 8 3. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act /.......................................................................................... 12 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)/ .................................... 13 5. Research and development /article 39, item 5 of the Accountancy Act/ .................................. 14 6. Information on the acquisition of own shares required by Article 187d of the Commerce Act /Article 39, Item 6 of the Accountancy Act/ ................................................................................................... 18 7. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/ ................. 18 8. Use of financial instruments /Article 39, item 8 of the Accountancy Act/ ................................ 18 IV. Information under Article 247 and Art. 240b of the Commerce Act ........................................ 20 1. Information under Art. 247 of the Commerce Act ................................................................... 20 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 conditions22 V. Information on Annex 2 to art. 10, item 1 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 any individual seller or buyer / user, in case their share exceeds Management report – “Sopharma” AD 2023 2 10 percent of the expenses or sales revenue, provide information for each person for his share in sales or purchases and links with the issuer ................................................................................................... 23 3. Information on significant transactions concluded ................................................................. 23 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 .......................................................................................................... 23 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 .... 24 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 ................. 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 commitmets ........................................................................... 25 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 fr payment and the purpose for which they were granted 25 10. Information on the use of funds from the issuance of new securities during the reporting period26 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 .......................................................... 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 26 13. Assessment of the feasibility of investment intentions, indicating the amount of available funds and possible changes in the financing structure of this activity ................................................................. 26 14. Information about changes in the reporting period in the basic principles of management of the issuer and its group of companies within the meaning of the Accountancy Act ............................................ 26 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management .................................................. 26 16. Information about changes in management and supervisory boards during the accounting year27 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: .................................................................................................... 27 Management report – “Sopharma” AD 2023 3 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 isuer 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. ................................................................................................................................. 27 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 ............................... 28 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 percent of its equity, provide information about each case separately .......... 28 21. Information about the Investor Relations Director, including telephone number and mailing address 28 VI. Information Appendix 3 to Article 10, item 2 of Ordinance 2 of LPOS ..................................... 28 1. Structure of the capital of the Company, including securities not admitted to trading on a regulated market in Bulgaria or another Member State, indication of the different classes of shares, the rights and obligations of each class of shares and the portion of the total capital represented by each class. ...... 28 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 ............................................................................................................ 29 3. Information about shareholders with special control rights .................................................... 29 4. Agreements between Shareholders which are known to the Company and which may lead to restrictions on the transfer of shares or voting right. ......................................................................... 29 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 copany; exemption under the preceding sentence shall not apply in cases where the company is obliged to disclose information under the Law .......................... 29 VII. Non-financial declaration under Art. 48-52 of the Accounting Act .......................................... 30 1. About the Declaration ........................................................................................................... 30 2. Business model ..................................................................................................................... 31 3. Commitment to stakeholders ................................................................................................ 34 4. Company’s activity impact ............................................................................................................ 40 4.1. Economic impact ...................................................................................................................................... 40 4.2. Social impact ............................................................................................................................................. 41 4.3. Ecologic impact ......................................................................................................................................... 44 5. Risks ..................................................................................................................................... 48 Management report – “Sopharma” AD 2023 4 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 of 31 December 2023 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 а procurator - Simeon Donev. 38.57% 16.15% 8.30% 22.81% 14.17% "Donev investments holding" AD "Telecomplect invest" AD "Sopharma" AD (treasury shares) Other legal entities Individuals Management report – “Sopharma” AD 2023 5 II. Recent developments 1. Industrial activity The production activities of the Company are realized and developed in the following areas: • Substances and preparations based on plant raw materials (phytochemical production); • Ready-to-use formulations, incl.: ✓ Hard tablets, coated tablets, film-coated tablets, capsules; ✓ Galenic - suppositories, drops, syrups, ointments; ✓ Parenteral - injection solutions, lyophilic powder for injection. • Medical and cosmetic products, incl.: ✓ Plasters; ✓ Bandages; ✓ Sanitary-hygiene products; ✓ Herbal cosmetics; ✓ 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: ➢ Carsil - traditional plant-based product used to treat gastro-enterology diseases (liver diseases); ➢ Tempalgin - traditional analgesic (pain reliever); ➢ Tabex - traditional plant-based smoking cessation product; ➢ Tribestan - traditional plant-based product that stimulates the functions of the sexual system; ➢ Broncholitin - traditional plant-based product used to suppress cough; ➢ Analgin - generic analgesic (pain reliever); ➢ Nivalin - traditional plant-based product used for diseases of the peripheral nervous system; ➢ Methylprednisolone - generic medicine for cases of severe allergies and certain life-threatening conditions; ➢ Vitamin C - widely used nutritional supplement; ➢ Valeriana - generic non-prescription herbal medicine used to reduce stress; ➢ Medical devices - gauzes, compresses and dressings. Management report – “Sopharma” AD 2023 6 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 Indicators 31.12.2023 31.12.2022 Change BGN '000 BGN '000 % Revenues 250 020 230 832 8,3% EBITDA 70 598 63 835 10,6% Operating profit 49 633 44 406 11,8% Net profit 48 121 36 581 31,5% CAPEX 16 018 34 751 -53,9% Indicators 31.12.2023 31.12.2022 Change BGN '000 BGN '000 % Non-current assets 537 875 511 613 5,1% Current assets 336 682 188 204 78,9% Owners’ equity 576 125 592 955 -2,8% Non-current liabilities 66 091 32 627 102,6% Current liabilities 232 341 74 235 213,0% * tangible and intangible fixed assets acquired Indicators 1-12/2023 1-12/2022 EBITDA/ Revenues 28,2% 27,7% Operating profit/Sales Revenue 19,9% 19,2% Net profit/ Sales Revenue 19,2% 15,8% 31.12.2023 31.12.2022 Debt/ Equity 0,52 0,18 Net debt/ EBITDA on annual basis (0,1x) 0,4x * the net debt comprises the sum of borrowings from banks and lease liabilities less cash and cash equivalents Risks, related to the Company’s business and the industry the Company operates in • The Company faces significant competition. • The Company is dependent on regulatory approvals. • Government regulations affecting the Company's business may change, this possibly increasing compliance costs or otherwise affecting its operations. Management report – “Sopharma” AD 2023 7 • Part of the Company’s revenues, in particular in Bulgaria, depend on the inclusion of the Company’s medicines in reimbursement lists. • The Company’s production facilities and processes are subject to strict requirements and regulatory approvals that may delay or disrupt the Company’s operations. • The Company’s ability to pay dividends depends on a number of factors and there can be no guarantee that the Company will be able to pay dividends in accordance with its dividend policy. • The Company is subject to operational risk, which is inherent to its business activities. • 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. • 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 • The macroeconomic environment, particularly in Bulgaria, Russia and Ukraine, has a significant effect on the Company’s operations; • 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; • Risks related to the Bulgarian legal system; • 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; • Risks relating to exchange rates and the Currency Board in Bulgaria; • 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. 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/ Management report – “Sopharma” AD 2023 8 Sales revenues Revenues from contracts with customers are from sales of manufactured medicinal products and in 2023 increase by BGN 19,4 million, to BGN 247,7 million, compared to BGN 228,3 million in 2022. • European market Sales revenues for 2023 for European countries increased by BGN 8.8 million or 7,5 % compared to 2022. Sales in Russia have the largest share, growing by 18.7% for the current period. Growth was also registered in Moldova by 11%, in Serbia by 3.9%, in Poland by 57.5% and in the Czech Republic by 113.4%. A decrease in sales was recorded in Ukraine by 21.4%, in Belarus by 19%, in Lithuania by 3% and in Latvia by 10.2%. • Bulgarian market Sales of “Sopharma” AD on the domestic market increase by BGN 3,4 million or 3.9% in 2023, to BGN 90,3 million, compared to BGN 86,9 million in 2022. According to IQVIA data, by the end of 2023 the company occupies 2.06% (seventeenth position) of the total volume of the Bulgarian pharmaceutical market in terms of value and 7.22% (second position) of sales in volume. The positions of the company's main competitors on the territory of the country are as follows: Roche - 5.29% (0.19% in units), Merck Sharp & Dohme - 4.69% (0.14% in units), Novartis - 4.27% (1.20% in units), AstraZeneca - 4.03% (0.46% in units), Pfizer - 3.85% (0.68% in units), Abbvie - 3.56% (0.07% in units), Swixx Biopharma - 3.40% (1.12% in units), Teva - 3.33% (8.90% in units), Phoenix 86 891 141 467 228 358 90 280 157 437 247 717 0 50 000 100 000 150 000 200 000 250 000 300 000 Domestic market Export sales Total thousand BGN Sales revenues 1-12/2022 1-12/2023 Revenues by markets 1-12/2023 1-12/2022 change BGN '000 BGN '000 % EUROPE 126 119 117 284 7,5% BULGARIA 90 280 86 891 3,9% OTHER 31 318 24 183 29,5% Total 247 717 228 358 8,5% 51.0% 36.4% 12.6% EUROPE BULGARIA OTHER Management report – “Sopharma” AD 2023 9 – 2.80% (4.03% in units). The products with the largest share of sales in the country are Analgin, Vicetin, Famotidine, Vitamin C, Paracetamol, Methylprednisolone. • Other markets Revenues from other markets increased by BGN 7,1 million or 29.5% compared to 2022 as a result of the growth of the sold production in the countries of the Caucasus region (Armenia with a growth of 23.4%, Georgia with a growth of 24% and Azerbaijan with 69.7% growth), Uzbekistan with 6.1% growth and Vietnam with sales revenue growth of 111.9%, while in Kazakhstan sales were down 2.9% and in Mongolia the decline was 3.7 %. Sales by therapeutic groups Operating expenses For the current period, the costs for materials increase by BGN 4,2 million compared to 2022 in the part of basic, laboratory and technical materials. A decrease was registered in the costs of heating and electricity. Personnel costs increased by BGN 13,6 million as a result of an increase in current remunerations, and in external service costs, which increased by BGN 9,7 million, the largest change was registered in the costs of making medicines and the costs of advertising and marketing services, increasing by BGN 1.9 million and BGN 6,2 million, respectively. Other operating expenses decreased by BGN 3,3 million as a result of the net change in accrued (recovered) impairments for credit losses on receivables in the amount of BGN 5,7 million. Finance income and costs Financial income increased by BGN 3,1 million to BGN 7,8 million in 2023, mainly due to a restored provision for financial guarantees in the amount of BGN 1,3 million and income from interest on deposits in amount of BGN 1 million. Financial expenses decrease by BGN 0,08 million to BGN 3,6 million in 2023. 35% 26% 11% 9% 3% 3% 2% 4% 6% N Nervous system A Digestion and metabolism C Cardio-vascular system R Respiratory system G Urinary system and sex hormones H Hormonal products, exc. sex hormones and insulin M Musculoskeletal system Other Cosmetic products, nutritional supplements and medical devices Management report – “Sopharma” AD 2023 10 Financial results Profit on operating activities before depreciation (EBITDA) in 2023 increased by BGN 6,8 million or 10.6%, to BGN 70,6 million, compared to BGN 63,8 million in 2022 The growth achieved during the period is due to the increase in sales in the main markets and the improved gross profit margin on the one hand, as well as a relatively stable structure of operating expenses. Profit from operating activities in 2023 increased by BGN 5,2 million, or 11.8%, to BGN 49,6 million, compared to BGN 44,4 million in 2022. Net profit in 2023 increased by BGN 11,5 million, or 31.5%, to BGN 48,1 million compared to BGN 36,6 million in 2022. Assets Compared to the end of 2022, non-current assets increased by BGN 26,3 million to BGN 537,9 million, with the most significant increase being the change in investments in associated and subsidiary enterprises due to the newly acquired shares in " Sopharma Imoti” REIT, in “Sopharma Buildings” REIT and in “Sopharma Warsaw”. Long- term receivables from related enterprises decrease by BGN 4,8 million as a result of loans granted by "Doverie Invest" EAD and "Industrial Holding Doverie" AD. Current assets increased by BGN 148,4 million to BGN 336,6 million, the most significant being the impact of the increase in cash and cash equivalents amounting to BGN 100,5 million as a result of the increase of the capital after exercising warrants. An increase is recorded in material stocks by BGN 23,9 million, in receivables from related enterprises in the amount of BGN 16,7 million, in trade receivables by BGN 4,7 million and in loans granted to third parties by BGN 2,9 million. Liabilities and equity Equity decreased by BGN 16,8 million, to BGN 576,1 million, as a result of the profit distribution and additional dividend reserves. Non-current liabilities increased by BGN 33,5 million, to BGN 66,1 million, as a result of an increase in long- term bank loans by BGN 33,8 million. 63,835 44,406 36,581 70 598 49 633 48 121 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 EBITDA Operating profit Net profit thousand BGN 1-12/2022 1-12/2023 Management report – “Sopharma” AD 2023 11 Current liabilities increased by BGN 158,1 million, to BGN 232,3 million, as a result of the increase in liabilities under short-term bank loans by BGN 33,1 million, as well as a result of accrued liabilities to related parties and third parties to receive of dividends in the amount of BGN 142,5 million. Trade payables decreased by BGN 18,3 million, which is the result of the reduction in advances received for the sale of finished products, which decreased by BGN 22,5 million. Cash flows 1-12/2023 BGN '000 1-12/2022 BGN '000 Net cash flows from/(used in) operating activities (2 607) 88 153 Purchases and sales of property, plant and equipment, intangible assets, net (836) (12 988) Payments under lease contracts (2 793) (2 193) Free cash flow (normalized) (6 236) 72 972 The free cash flow (normalized with the payments under lease contracts), generated for 2023 amounts to BGN 6,2 million outflow compared to BGN 73 million inflow in 2022. The recorded net cash outflow from operating activities in the current period is in part the result of advance payments received from customers in 2022 related to realized sales of output in 2023. 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 of waste gases in the atmospheric air are carried out at the Steam Power Plant Installation at sites “A” and “B”. - “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. Production waste is handed over to licensed companies for recycling. The annually measured emissions of waste gases in the atmosphere, as well as the emissions in waste water, are within the required norms. The terms of the Discharge Permit have been met. Once a month, a report is made on the packaging imported and/or placed on the market by type of material, for which a monthly contribution is paid to "Ecobulpak Bulgaria" AD, which has a contract for the utilization of packaging waste with "Sopharma" AD. Management report – “Sopharma” AD 2023 12 Personnel The average number of employees for 2023 in "Sopharma" AD is 1,720 workers and employees (compared to 1,760 for 2022). 3. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act / • On January 10, 2024, a liquidation procedure of "Fito Palauzovo" AD was entered in the Commercial Register. • From January 22, 2024, the payment of the accrued advance dividend from the profit for 2023, which is in the amount of BGN 141.9 million, began. • On January 23, 2024, the Company submitted documents for consideration to the Financial Supervision Commission in connection with the merger of "Veta Pharma" AD, which is a subsidiary of "Sopharma" AD. • On February 20, 2024, the Financial Supervision Commission by letter No. RG – 05 – 684 -2 on the basis of Art. 125 in connection with Art. 89 r, para. 2 of LPOS notified the company that it should submit additional information within one month, data and documents regarding the requested merger. • On January 26, 2024, a General Meeting of the holders of warrants from issue with ISIN BG9200001212 was held, at which a decision was made to exercise the rights under them, by subscribing shares from a future increase in the capital of "Sopharma" AD, by issuing up to 7,133,264 number of ordinary, registered, dematerialized shares, with voting rights, with a nominal value of BGN 1 each and an issue value of BGN 4,13 per share, conditional that the shares from the increase are subscribed by the warrant holders. The holders of warrants made a request to the Board of Directors to decide on conditional capital increase to be carried out on the basis of the Company's Articles of Association, Art. 195 of the Commerce Act and, accordingly, Art. 113, para. 2, item 2 of the LPOS, in which the warrant holders can exercise their rights under item 2 of the agenda, and under the terms and conditions according to the Prospectus for the public offering of warrants, confirmed by the Decision of the FSC No. 804 – E/04.11.2021. The capital increase was launched with the publication of an announcement under Art. 89t of LPOS on January 26, 2024. After the end of the deadline for exercising the warrants, 6,509,485 shares of the company's capital were subscribed. Their issue value is BGN 26,884,173.05. The registration of the company's capital increase in the Commercial Register took place on 05.03.2024. 31.12.2023 Relative share Number of employees as of 31 December 2023 1 746 100% Higher education 832 48% College education 27 2% Secondary education 862 49% Primary education 25 1% Employees under 30 years 136 8% Employees 31 - 40 years 308 18% Employees 41 - 50 years 469 27% Employees 51 - 60 years 673 38% Employees over 60 years 160 9% Women 1 127 65% Men 619 35% Management report – “Sopharma” AD 2023 13 • On March 7, 2024, the company acquired 1,090,512 shares of the capital of Achieve Life Sciences, Inc., USA (3.18%) worth USD 4,864 thousand and 1,090,512 warrants worth USD 136 thousand. • On March 20, 2024 the company paid 84,132 bonds issued by Doverie United Holding AD with a total issue value of BGN 8,413,200. The bonds are issued according to a decision of the Board of Directors of Doverie United Holding AD, in accordance with the terms and conditions described in the Prospectus for public offering of 200 000 registered, dematerialized, interest-bearing, unsecured, freely transferable, convertible bonds, with a nominal and issue value of one bond BGN 100, with a floating interest rate equal to the sum of 6 - monthly EURIBOR, increased by an allowance of up to 2.00% per annum and not more than 6.00% per annum, payable on a half-yearly basis with a maturity of five years from the date of issue of the issue. 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)/ Key moments of the Company's strategy are planned by "Sopharma" AD: • to increase sales of its existing portfolio, as well as by adding new products in categories in which the Company has a strategic interest. To this end, the company is actively exploring various opportunities to acquire products that would complement and diversify its own portfolio; • to achieve a phased transformation of its production processes and capacities through the optimization of the Company's production capacity through the purchase and modernization of new machinery and equipment and the transfer of production activities and technologies. In addition to this, a strategy has been developed and is in the process of implementation to optimize the processes of planning, supplies, production, distribution through active management along supply chains. This would allow new business segments to develop, such as potential contract manufacturing; • continued operation of the production in full compliance with the good manufacturing practices adopted in the EU; • to implement new technologies to support the automation of business processes; • to develop its staff through training aimed at increasing qualifications and competences and to preserve and maintain the reputation of a preferred employer with opportunities for career development, as well as to work closely with specialized higher education institutions and offer a career start to staff; • to implement a diversity policy in order to create a working environment free from prejudice, cultivating an atmosphere of respect and mutual trust, fostering a corporate culture of mutual respect and valuing each individual. Managers and employees carry out their activities professionally, impartially, with dignity and integrity, avoiding conflicts of interest; • to implement a green policy in order to reduce the carbon footprint by using energy from renewable sources. "Sopharma" AD will strive to achieve a stable result of developing eight to ten new products per year for its pharmaceutical business. Management report – “Sopharma” AD 2023 14 Except Bulgaria, the main markets for finished products continue to be Russia and Ukraine. The Company's plans are to increase its presence in the Russian market through increased investments in marketing and advertising activities and human resources. In addition, expansion of the portfolio and relations with various counterparties is planned. In Ukraine, in view of the military conflict at this stage, the main immediate goal is to maintain market presence through its distribution company for the local market "Sopharma Ukraine" and the production company PAO "Vitamini". In the remaining traditional markets in Poland, Serbia, Belarus, Kazakhstan, Moldova, the countries of the Caucasus region and the Baltic States, the Company continues its presence and plans to strengthen its positions through additional marketing activities and the imposition of products in therapeutic groups where there is potential for growth. The company will continue to look for opportunities for an even more active presence in a highly developing market such as that of Vietnam. 5. Research and development /article 39, item 5 of the Accountancy Act/ “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 Company mainly submits applications for new product authorizations including new product forms in Bulgaria and/or export markets and for existing products in new markets. Intellectual Property Although oriented towards generic pharmaceutical products, “Sopharma” AD has been known for years with the traditional production of several unique products based on plant extracts obtained from own-produced technologies. These products are protected not only by trademark, but also by patent or company know-how. 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 2023 in the Division "Development and Regulatory Compliance" the following activities were performed: • New medicinal products During the reporting period, authorizations for use of 3 new medicinal products were obtained: - Glycerax Pico oral drops solution (Bulgaria); - Suxamethonium Sopharma 10 mg/mL solution for injection (Bulgaria); - Suxamethonium Sopharma 20 mg/mL solution for injection (Bulgaria). • New registrations and re-registrations / changes New registrations of medicinal products Management report – “Sopharma” AD 2023 15 Documentation for registration of 27 medicinal products has been submitted: - Paracetamol 500 mg tb. (Belarus); - Paracetamol Sopharma 500 mg tb. (Moldova) - Tempalgin (paracetamol) 500 mg tb.; - Carsil 90 mg caps. – (Belarus); - Molsidomin 8 mg SR tb. (Russia); - Aminophylline sfi (Lithuania); - Digoxin Sveikuva sfi (Lithuania); - Felogel 2.32% gel (Lithuania); - Carsil 22.5 mg film-coated tb. (Azerbaijan); - Carsil 22.5 mg film-coated tb. (Tadzhikistan); - Carsil 22.5 mg film-coated tb. (Georgia) MRP; - Carsil 22.5 mg film-coated tb. – (Moldova); - Tribestan 250 mg film-coated tb.; - Digoxin Sveikuva 0.25 mg/ml sfi (Lithuania); - Pethidine hydrochloride Sveikuva 50 mg/ml sfi (Lithuania); - Amrex 30 mg/5 ml syrup (Lithuania) MRP - Ambrolytin 30 mg tb. (Lithuania) MRP - Ambrolytin 30 mg tb. (Kirgizstan); - Sodium picosulfate oral drops solution (Ukraine); - Carsil 22,5 mg film-coated tb. (Turkmenistan); - Videral 0,5 mg/ml oral drops, solution (Czech Republic); - Deavit Neo 0.5 mg/ml oral drop, solution (Kirgizstan); - Felogel 5 % gel (Kirgizstan); - Felogel 2.32 % gel (Kirgizstan); - Tempalgin 500 mg/20 mg film-coated tb. (Armenia) New manufacturing site; Licensing - Sophamet XR 500 mg; 750 mg; 1000 mg SR tb. (Bulgaria); - Trachihelp 5 mg/1,5 mg lozenges (Ukraine); • Medicinal products have been registered for 43 new directions: - Verapamil sfi (DCP – Denmark; Sweden; Norway; Finland) - Carsil 110 mg caps. (Georgia); - Isocor 2,5 mg/ml sfi (Malaysia); - Cinnarizine 25 mg tb. (Vietnam); - Carsil 22.5 mg film-coated tb. (Ukraine) - Carsil Forte 90 mg caps. (Kirgizstan); - Pethidine Macure sfi (DCP – Finland; Norway; Sweden; Denmark); - Carsil Max 110 mg caps. (Peru); - Syafen 100 mg/5 mL oral susp. (Georgia) MRP; - Furosemide Sopharma 40 mg tb. (Georgia) MRP; - Zondaron 2 mg/mL sfi (Georgia) MRP; - Digoxin Sopharma 0.25 mg/mL sfi (Georgia) MRP; Management report – “Sopharma” AD 2023 16 - Valeriana 30 mg tb. (Georgia) MRP; - Ambrolytin 30 mg tb., (Georgia) - Valeriana Max 200 mg fct, (Georgia); - Valeriana 30 mg film-coated tb. (Georgia); - Feloran Forte 5 % gel (Georgia); - Alergosan (Desloratadin) oral solution (Peru); - Carsil 22.5 mg film-coated tb. (Ukraine); - Tempofen DUO film-coated tb. (Ukraine); - Tempaforte 500 mg effervescent powder; - Tempaforte 1000 mg effervescent powder (Azerbaijan); - Тamoxifen Sopharma 10 mg tb. (Georgia) MRP; - Carsil 35 mg coated tablets (Russia) EAEU; - Carsil Max 110 mg caps. (Russia) EAEU; - Dexketoprofen Sopharma 50 mg/ 2 ml solution for inj/inf (Ukraine); - Carsil 22.5 mg film-coated tb. (Tajikistan); - Persen tb. (Georgia); - Persen tb. (Belarus); - Troxerutin 300 mg caps. (Vietnam); - Talert 1mg/ml syrup (Vietnam); - Diclofenac diethylamine Sopharma 23,2 mg/g gel (Lithuania); - Carsil 22,5 mg film-coated tb. (Moldova); Licensing - Analgin Max 1000 mg effervescent powder (Georgia); - Sitagliptin/Metformin APC 50 mg/500 mg modified release tablets (Bulgaria); - Sitagliptin/Metformin APC 50 mg/1000 mg modified release tablets (Bulgaria); - Sitagliptin/Metformin APC 100 mg/1000 mg modified release tablets (Bulgaria); Re-registrations/changes - Renewed Authorizations for the use of 50 medicinal products. - Submitted documentation for renewal of Permits for use of 71 medicinal products to agencies. - Submitted 329 changes for medicinal products to agencies; - 279 changes for medicinal products approved by agencies; Food additives - 14 food additives have been notified - 1 for Belarus; 3 for Poland; 5 for Bulgaria; 1 for Ukraine; 2 for Georgia; 1 for Azerbaijan and 1 for Kazakhstan; - 22 food additives have been submitted for notification - 3 for Belarus; 2 for Ukraine; 3 for Poland; 4 for Azerbaijan; 3 for Kazakhstan; 7 for Bulgaria; Medical supplies • 7 Medical devices have been uploaded into the Bulgarian Drug Agency system; • Developments Pharmaceutical development of 12 new medicinal products / projects: Management report – “Sopharma” AD 2023 17 - Cytisine 3.0 mg tablets – Project with company Achieve; - Dexketoprofenum 25 mg tablets; - Xylmetazoline/Dexpanthenol nasal spray; - Paracetamol 500 mg tablets; - Molsidomin 4 mg tablets; - Ketorolac 10 mg tablets; - Glauvent 40 mg film-coated tablet; - Vitamin C 200 mg/mL injection solution; - Butamirate Citrate oral drops; - Simethicone oral drops; - Ibuprofen 200; 400 and 600 mg tablets; - Ibuprofen 100 and 200 mg/5 ml oral suspension; • API - 4 - Valeriana extract/ Maltodextrin; - Glaucine hydrobromide; - Dry extract of milk thistle fruits; - Dry extract of Granny's teeth; • Development of 11 nutritional supplements is underway: - Valeriana/Melatonin oral spray; - Melatonin oral spray; - Propolis nasal spray for children; - Propolis nasal spray for adults; - Propolis throat spray for children; - Propolis throat spray for adults; - Syrup (with bee products and extracts) for children; - Syrup (with bee products and extracts) for adults; - Valeriana Son 50/1 mg tablets; - Valeriana Son 150/3 mg tablets; - Vitamin C 100 mg tablets; • Transfer and validation of technological processes - 4 new medicinal products were transferred - Glycerax Pico oral drops, p-r; Felloran 2.32% gel; Duzofarm 200 mg tablets; Dexketoprofen 25 mg tablets; - 42 production processes/technologies have been validated/optimized. • Prepared documentation for qualification / production - Documentation for qualification of raw materials for production - 145; - Production regulations - 163; - Documentation for qualification of finished forms - 267. Management report – “Sopharma” AD 2023 18 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 850 000 treasury shares were purchased and no shares sold. The treasury shares purchased during the year amount to 0.49% of the Company's share capital and the average acquisition price is BGN 6,15 per share. Shares Owner’s equity, net of treasury shares Number BGN '000 Balance at 1 January 2022 121 742 899 84 514 Treasury shares (424 188) (1 909) Expenses for treasury shares - (10) Balance at 31 December 2022 121 318 711 82 595 Issue of capital 37 792 679 37 793 Effects of Subsidiary Merger 852 3 Treasury shares (850 000) (5 226) Expenses for treasury shares - (26) Balance as of 31 December 2023 158 262 242 115 139 The Board of Directors is authorized to buy treasury shares under certain conditions, according to the decisions of the AGMS, held on June 23, 2010 of the EGMS from November 30, 2011, of the EGMS from November 1, 2012, of the EGMS from February 28, 2013 and of the EGMS from February 23, 2018 and EGMS from August 04, 2023. Number and nominal value of the own shares held and the proportion of the capital they represent “Sopharma” AD holds 14 328 336 treasury shares, representing 8.3% 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. Management report – “Sopharma” AD 2023 19 The latter has adopted basic principles for general financial risk management, on the basis of which specific procedures have been developed for the management of individual specific risks, such as currency, price, interest, credit and liquidity, and the risk of using non-derivative instruments. 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 expected credit losses. 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 pharmaceutical distributers. 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. 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. Management report – “Sopharma” AD 2023 20 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 statement Section II and III, describe the operations and the position of the Company and explain the annual financial statement. Remunerations received in total during the year by the members of the councils and procurators The remuneration and other short-term income of the Board of Directors and procurators for 2023 amounted to BGN 1 867 thousand (2022: BGN 1 796 thousand) are as follows: • Current - BGN 1 469 thousand (2022: BGN 1 517 thousand); • Tantieme - BGN 398 thousand (2022: BGN 279 thousand). Acquired, held and transferred by the members of the councils during the year shares and bonds of the company The shares of the Company acquired, owned and transferred in 2023 by the members of the Board of Directors and the procurator of the company are as follows: Members of the Board of directors and Procurator 31.12.2023 31.12.2022 Change Shares Relative share of the capital % Shares Relative share of the capital % Acquired shares in 2023 Transferred shares in 2023 Ognian Donev 14 441 613 8.37% 6 608 350 4.90% 8 507 024 673 761 7 833 263 Vessela Stoeva 150 0.00% 150 0.00% - - - Alexandar Tchaoushev 390 442 0.23% 262 442 0.19% 128 000 - 128 000 Bissera Lazarova 30 000 0.02% - - 30 000 - 30 000 Ivan Badinski 2 030 0.00% 2 030 0.00% - - - Simeon Donev 195 450 0.11% 195 450 0.14% - - - 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 Management report – “Sopharma” AD 2023 21 Participation of the members of the Board of Directors by more than 25 per cent of the capital of other companies: Ognian Ivanov Donev has a direct / indirect significant share (over 25%) of the capital of the following companies: • “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str.; • “Telecomplect” AD, UIC 831643753, with headquarters in Sofia, 5 Lachezar Stanchev Str.; • “Sofprint Group” AD, UIC 175413277 with seat and headquarters: Sofia, 12 Pozitano Str.; • “Sofconsult Group” AD, UIC 175413245, with seat and headquarters: Sofia, 12 Pozitano Str.; • “Sopharma” AD, UIC 831902088, with seat and headquarters: 16 Iliensko Shose Str.; • “Energoinvestment” AD, UIC 200929754, with a registered office in Sofia, 9 P. R. Slaveykov Square; • “Simba Private Kindergarten” EOOD, UIC 204683684, with seat and headquarters in Sofia, 16 Iliensko Shose Str. • “Selso” EOOD, UIC: 206522151, with seat and headquarters in Sofia, 12 Pozitano Str. Vessela Lyubenova Stoeva controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “VES elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square; • “Eco Solar Invest” OOD, UIC 201634905, with headquarters: Sofia, 9 P. R. Slaveykov Square; • “Aquatex” OOD, UIC 203934379, with headquarters: Sofia, 9 P. R. Slaveykov Square; • “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square. Alexandar Victorov Tchaushev controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “Alpha In” EOOD, UIC 131156322, with headquarters in Sofia, 1B Dimcho Debelianov Str. • "Assa Asset Management" OOD, UIC 131156297, with seat and headquarters in Sofia, 1B Dimcho Debelyanov Str, Entr. A; Fl. 3; App. 8. Ivan Venetskov Badinski does not hold a direct / indirect significant share (over 25%) of the capital of companies. Bissera Nikolaeva Lazarova controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “Consumpharm” OOD, UIC 121148366, with headquarters in Sofia, 80 Yanko Sakazov Blvd. Participation of Board members in the management of other companies or cooperatives as procurators, managers or board members: Ognian Ivanov Donev participates in the managing/controlling body in the following companies: • “Sopharma Trading” AD, UIC 103267194, with headquarters in Sofia, 5 Lachezar Stanchev Str. – Chairman of the Board of Directors. • “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str. – Chairman of the Board of Directors. • “Telecomplect” AD, UIC 831643753, with address management in Sofia, 5 Lachezar Stanchev Str., Building A – Chairman of the Supervisory Board. • “Doverie Capital” AD, UIC 130362127, with headquarters in Sofia, 5 Lachezar Stanchev Str. – Member of the Supervisory Board. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Chairman Management report – “Sopharma” AD 2023 22 of the Board of Directors and Executive Director. Vessela Lyubenova Stoeva participates in the management/supervisory body for the following companies: • “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square - Мember of the Board of Directors; • “VES Elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square – Manager; • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Deputy Chairman of the Board of Directors. Alexandar Victorov Tchaoushev participates in the management/supervisory body of the following companies: • “DK-Domostroene” AD, UIC 102148397, with registered office in Burgas, Pobeda area – Мember of the Board of Directors; • “Alpha IN” EOOD, UIC 131156322; with seat and headquarters: Sofia, 1b Dimcho Debelyanov Str. - Manager; • “Sopharma” AD, UIC 831902088, with seat and headquarters: Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors. Ivan Venetskov Badinski participates in the management/supervisory body of the following companies: • “Sopharma” AD, UIC 831902088, with seat and headquarters: 16 Iliensko Shose Str. – Member of the Board of Directors. Bissera Nikolaeva Lazarova participates in the management/supervisory body of the following companies: • Sopharma Imoti REIT, UIC 175059266, with seat and headquarters in Sofia, 5 Lachezar Stanchev Str. – Member of the Board of Directors. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors. Planned economic policy in the next year (Article 247, paragraph 3 of the Commerce Act) The information is reflected in Section III, paragraph 4 of this Report - Future development of the Company (Article 39, paragraph 4, of the Accountancy Act). 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 2023 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 Management report – “Sopharma” AD 2023 23 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 percent 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 2023 are “Sopharma Trading” AD with 35% share, OOO “FC PULSE” with 21% share. • “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. • OOO “FC PULSE” with address Russia, Khimki, d. 29 Leningradskaya Str., main activity is distribution of pharmaceutical products. Relations between the company and “Sopharma” AD are governed by a sales agreement. 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 2023 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. In 2023 there are no such concluded contracts. 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 Management report – “Sopharma” AD 2023 24 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 2 June 2023, the following transactions were voted between the Company and related parties: Contract for the provision of services between "Sopharma" AD as the Contracting Authority and "Telekomplekt" AD as the Contractor under the following basic conditions of the proposed transaction: • Subject of the transaction: engineering and project management; construction-installation and repair-restoration works in the properties of the Contracting Authority or in those that have minimal rights, reconstructions, innovations and others, indicated by types, volumes, prices and deadlines for execution in requests-specifications, bilaterally agreed and signed by the parties to this contract. The services under this provision are intended to be performed with the means and materials of the Contractor, unless otherwise specified in the specific request-specification; and supplies and services for objects owned by or used by the Contracting Authority; • Term of the contract : 5 /five/ years; • Value of the transaction: up to BGN 10,000,000 /ten million/ per year or in total for the planned 5- year period the value of the transaction amounts to BGN 50,000,000 /fifty million/; • Other conditions: The performance of each service will be carried out at the request of the Employer and with means and materials of the Contractor, unless otherwise agreed; “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 2023 there are no events and indicators of unusual nature for Sopharma AD. 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 2023 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 is listed in the Notes to the annual financial statement - "Investments in subsidiaries", "Other long -term capital investments" and "Investments in associates and joint ventures ". Information regarding investments in Management report – “Sopharma” AD 2023 25 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 related parties, and the specific terms, including the deadlines for payment and the purpose for which they were granted Long-term loans to related parties: • Recipient - Doverie Invest EAD; Contract amount - BGN 83,400 thousand; interest rate – 3.00%; maturity – 31.12.2025; balance as of 31.12.2023 – BGN 40 901 thousand; • Recipient - "Industrial Holding Doverie" AD; Contract amount – BGN 14 939 thousand; interest rate – 4.36%; maturity – 31.12.2025; balance as of 31.12.2023 – BGN 8 052 thousand; Long-term loans to related parties were granted to assist in financing the activities of these companies for common strategic objectives. They are secured by pledges of securities (shares) and promissory notes. Current commercial loans provided by "Sopharma" AD to related parties: • Recipient - Doverie Capital AD; Contract amount - BGN 4,000 thousand; interest rate – 3.33%; maturity – 31.12.2024; balance as of 31.12.2023 – BGN 4,067 thousand; • Recipient - Doverie Grizha EAD; Contract amount - BGN 10,997 thousand; interest rate – 3.10%; maturity – 31.12.2024; balance as of 31.12.2023 – BGN 8,740 thousand Short-term loans granted to related parties are to help finance the activities of these companies for achieving their strategic purposes. They are secured by pledges of shares, securities and promissory notes. Information on the loans of the subsidiaries of “Sopharma” AD will be available in the consolidated financial statements of the Group. The commercial loans provided by “Sopharma” AD to third parties are as follows: • Recipient – "Pharmaplant" AD; Contractual amount BGN 4,184 thousand; interest rate – 4.30%; maturity – 31.12.2024; balance as at 31.12.2023 – BGN 187 thousand; • Recipient – "Pharmaplant" AD; Contractual amount BGN 949 thousand; interest rate – 4.70%; maturity – 31.12.2024; balance as at 31.12.2023 – BGN 48 thousand; • Recipient – Sopharmacy MC; Contract amount - 695 thousand euros; interest rate – 3.05%; maturity – 31.12.2024; balance as of 31.12.2023 – BGN 1, 610 thousand; • Recipient – Sopharmacy MC; Contract amount – 3,000 thousand euros; interest rate – 3.05%; maturity – 31.12.2024; balance as of 31.12.2023 – BGN 6, 667 thousand; Management report – “Sopharma” AD 2023 26 • Recipient - "Alliance Energy Companies" AD; Contract amount – BGN 2,740 thousand; interest rate – 4.37%; maturity – 31.12.2024; balance as of 31.12.2023 – BGN 2,691 thousand; The loans granted to third parties are for the purpose of supporting the financing of activities of these enterprises for common strategic goals. They are secured by pledges of securities (shares). 10. Information on the use of funds from the issuance of new securities during the reporting period On October 6, 2023, an increase in the company's capital was recorded in the Commercial Register by issuing 37,792,679 ordinary, registered, non-present, voting shares, with a nominal value of BGN 1 each and an issue value of BGN 4,13 per share action. Shares from the capital increase were subscribed by warrant holders. The funds received from the new issue are in the amount of BGN 156,1 million and at the end of the reporting period BGN 100,1 million were invested as a short-term deposit abroad. 11. Analysis of the relationship between the financial results reflected in the financial statements for the financial year and earlier published forecasts for these results There are no published forecasts of financial results. 12. Analysis and evaluation of the policy on the management of financial resources, including the ability to meet its obligations, possible threats and measures that the issuer has taken or will take to resolve them The Company's management currently controls the collection of receivables, the implementation of financial ratios of bank and ensures regular servicing of its obligations. Financial risk management is fully disclosed in the note "Financial Risk Management" as part of the individual financial statement 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 2024 includes investments of BGN 22,5 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 within the meaning of the Accountancy Act 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 Management report – “Sopharma” AD 2023 27 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 During the reporting period, there were no changes in the management and supervisory bodies of “Sopharma” AD. 17. Information on the amount of remuneration, rewards and / or benefits of each of the members of the management and supervisory bodies for the financial year, paid by the issuer, 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 on the held by members of the Board of Directors and the procurators shares of “Sopharma” AD is listed in section IV of this report – information Art. 247a paragraph 2 of the Commerce Act. Members of the Audit Committee 31.12.2023 31.12.2022 Number of shares Rel. share of the capital % Number of shares Rel. share of the capital % Change Tzvetanka Zlateva - - - - - Vasil Naidenov 386 0.00% 386 0.00% - Kristina Atanasova - Eliot - - - - - By Decision № 804 - Е of November 4, 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 Management report – “Sopharma” AD 2023 28 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. Member of the Board of Directors 31.12.2023 Number of warrants Rel. share of total number of subscribed warrants % Ognian Donev 1 667 000 23.37 Vessela Stoeva - - Alexander Tchaushev - - Bissera Lazarova - - Ivan Badinski - - Simeon Donev - - As of December 31, 2023 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 percent 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, item 2 of Ordinance 2 of LPOS 1. Structure of the capital of the Company, including securities not admitted to trading on a regulated market in Bulgaria or another Member State, indication of the different classes of shares, the rights and obligations of each class of shares and the portion of the total capital represented by each class. The total number of issuers by “Sopharma” AD as at December 31, 2023 is 172 590 578 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 Management report – “Sopharma” AD 2023 29 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 December 31, 2023: • Individuals: 6 348 – 24 460 701 shares – 14.17% • Legal entities: 141 – 148 129 877 shares – 85.83% 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: • claims against them; • taking action or refusal to act, related to the fulfillment of obligations to the Company; • 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 2023 are as follows: SHAREHOLDERS Number of shares % of the capital “Donev Investment Holding” AD, UIC: 831915121, Sofia, 12 Positano Str. 66 570 976 38.57% “Telecomplect invest” AD, UIC: 201653294, Sofia, 9 Slaveykov Square 27 881 287 16.15% “Sopharma” AD, UIC: 831902088, Sofia, 16 Iliensko Shose Str. 14 328 336 8.30% 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. Management report – “Sopharma” AD 2023 30 VII. Non-financial declaration under Art. 48-52 of the Accounting Act 1. 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 interested parties and ensures transparency and comprehensiveness in the reporting of its activities. With a clear awareness of its impact in the socio-economic, public sphere and the environment, Sopharma AD uses metrics that show its actual impact and works in the direction of limiting its negative impact. The declaration complies with the reporting requirements of Art. 48 of the Accountancy Act on the description of the policies and companies regarding their activities in the field of ecology, social issues, employees, anti-corruption, human rights. In connection with the requirements of Art. 8 Transparency of undertakings in non-financial statements, Regulation (EU) 2020/852 of The European Parliament and The Council of Jume 18, 2020 on the establishment of a framework to facilitate sustainable investments, and amending Regulation (EU) 2019/2088, the Company should disclose whether its activity is eligible under the current Taxonomy, as a qualification system for ecologically sustainable economic activities. The Taxonomy Regulation is a key component of the European Commission's action plan to redirect capital flows towards a more sustainable economy. A detailed analysis was carried out of all economic activities meeting the taxonomy listed in the Climate Delegated Regulation based on our activities as a pharmaceutical company. The Climate Delegated Regulation focuses on those economic activities and sectors that have the greatest potential to achieve the climate change mitigation objective – i.e. the need to avoid creating greenhouse gas (GHG) emissions, to reduce these emissions or to increase GHG sinks and long-term carbon storage. Sectors covered include energy, selected manufacturing activities, transport and buildings. After a thorough review involving all relevant divisions and functions, we have concluded that our activity as a pharmaceutical manufacturer is not covered by the Climate Delegated Act and is therefore taxonomically ineligible. Our assessment of taxonomy eligibility is focused on economic activities defined as the combination of resources to produce specific goods or services. In this context, we, as a pharmaceutical manufacturer, generate external revenue from our products through only one activity (production and sale of our pharmaceutical products), but we are active in several sectors within the value chain of our products. Activities within the value chain of our products that do not generate revenue but result in assets or processes that are essential to our revenue-generating activities are not accounted as economic activities meeting the requirements of the taxonomy. For instance, transporting our pharmaceutical products to our customers does not count as a taxonomy-eligible activity and is not included in our turnover KPI, as we do not generate external turnover on a stand-alone basis with this activity. Management report – “Sopharma” AD 2023 31 We considered our activities also based on the exceptions for the reporting period according to Art. 10 of Delegated Regulation (EU) 2021/2178. As we draw attention to, and in view of the active change and updating of the understandings of the European Commission in this regard, it is possible that we re-evaluate both our income reporting and disclosures in our next reports. As far as for the reporting period 2023 our turnover is taxonomically ineligible, as our economic activities are not covered by the Climate Delegated Act, the capital and operating expenses related to these activities are also taxonomically ineligible, which is reflected in the following table: Table 1 - Ratio of taxonomy-compliant and taxonomy-unacceptable economic activities in total turnover, capital and operating costs Total (BGN’000) Share of taxonomically eligible economic activities (in %) Share of taxonomically- ineligible economic activities (in %) Turnover 247,717 0% 100% Capital costs (CAPEX) 16,018 0% 100% Operating costs (OPEX) 5,220 0% 100% 2. Business model a. Vision and strategy Vision For 90 years now, Sopharma AD has been a symbol of sustainable development and success. Our ambition is to constantly improve our activities in the next 90 years to be an example of stability, quality, reliability and transparency. We take care of everyone's health, through our social projects and by providing reliable information. We strive to protect the environment for future generations. 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. We build sustainable profitable partnerships. We care for our employees, supporting the happiness and development of our team members. Strategy "Sopharma" AD is a regional leader in the pharmaceutical sector. The company is currently pursuing its strategy to expand its presence in its existing markets by adding key products to its portfolio, creating and building Management report – “Sopharma” AD 2023 32 strategic partnerships and asserting its active contribution to healthcare in each market, as well as possible acquisitions. In addition, structural changes in the Company contribute to constant search for opportunities in new markets, creation of long-term license partnerships. Corporate philosophy of “Sopharma” AD The management stands behind the belief that the production of medicines is not only technological process, it is a humanitarian mission based on the highest standards of quality, safety and medicinal effectiveness. Our core values Care: We put customer satisfaction at the heart of our decisions and actions Responsibility: We take personal responsibility and deliver results Constant improvement: "Better than yesterday" Teamwork: We are all one team! "The whole is greater than the sum of its parts!" Integrity: We follow the highest standards of ethical behavior Sopharma's mission is to continuously seek and invest in every opportunity that improves the business environment and society and increases the quality of life Responsible corporate behavior is the basis of the business development of Sopharma AD. b. 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 consisting of: Ognian Donev PhD – Chairman, Deputy Chairman - Vessela Stoeva, Members - Bissera Lazarova, Aleksandar Tchaushev and Ivan Badinski. The company is represented and managed by the Executive Director Ognian Donev, PhD. Based on a contract for commercial management from June 9, 2020, the procurator of the company is Simeon Donev. The Board of Directors determines the guidelines and the strategic plan for development of the Company and the operational implementation is performed by a management team reporting to the Executive Director. Management report – “Sopharma” AD 2023 33 Systems of corporate governance Corporate governance systems Description Adoption date Last update Articles of Association The Articles of Association determine the basic rules according to which significant decisions are made concerning the Company's activities. 2003 2023 Decisions taken at the General Meeting of Shareholders The decisions of the shareholders are fundamental for the activity of the Company. at least once a year 2023 Code of conduct of the board of directors Instructions and explanations for the duties and responsibilities of the members of the Board of Directors. 2007 Code of ethics Rules of conduct for employees based on the highest standards of ethical behavior. 2007 2007 Good corporate governance program A system of rules protecting the rights of shareholders and other stakeholders. 2009 2021 Good Manufacturing Practice / GMP A system of principles and rules that ensure the proper course of each stage of the production process, ensuring a quality end product. 2003 2023 Good distribution practices / GDP System of principles and rules for the distribution of medicinal products and active substances. The quality of medicinal products may be affected by a lack of adequate controls. 2003 2023 ICH “Q8 Pharmaceutical Development” Principles and examples of Pharmaceutical Development. 2004 2023 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. 2013 2023 Internal Insider regulations Instructions and clarification on the obligations and responsibilities with regard to the Law on the Implementation of Measures Against Abuse with Financial Instruments. 2007 2023 Management report – “Sopharma” AD 2023 34 3. Commitment to stakeholders In the process of identifying interested parties, "Sopharma" AD follows good practices, considering every group that is directly or indirectly related to the Company's activity, 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 of the country and how good the adopted direction of development is. The following key stakeholders have been identified: • A key stakeholder is the patients for whom the products of "Sopharma" AD are intended, as a means of improving their quality of life. "Sopharma" AD follows a flexible marketing policy, taking into account the possible increase in the delivery prices of raw materials and materials, changes in the requirements for pharmaceutical manufacturers for raw material suppliers, as well as the specifics of the pharmaceutical market. Activities comply with change control criteria (ICH Q10 3.2.3) and material and process requirements according to Good Manufacturing Practice (GMP) Guidelines Part 1, with internal procedures confirmed in a change control standard operating procedure and standard operating procedures by approval of manufacturers of actives, excipients, packaging materials, starting materials and are managed through an internal eDMS system. The selection and evaluation criteria cover quality criteria, regulatory compliance, certification status, documentary evidence as well as economic, financial criteria and delivery parameters. Approved manufacturers and supply performance are subject to ongoing monitoring as part of purchasing process management. "Sopharma" AD has developed a policy and procedures for evaluating its counterparties, making a regular risk assessment. The company partners with over 70 Bulgarian and foreign licensed pharmaceutical distributers, with a proven history of relationships in the main markets. The Company's communication messages are in accordance with national ethical rules for advertising and commercial communication. "Sopharma" AD strictly complies with the national and European legislation and the requirements related to the rules of ethical competition. The company is guided in its activities by the conviction that ethical behavior is a mandatory condition for the 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 field of health care. "Sopharma" AD invests mainly in the development of generic production, as the role of the generic industry for sustainable healthcare in Bulgaria and in Europe is expected to grow. • Investors – as a public company, Sopharma AD considers its obligation to provide adequate and timely information about its activities in the field of ESG to all shareholders and potential investors in the Company. • Partners and membership - "Sopharma" AD is a member of: o Confederation of Employers and Industrialists in Bulgaria (KRIB). http://krib.bg/ Management report – “Sopharma” AD 2023 35 o The German-Bulgarian Chamber of Industry and Commerce (GBITK), a connecting link between the economies of Germany and Bulgaria, in which more than 450 German, Bulgarian and international companies are members. http://bulgarien.ahk.de/bg/ o Founding member of the Union of Bulgarian Pharmaceutical Manufacturers, currently the Bulgarian Generic Pharmaceutical Association (BGPHARMA), whose priorities are harmonizing interests in relation to common national and international mechanisms regulating the production and use of medicines, improving the implementation of the principles of Good Manufacturing Practice and compliance with the principles of fair competition. http://www.bgpharma.bg o Founding member of the Bulgarian National Committee of the International Chamber of Commerce, accepted as a full member of the International Chamber of Commerce (ICC). ITC is the most prestigious organization in the field of international trade and international economic relations that promotes cross- border trade and investment. http://www.icc-bulgaria.bg o Member of the Bulgarian Network of the UN Global Compact http://www.unglobalcompact.bg o Member of the National Commission on Corporate Governance, which was created for the purpose of promoting the application of good corporate governance practices and the development of the Bulgarian National Corporate Governance Code (the Code). The Commission is a permanent independent body established 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) http://www.nkku.bg o 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. • "Sopharma" AD supports the development of public communications as the basis for any democracy. The company works outside of traditional pharmacy projects and supports forums and festivals related to longevity, a healthy lifestyle, and the development of public communications. • Employees – today employees are among the most valuable assets of any company, especially in high- tech production, such as pharmaceuticals, and the investment in them has a high return. They are the first ambassadors of the company's mission and corporate culture and reputation. Beyond the healthy working environment, opportunities for professional development, social benefits, which are a mandatory minimum in the company's labor-legal relationships, "Sopharma" AD strives to build common values with its employees and to get involved in public projects that are important to them. • Local community - "Sopharma" AD owns 9 plants in the country and as the main investor in some regions bears responsibility that goes beyond business commitments. The company invests resources in projects that are important for the specific region. At the same time, as the largest Bulgarian pharmaceutical manufacturer, Sopharma AD implements large-scale national campaigns. „Sopharma“ AD uses its expertise and resources to contribute not only to economic and social development, but also to the enhancement of culture and quality of life through specific projects. “Sopharma” AD annually stands Management report – “Sopharma” AD 2023 36 behind various social projects aimed at caring for the health of generations, promoting an active lifestyle, developing education, those related to culture and cultural heritage. As a company that has operations in different parts of the country, “Sopharma” AD actively supports local communities. For example: o In 2023, the company continued to support the "Hristo Botev" folk community center in Vrabevo. o Stood behind the organizers of the Charity Cross in support of the fight against breast cancer in the city of Troyan. o Support an information campaign of the Bulgarian Pharmaceutical Student Association related to World No Tobacco Day. o Sopharma sustainably supports the development of education in its various stages, creates opportunities for practice in its factories, company representatives share experience, etc. It supports the organization of cultural and sports events, such as the Cycling Tour of Bulgaria, dance competitions, etc. • Pharmaceutical Industry - The European generics and biosimilars industry "fulfills its mission to provide high-quality medicines to patients in Europe, increasing their access to effective treatments and partnering for sustainable healthcare". The generic and biosimilar industry is creating a model of sustainable pharmaceutical innovation related to the creation and production of value-added products that can improve healthcare revenue and hospital efficiency. Management report – “Sopharma” AD 2023 37 Engagement matrix Market Employees Environment Community Corporate Citizenship Transparent corporate governance Responsible employer: Zero discrimination regarding the right to work Environmental management systems Contribution to economic development Anticorruption Guaranteed quality and safety of products and services Ensuring the right of association Reduciton of environmental impacts Developing the healthcare system Work on SDG 2015 Sustainability Employee development: hierarchically and as a qualification and education Responsible use of resources Health prevention Participation in the establishment and implementation of international pharmaceutical standards Ethical Competition Decent labor wages Reduction of direct impacts Providing аffordable and quality treatment Working with partner organizations 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 related matters Management report – “Sopharma” AD 2023 38 Communication channels “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. 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 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 profiles of “Sopharma” AD in various social networks, the company’s mobile applications, etc. The company communicates with all stakeholders through new digital tools and continues to invest and develop its digital channels. The company communicates through its social media profiles. Stakeholders Communication channels Frequency of communication Patients Product websites; Official corporate sites of “Sopharma” AD. Website of the group www.sopharmagroup.com Company’s profiles on FB, Instagram, Twitter; Social platform “Tabex”, mobile app. Weekly; If there is current 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. Daily; Daily; When needed; Shareholders General Meeting of Shareholders; Notifications; Regularly Management report – “Sopharma” AD 2023 39 Meetings; Sopharma's official corporate media; Website of the group www.sopharmagroup.com. State and Local authorities 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; Participation in working groups related to the healthcare system and pharmacy. Digital transformation in the pharma sector; Forum on the markets in the Eurasian Union. Every day Regularly, depending on the program of the particular group Chain partners Business meetings; Regularly Employees Internet page; FB page of “Sopharma” AD; Corporate website of the Group www.sopharmagroup.com; New info page with inside information for employees; Bulletin boards; Internal mailing. When needed Daily When needed Society Healthy life conferences; Public communication conferences; FB pages of “Sopharma” AD; Profiles on social media Instagram, YouTube. Daily 4 conferences per year Daily Daily Partners Meetings and conferences; Business meetings. Regularly Management report – “Sopharma” AD 2023 40 4. Company’s activity impact 4.1. Economic impact We create added value for our stakeholders Economic and financial data 2023 2022 % change Stakeholders Decision for payment of dividends by the General Meeting in the amount of BGN per 1 share BGN 0,6 BGN 0,9 - - Shareholders Taxes paid (other) in thousand BGN Taxes refunded (other) in thousand BGN Corporate tax paid in thousand BGN 10 433 2 361 8 205 6 999 4 632 4 921 49.06% -49.03% 66.73% State and local authorities Payments to suppliers in thousand BGN 162 725 146 838 10.82% Suppliers /including hired services/ Payments for staff in thousand BGN 64 262 51 232 25.43% Employees The economic footprint is most clearly tracked through dividend decisions that show the relationship with shareholders as stakeholders; 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 relations with employees as interested parties. Shareholders and investors State and local authorities Clients and partners Environment and society Management report – “Sopharma” AD 2023 41 4.2. Social impact The organization of the processes created in Sopharma AD ensures an effective two-way flow of information both vertically and horizontally. 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 Production Finance Market presence of "Sopharma" AD in: Russia Ukraine Poland Kazakhstan Baltic States and Belarus Turkey Azerbaijan Georgia Armenia Tunisia China Sales Resources Energy management Operational Directorate Investor relations Environmental management Quality management Health and safety at work Strategy management Administrative Directorate Human Resources Development and regulatory compliance Supply chain management Finance and Accounting Business applications Legal Department Technological development Information Technology We promote the development of health culture and invest in civil society Economic and financial data 2023 2022 Stakeholders Plants / Number of employees as of 31.12. 9/1 746 9/1 739 Employees, Local communities Training courses /expenses BGN ‘000/ 175 134 Employees Social expenses /expenses BGN ‘000/ 3 436 2 306 Employees Medical services /expenses BGN ‘000/ 707 711 Employees Donations /expenses BGN ‘000/ 612 321 Employees, Local communities Investments related to development of the business environment (KRIB, ABIRD etc.) / number 2 2 All stakeholders Investments to sport and healthy lifestyle programs / number 3 3 Society Investments in public communications /number 1 1 Society Management report – “Sopharma” AD 2023 42 “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. • Supporting various sports activities and competitions: • Zero tolerance to any kind of discrimination in the workplace; • Ensuring healthy and safe working conditions; Due to the nature of its activity, „Sopharma“ AD guarantees safe and healthy working conditions, following the standards of Good Manufacturing Practices. o For the workplaces, professions and types of work for which personal protective equipment is required, including special work clothing, the order of the Procurator of “Sopharma” AD, drawn up in accordance with Ordinance No. 3 on minimum requirements for safety and health protection of those working when using the PPE of the worker. place / prom. SG, No. 46/2001/, Ordinance on free work and uniform clothing/ prom. SG No. 9/2011/ and in accordance with Art. 284 of the Labor Code. o For the safe operation of machines and equipment, the Safe Operation Instructions are followed for each one of them, with which the operators of the machines are familiar and obliged to comply. o Prevention of risky situations concerning the health of workers - instructions on safety and health at work are given to everyone working in the enterprise, regardless of the term of the contract, working hours and the position held. In addition to the mandatory initial briefing upon entry to work, there are also briefings at the workplace, daily briefings for the positions for which it is required, quarterly periodic briefings and, if necessary, extraordinary briefings in all factories by sections of the employees, documented with the employee's personal signature. • Ensuring opportunities for development based on equality; The funds invested in improving the qualifications of employees (training) in 2023 are in the amount of BGN 175 thousand. Outside of its direct commitments as an employer, Sopharma AD creates and develops social projects and programs and participates in collective ones aimed at employees and their communities, focusing on the following areas: o Additional health insurance; o Presence of a nurse at the largest production site of the Company in the city of Sofia; o Annual free examinations by specialists; o Inclusion in the Multisport physical activity program; o Involvement of employees as @SopharmaTeam in various competitions: tennis court competition; cycling race; participation in ultra marathons. • Ensuring the right of association and labor protection for employees. Management report – “Sopharma” AD 2023 43 Quantitative indicators Indicator 2023 2022 Parental Care Employees that took parental leave /% of total employee numbers/ 4.8% 4% Employees that returned to work in the reporting period after parental leave ended <1% <1% Employees that took unpaid parental leave <1% <1% Employees that returned to work after parental leave ended that are still employed 12 months after their return to work 5.6% 3.8% A baby set for each new-born baby/ number 32 30 Assistance for each first grader – a rucksack with all the needed aids/number 43 34 Free kindergarten on the territory of Sopharma for children of the employees of the Company, opened 2012/number of children 28 28 Structure of employees by gender 31.12.2023 (31.12.2022) Gender of employees 2023 2022 Men 35% 37% Women 65% 63% Structure of employees by education 2023 (2022) Employees/education Number Relative share % Number 31.12.2023 31.12.2023 31.12.2022 Higher education 832 48% 830 Colleges 27 2% 32 Secondary school 862 49% 856 Primary education 25 1% 21 Structure of employees by age 2023 (2022) Employees /Age Number Relative share % Number 31.12.2023 31.12.2023 31.12.2022 under 30 136 8% 147 31- 40 308 18% 281 41 – 50 469 27% 453 51 – 60 673 38% 676 Over 60 160 9% 182 Management report – “Sopharma” AD 2023 44 Structure of the employees of “Sopharma” AD in 2023 Employees Total Women Men Hierarchy 2023 % 2023 % Top management 5 2 40% 3 60% Senior Management 56 25 45% 31 55% 4.3. Ecologic impact 4.3.1. Information in connection with Art. 9, letter a) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of June 18, 2020 on climate change mitigation Contribution to climate change mitigation: In 2023 „Sopharma“ AD built and put into operation a photovoltaic plant. A photovoltaic plant /PV generator/ has been installed on the structures of the roof of the production area and the high-rack warehouse of the plant for solid dosage forms. The installation is stationary. The consumption of solar photovoltaic energy as a percentage of the total electricity used in 2023 for the needs of site "B" is 7.09%. 4.3.2. Information in connection with Art. 9, letter b) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of June 18, 2020 on adaptation to climate change The Company has developed and implements a Standard Operating Procedure (SOP) for environmental protection. The procedure is applied by all persons in "SOPHARMA" AD, performing activities that have or may have an impact on the environment. Environment protection activities are implemented through the application of the Normative Regulation, the Permits for the discharge of industrial waste water and the Permits for water abstraction. All activities are aimed at preventing, reducing, limiting and, if possible, eliminating the identified significant adverse effects on the environment and human health. For the measures aimed at reducing or eliminating the harmful impact on the environment, funds and specified deadlines for their implementation are provided. The company maintains the operation of the facilities and measures are taken to achieve efficient use of raw materials and energy in order to minimize the generation of waste. All technological facilities are equipped with purification devices for capturing and purifying emissions. The company implements measures to: • separate collection of waste, minimization, utilization and recycling of production, construction and household waste; • ensuring appropriate training of personnel on issues related to environmental protection and pollution prevention; • responsible fulfillment of the imperative requirements laid down in the Waste Management Act (WMA) for recovery and paying a product fee, according to the Ordinance on Packaging and Packaging Waste; Management report – “Sopharma” AD 2023 45 • for the documentation and reporting of fluorinated greenhouse gas emissions. Control/own monitoring is organized and carried out through measurements by licensed companies of stationary air-conditioning equipment containing fluorinated greenhouse gas emissions. Conducting own monitoring of environmental factors – air, noise, water emissions: Emissions of harmful substances (powdery substances and emissions of organic substances, defined as total carbon), released into the atmospheric air from the stationary sources of the Plant for solid medicinal forms - the city of Sofia and the Plant for solid and semi-solid medicinal forms– Vrabevo village – once every two years. The sources that generate emissions in atmospheric air, from each technological process at each phase in the production activity, are determined. According to the own monitoring carried out in 2022 at the above-mentioned sites of Sopharma AD, the emissions generated in the atmospheric air from the discharge devices meet the norms for permissible emissions. The next own monitoring is due to take place in 2024. Emissions of CO, SO2 and Nx released into the atmospheric air from the stationary sources - the steam boilers from the sites in the city of Sofia, the village of Vrabevo and the city of Kazanlak - once every two years. According to the own monitoring carried out in 2022 at the above-listed sites of Sopharma AD, the emissions generated by the discharge devices meet the permissible emission standards. The next own monitoring is scheduled to take place in 2024. Measurements of noise levels along the border of the industrial source and in the place of impact - the production and storage areas and areas of the sites in the city of Sofia, the village of Vrabevo, Sandanski and Kazanlak - once every two years. According to the own monitoring carried out in 2023 at the following sites of "Sopharma" AD: in the city of Sofia and the city of Sandanski, the noise levels meet the permissible norms. The next own monitoring is scheduled to take place in 2025. The own monitoring for the sites in the village of Vrabevo and the town of Kazanlak is scheduled to take place in 2024. 4.3.3. Information in connection with Art. 9, letter a) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of June 18, 2020 on the sustainable use and protection of water and marine resources Measurements of water emissions: For the site of "Sopharma" AD - Sofia: Three to five times a year "Sofiyska voda" AD measures the emissions in waste water at production site "B". The results of the analyzes of waste water, taken for research by “Sofiyska voda” AD in 2023, correspond to the norms laid down in Ordinance No 7 on the conditions and procedure for discharging industrial waste water into the sewage systems of populated areas. Every quarter, the drinking water is given for testing (short chemical and microbiological analysis) in an accredited laboratory by: Industrial unit for suppository dosage forms, Plant for ampoule medicinal forms, Plant for lyophilic dosage forms and Plant for solid dosage forms. Management report – “Sopharma” AD 2023 46 The results of the analyzes of the drinking water submitted for analysis to an accredited laboratory in 2023 correspond to the norms laid down in Ordinance No 9 for the quality of water intended for drinking and domestic purposes. Twice a year, our own monitoring is carried out - groundwater and wastewater are tested in an accredited laboratory, according to the permits for water abstraction and for the use of a surface water body. The results of the analyzes of waste water taken for testing by an accredited laboratory in 2023 correspond to the norms laid down in the Permit for the use of a surface water body. Monitoring of water extraction and water levels is organized and carried out - every month. For the site of "Sopharma" AD - the village of Vrabevo: Twice a year, own monitoring and control monitoring is carried out by Regional Inspectorate for Environmental and Water Protection-Pleven - waste water is given for testing in an accredited laboratory, according to the permit for the use of a surface water body. The results of the wastewater analyzes from the own monitoring and control monitoring conducted in 2023 do not exceed the norms laid down in the permit for the use of a water body for the discharge of wastewater. Once a year, the drinking water from the Plant for solid and semi-solid medicinal forms is given for testing (short chemical and microbiological analysis) in an accredited laboratory. The results of the analyzes of the drinking water submitted for analysis to an accredited laboratory in 2023 correspond to the norms laid down in Ordinance No 9 for the quality of water intended for drinking and domestic purposes. For the site of "Sopharma" AD - Sandanski: The water supply and removal of industrial wastewater from the Plant for medical products, liquid and solid forms "Sopharma" AD, Sandanski, is carried out by the municipal company "UVEX", Sandanski. Twice a year, waste water samples are taken, in the presence of representatives of both countries, after which the samples are sent to an independent laboratory. The results of the analyzes of waste water, taken for research by the municipal company "UVEX" in 2023, correspond to the norms laid down in Ordinance No 7 on the conditions and procedure for the discharge of industrial waste water into the sewage systems of populated areas. Once a year, the drinking water from Plant for medical products, liquid and solid forms is given for testing (short chemical and microbiological analysis) in an accredited laboratory. The results of the analyzes of the drinking water submitted for analysis to an accredited laboratory in 2023 correspond to the norms laid down in Ordinance No 9 for the quality of water intended for drinking and domestic purposes. For the site of "Sopharma" AD - Kazanlak: The water supply and removal of industrial waste water from the Plant for Solid Medicinal Forms, Phytochemical and Synthetic Products "Sopharma" AD, Kazanlak, is carried out by the local "VIK" company. Twice a year, waste water samples are taken, in the presence of representatives of both countries, after which the samples are tested by the accredited laboratory of the "VIK" company. Management report – “Sopharma” AD 2023 47 The results of the analyzes of waste water, taken for research by the local "VIK" company in 2023, correspond to the norms laid down in Ordinance No 7 on the conditions and procedure for the discharge of industrial waste water into the sewage systems of settlements. 4.3.4 Information in connection with Art. 9, letter a) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 18 June 2020 on the transition to a circular economy The company has developed and implements a Standard Operating Procedure (SOP) for waste management. The procedure is applied by all persons in "SOPHARMA" AD. The waste generated by the company is handed over to licensed companies. A policy of separate waste collection, minimization, recovery and recycling of production, construction and household waste is applied. The waste handed over in 2023: production - 336,611 tons and construction - 126,693 tons, with a total amount - 463,304 tons by types and sites of "Sopharma" AD are: Production waste sites Sofia tons sites Vrabevo tons sites Kazanlak tons sites Sandanski tons Total for all sites tons Sent for recycling 179.99 36.44 3.27 46.05 265.742 Submitted for disposal/utilization 63.773 - - 7.096 70.869 Total: 243.76 36.44 3.27 53.15 336.611 Separately collected and delivered production waste in 2023 was 7.14% more than the previous year, with recyclables increasing by 10.7% and non-recyclables decreasing by 4.37%. Construction waste sites Sofia tons sites Vrabevo tons sites Kazanlak tons sites Sandanski tons Total for all sites tons Sent for recycling 80.020 0.493 - - 80.513 Submitted for disposal/utilization 46.180 - - - 46.180 Total: 126.200 0.493 - - 126.693 The total quantity of recyclable production and construction waste is 346,255 tons, and of non- recyclable waste – 117,049 tons. The waste generated by the company is handed over to licensed companies. 4.3.5. Information in connection with Art. 9, letter a) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 18 June 2020 on Pollution Prevention and Control In order to achieve a high level of protection of life and health of people and the environment, the company examines and determines possible accidents and crisis situations, and is prepared to respond to emergency situations by planning activities to prevent or mitigate negative impacts on the environment. Management report – “Sopharma” AD 2023 48 The Company maintains a file with safety data sheets (SDS) of all available substances and mixtures, which are regularly replaced with their current versions. Based on the information from ILB, all production sites of "Sopharma" AD: Prepare and keep available up-to-date information on the classification of dangerous chemical substances and mixtures - "Format for documenting the assessment of the safety of the storage of dangerous chemical substances and mixtures", approved by the Minister of the Ministry of Environmental and Water Protection; Determine, analyze and classify in their capacity as "OPERATOR" the enterprise/facility in one of the following categories: "enterprise/facility with low-risk potential", "enterprise/facility with high-risk potential" or "is not classified as an enterprise/facility with low or high-risk potential", depending on the amount of hazardous substances, mixtures and wastes that are present or expected to be present at the site of the enterprise/facility. According to the latest updated classifications, the production sites of "Sopharma" AD in the city of Sofia, the city of Sandanski and the village of Vrabevo are not classified as "enterprise/facility with low or high-risk potential", while the site in the city of Kazanlak is classified as " enterprise/facility with low-risk potential”. The classifications have been approved by the Environmental Protection Agency for the site in the city of Kazankak and by the relevant Regional Inspectorate for Environmental and Water Protection for the rest of the sites. The site in the city of Kazankak has a "Report on the Policy for the Prevention of Major Accidents" prepared and approved by Regional Inspectorate for Environmental and Water Protection -Stara Zagora. All production sites of "Sopharma" AD have an "Internal Emergency Plan" prepared, which is updated every year, and a "Risk Assessment" is also prepared to it in order to prevent and control possible and crisis situations. 4.3.6. Information in connection with Art. 9, letter a) of REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of June 18, 2020 on the protection and restoration of aquatic biodiversity and aquatic ecosystems A wastewater treatment plant (WWTP) for the treatment of mixed domestic and industrial wastewater was built in the plant of "Sopharma" AD - the village of Vrabevo. The company and the service staff make efforts, through competent maintenance and quality and reliable service, to ensure the optimal operation of the WWTP. This leads respectively to the protection of the environment, which is evident from the achieved results of the monitoring in 2023. The protocols of the analyzes from our own monitoring, as well as those from the control activity of Regional Inspectorate for Environmental and Water Protection -Pleven, do not exceed the norms laid down in the discharge permit. 5. Risks “Sopharma” AD monitors the following risks, which it has identified as significant and potentially affecting its activities: • Socio-political • Internal related to employees • Ecological • Internal corruption-related Management report – “Sopharma” AD 2023 49 Risk Low Medium High Socio - political Loss of trust in the media (the user stops trusting advertisements as well); Reduction in the macroeconomic stability; The unstable political situation in Bulgaria and the countries in which “Sopharma” AD operates may affect the company's activities; Decline in foreign investment; Household indebtedness. The reputation of “Sopharma” AD may be affected by misleading or incorrect information in the media; Changes in legislation and regulations may lead to an increase in Company’s expenses; Loss of confidence in the expertise of doctors or pharmacists; Restrictions on household consumption, including for medicines. Employees Turnover due to the highly competitive market; Pressure to raise salaries and social benefits. Shortage of skilled employees with experience. Ecological As a result of certified production, environmental risks are minimized; Potential risk as a result of natural cataclysm. Anticorruption Standard operating procedures for decision making. An attempt for involvement in non- transparent practices on the part of monitoring institutions; Unethical competition. Responsible choice and transparency Transparent and responsible business is the only way to build a sustainable reputation and empower society. At „Sopharma“ AD there is zero tolerance for any type of corruption, employees are expected and required not only to behave ethically, but also to take actions to fight corruption. Our employees interact with all levels of management of our stakeholders and therefore have the right and responsibility to openly express the Company's corporate citizenship position. 28 March 2024 Ognian Donev, PhD Executive Director Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:51:57 +02'00' . 1 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: • Protection of shareholders' rights; • Ensuring fair treatment of all shareholders, regardless of the number of shares held by them; • Recognition of the rights of the interested parties and promotion of the cooperation between the Company and the interested parties; • 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; • 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. . 2 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: • monitors the results of the Company's activities and, if necessary, initiates changes in management; • treats all shareholders equally, acts in their interest and with the care of a good trader; • strives to follow the economic, social and environmental priorities of the Company; • encourages the implementation and monitors the compliance of the subsidiaries with the adopted principles of sustainable development at group level, also promotes the establishment of a culture of sustainable development; • ensures and controls the integrated functioning of the accounting and financial reporting systems; • ensures and controls the construction and operation of a risk management system, incl. for internal control and internal audit; • is responsible for the creation and reliable functioning of the financial information system of the Company; • 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; • reports on its activities to the General Meeting of Shareholders, preparing an annual report and submitting it for approval to the GMS. . 3 1.2 . Election and dismissal of members of the Board of Directors The General Meeting of Shareholders elects and dismisses the members of the Board of Directors of “Sopharma” AD, in accordance with the law and the Articles of Association of the Company, observing the principles of continuity and sustainability of the work of the Board of Directors. All members meet the legal requirements for holding office. In case of proposals for election of new members of the Board of Directors, the principles of compliance of the competence of the candidates with the nature of the activity of the 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 . 4 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. 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: • 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. • 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. • 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. • 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. • 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. • 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 . 5 decision of Shareholders to determine the specific amount of the bonus on the General Meeting, which adopts the relevant audited annual financial statements and if there is a positive financial result /profit/. The disclosure of information about the remuneration of the members of the Board of Directors is in accordance with the legal norms and the Articles of Association of the 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. . 6 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. • 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. • Management maintains a database of contacts of its shareholders holding 5 or more than 5% of the company's capital, which allows sending direct messages to them or to a specific person. • The management exercises effective control by creating the necessary organization for the voting of the authorized persons in accordance with the instructions of the shareholders or in the ways permitted by law. • 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. . 7 • 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. • 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.sopharmagroup.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 2023, Sopharma AD held three General Meetings of shareholders and one General Meeting of warrant holders. 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. . 8 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 2023. 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: • 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 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; • 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 material periodic and incidental information about the Company, its management, its corporate management, its operational activities, its shareholder structure; . 9 • 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: ➢ 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; ➢ 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; ➢ financial statements for the last 10 years; ➢ the materials for the forthcoming general meetings of the shareholders of the Company, as well as additional ones, received by law; ➢ 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; ➢ 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; ➢ 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 2023 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). . 10 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. . 11 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: • ensuring current monitoring and directing the reporting activities towards their goals and expectations of its various users, and achieving their necessary efficiency and effectiveness, incl. when using the borrowed resources; and • ensuring adequate and timely addressing of identified business risks that have an impact on financial, management and operational reporting. In particular, it is designed to create leadership comfort that: • The 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; • the Company follows the instructions and guidelines of the top management regarding the reporting and documentation; • there is the required efficiency and effectiveness of the financial and accounting process, incl. consolidation and documentary justification; • there is a high degree of security in the protection and maintenance of the company's assets, incl. and prevention of fraud and error; and • there is the provision of reliable, high-quality and timely financial and operational information for internal and external users. . 12 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; 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. . 13 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: • The Board of Directors accepts and confirms: the accounting policy and the changes in it for each reporting period, the developed accounting estimates as of the date of each reporting period, incl. the applied methodology; financial statements and other public documents containing financial information; the functions, organization and responsibilities of all structural units and their heads, engaged in the processes of and related to financial reporting; the development, implementation and ongoing monitoring of the functioning of the individual components of the internal control system, incl. the activity of the Internal Audit Department; • The Audit Committee independently monitors the implementation of the financial reporting processes, the applied accounting policies and the effectiveness of the internal control system of the company, incl. risk management, as well as the implementation and results of the external and internal audit; • The CFO is responsible for the overall organization, operation and ongoing control of accounting and financial reporting. He directly manages the whole process, makes all key decisions related to financial statements and other public documents with financial information. It also approves at the first level the accounting policy, the main reporting methodologies and evaluates and accepts the work of used independent experts (appraisers, actuaries, consultants, etc.) involved in the financial reporting process. He monitors on an ongoing basis, together with the Chief Accountant and the Head of the Reporting Department, the effects and risks on the financial statements of the identified business risks for the company; • The Chief Accountant organizes and manages the accounting activities of the company - controls and methodologically directs the current accounting, manages the preparation of financial and management reports; is responsible for the development and implementation of accounting methodologies and techniques; is responsible for the process of closing the accounts and preparing all accounting estimates, proposes and develops accounting policies and changes in them, monitors ongoing changes in IFRS. It is the direct contact with the used internal and external experts for the purposes of financial reporting; • The Reporting Department and its head carry out the overall organization, methodological support and implementation of the process related to the preparation of the consolidated financial statements of the company, incl. the current control, instruction, monitoring and analysis of the financial statements for the purposes of consolidation of the companies of the Sopharma Group; • The Internal Audit Department performs ex-post control over the operations and activities related to the preparation of the company's financial statements and compliance with the established internal controls over the individual routine and non-routine processes. . 14 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. In the selection leading are the requirements set out in the job descriptions of the individual positions. Personnel management policies also include those related to the continuous additional professional training, updating and expanding the knowledge and skills of the employed specialists. It is obligatory to conduct trainings in case of changes in normative acts, IFRS, tax laws and others, directly related to their work. The purpose of this policy is to increase their expertise and improve their skills to increase efficiency in the performance of their duties. Process of the 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. . 15 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. 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: • identify and reflect all valid transactions and operations; • describe transactions and operations in a timely manner in sufficient detail to enable them to be properly classified for financial reporting purposes; • assess the value of transactions and operations in a way that reflects their appropriate monetary value in the financial statements; • determine the time period during which the transactions and operations have occurred in order to allow their recording in the appropriate accounting period; • present the transactions and 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 . 16 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. 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 . 17 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. 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, . 18 in the course of their duties and functions, and their assessments of the functioning of certain internal controls, focusing considerable attention on assessing their effectiveness, communicating with relevant persons information on identified strengths and weaknesses of internal controls and make recommendations for their improvement. Ongoing monitoring activities include the use of external information that identifies problems or identifies areas for improvement. Such countries are customers, suppliers and servicing banks. In addition, the regulatory body, represented by the FSC, may also communicate with the company's management issues that affect the functioning of internal control, for example, exchange of information directly monitored by the Commission related to the implementation of certain actions or transactions of the Company or inspections from the FSC itself. Also, in the implementation of ongoing monitoring activities, the management always takes into account the communication with the external auditors related to the internal control and the identified weaknesses and recommendations. IV. Information referred to in 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 . 19 representative/s for the performance of his/her duties in the Board. The legal entity shall be jointly and severally liable with the other members of the Council for the obligations arising from the actions of its representative. The natural persons, who represent the legal entities - members of the Board of Directors, must meet the requirements of art. 234, para 2 of the CA. Persons who have been members of the management or supervisory body of a Company terminated due to insolvency during the last two years preceding the date of the decision to declare insolvency may not be members of the Board of Directors if unsatisfied creditors remain. A person who has been a manager, a member of a management or control body of a Company for which a non-fulfillment of obligations to establish and maintain the levels of stocks determined by him by an effective penal decree has been established by an effective penal decree may not be a member of the Council. stocks of oil and petroleum products. At least one third of the members of the Board of Directors must be independent. The independent member of the council may not be: • employee in the public company; • a shareholder who holds directly or through related parties at least 25 per cent of the votes at the general meeting or is a person related to the company; • a person who is in a lasting commercial relationship with the public company; • member of a management or control body, procurator or employee of a company or other legal entity; • a person related to another member of the management or control body of the public company. The members of the Board of Directors may be re-elected without restriction. In case of changes in the legislation, at the next General Meeting of Shareholders a decision is made to amend the Articles of Association in order to bring its provisions in line with those of the applicable regulations. Until this decision is made, the affected texts of the 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 №20231006154857. 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, of EGMS of 23.02.2018, and to EGMS from 04.08.2023. . 20 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: • Alexandar Viktorov Tchaoushev The members of the Board of Directors are acquainted with the rights and obligations related to their position. 2. Procedure for work of the Board of Directors “Sopharma” AD has developed Rules for the work of the Board of Directors, which comply with and are a continuation of the principles set out in the Good Corporate Governance Program. The Articles of Association of the Company are in accordance with the requirements of the Law on public offering of securities and the shareholders have the right to timely notification on various issues. The Board of Directors meets at least once a month. 3. Minutes of meetings Minutes of the decisions of the Board of Directors shall be kept and signed by all members present at the meeting. The minutes shall be kept by the Investor Relations Director of the company in a special register according to the provision of art. 116d, para. 3, item 3 of the LPOS. The protocols are a trade secret. Facts and circumstances thereof may be published, disclosed or brought to the attention of third parties only by decision of the Board of Directors or when required by law. 4. Responsibility The members of the Board of Directors must provide a monetary guarantee for their management in the amount determined by the General Meeting, but not less than their 3-month gross remuneration. The members of the Board of Directors are jointly and severally liable for the damages they have caused to the Company. . 21 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. The Board of Directors makes the best efforts to ensure easy and timely access to public information in order to exercise the rights of shareholders in an informed manner, respectively to make an informed investment decision by investors. 6. Due care. Avoiding conflicts of interest. The members of the Board of Directors are obliged: • to perform their functions with the care of a good trader, to be loyal to the Company and to act in the best interest of its shareholders; • to perform their duties with the skills, diligence and responsibility inherent in the professional and in a way that they reasonably believe is in the interest of all shareholders of the Company, using only information that they reasonably believe to be reliable, complete and timely; • to prefer the interest of the Company and the investors in the Company to their own interest and not to use for the benefit of themselves or others at the expense of the Company and the shareholders facts and circumstances that they learned in the performance of their official and professional duties; • to avoid direct or indirect conflicts between their interest and the interest of the Company, and if such conflicts arise - to disclose them in a timely and complete manner and not to participate and not to influence other members of the board in making decisions in these cases; • not to disseminate information about the discussions and decisions of the meetings of the Board of Directors, as well as other non-public information about the Company, including after they cease to be members of the Board of Directors, until the public announcement of the relevant circumstances by the Company; . 22 • to provide and disclose information to shareholders and investors in accordance with the requirements of the regulations and internal acts of the Company. The Board of Directors is assisted by an Audit Committee, which according to the Independent Financial Audit Act and International Standards on Auditing performs the following functions: • monitors the financial reporting processes in the enterprise; • monitors the effectiveness of the company's internal control systems; • monitors the effectiveness of risk management systems in the enterprise; • oversees the independent financial audit of the enterprise; • reviews the independence of the registered auditor of the company in accordance with the requirements of the law and the Code of Ethics for Professional Accountants, including monitors the provision of additional services by the registered auditor of the audited company. At the Extraordinary General Meeting of Shareholders of “Sopharma” AD, held on November 20, 2008, an Audit Committee was elected consisting of three people: Tsvetanka Zlateva, Vasil Piralkov and 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. 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: • Attracting, hiring and retaining people with a wide range of professional skills. The diverse abilities of managers and employees open new opportunities for innovative and creative solutions, increase creativity and innovation. This, in turn, would lead to a more effective adaptation to the impact of globalization and technological change. A more diverse workforce can increase a company's efficiency in achieving its goals. It can lift the spirits of employees, give access to new market segments and increase productivity. • Promoting a working atmosphere that embraces ethnocultural diversity and in which differences between people are valued and respected. . 23 • 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. • 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. 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 35% to 65% 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 . 24 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. Ognian Donev, PhD 28 March 2024 Executive Director Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:53:02 +02'00' 1 REPORT REGARDING THE APPLICATION OF THE REMUNERATION POLICY FOR THE MEMBERS OF THE BOARD OF DIRECTORS OF “SOPHARMA” AD FOR 2023 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 2023 “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. 2 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 2 June 2023 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 2022 recorded in the Separate Annual Financial Statements approved by the General Meeting of Shareholders, namely BGN 394 294 /three hundred ninety-four thousand two hundred ninety-four/, with 40% being deferred by the GMS for a period of three years. The ratio between fixed and variable remuneration in 2023 is 0,91. 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 2023 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 2023 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 3 countries in order to maintain the normal pace of work in the period of the crisis caused by Russia's hostile invasion in Ukraine and the subsequent military actions on the territory of Ukraine, the economic sanctions imposed on Russia, as well as their consequences affected logistics, price agreements and led to an increase in inflation and a change in almost all business practices in Europe. 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 2022 recorded in the approved Annual Financial Statements by the General Meeting of shareholders, namely BGN 394 294 /three hundred ninety-four thousand two hundred ninety-four/. In 2023 in favour of the the Executive Director have been accrued tantiems for the amount of BGN 394 294 and BGN 398 105 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 2023, the deferred variable remuneration of the Executive Director amounts to BGN 339 977,52 and shall be distributed as follows: - BGN 108 811,82 has a maturity in 2024; - BGN 93 878,71 has a maturity in 2025; - BGN 137 286,99 has a maturity in 2026. 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. 4 8. Information regarding the deferment period for the payment of the variable remuneration 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 of 40% of variable remuneration 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 provide for such an opportunity. 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 held on 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 members of the management and control bodies for the current financial year amounts to BGN 1 857 221. 5 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 BGN Paid remuneration Accrued remuneration Ognian Ivanov Donev 758 105 754 294 Vessela Lyubenova Stoeva 194 734 194 770 Bissera Nikolaeva Lazarova 120 000 120 000 Alexandar Viktorov Tchaoushev 120 000 120 000 Ivan Venetskov Badinski 171 445 163 864 Procurator - Simeon Donev 394 402 396 036 Valentina Taneva Koleva-Hadjieva 92 779 92 779 Boncho Ivanov Sholev 7 739 7 739 Nikolay Milenov Nikolov 7 739 7 739 *Board of Directors of Biopharm Engineering AD – from 1 January 2023 to 23 August 2023. 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 2023 at the Annual General meeting held on 2 June 2023 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 capacity 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 profit realized in 2022 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/her Vessela Lyubenova Stoeva – Deputy Chairman of the Board of Directors of “Sopharma” AD was paid BGN 74 734 under a contract of employment as an "Adviser on Economic Affairs to the Executive Director". Ivan Venetskov Badinski, a member of the Board of Directors of “Sopharma” AD, was paid BGN 12,000 in his capacity as the Company’s procurator and BGN 39,445 under a contract of employment as a “Director of Co-operation and 6 Licensing” Simeon Ognianov Donev - in his capacity as procurator of the Company, was paid BGN 60 000 and BGN 334 402 under an employment contract for the position of "Deputy Executive Director". Valentina Taneva Koleva – Hadjieva – member of the Board of Directors of “Biopharm Engineering” AD until 23 August 2023, was paid BGN 85 040 under an employment contract for the position of "Executive Director". 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 and no other service agreements have been concluded with them. 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 2023 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 statements, including data on the remaining outstanding part and interests. In 2023 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 statements. Social securities for the members of the Board of Directors in the amount of BGN 23 109,80 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. 7 The current remuneration policy of members of the Board of Directors of “Sopharma” AD does not provide for granting 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 comparison 17. Information on exercising the possibility to demand a refund of the variable remuneration The return of paid variable remuneration is regulated in Chapter IV, 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. Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 BGN’000 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. tantieme) 999 1,157 1,120 1,190 1,141 1,233 1,122 1,250 1,258 Average amount of remuneration per member of the Board of Directors per year 200 231 224 198 228 247 187 156 157 Results of the company (net profit) 25,354 38,347 44,228 33,298 40,382 28,664 24,271 36,581 48 121 Gross remuneration based on full- time employees of the company (excl. BoD) 24,886 24,367 30,273 34,671 34,879 36,397 33,256 36,767 46,851 Average amount of remuneration based on full- time employees of the company (excl. BD) 13 13 15 15 16 18 19 22 28 8 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 28 March 2024 Ognian Donev, PhD Executive Director Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:53:42 +02'00' 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 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. 28 March 2024 Ognian Ivanov Donev Digitally signed by Ognian Ivanov Donev Date: 2024.03.29 15:54:11 +02'00' Boris Anchev Borisov Digitally signed by Boris Anchev Borisov Date: 2024.03.29 15:55:16 +02'00' Yordanka Nikolova Petkova Digitally signed by Yordanka Nikolova Petkova Date: 2024.03.29 15:55:46 +02'00' Baker Tilly Klitou and Partners EOOD 5, Stara planina street 5th Floor Sofia 1000 Bulgaria T: +359 2 9580980 F: +359 2 8592139 [email protected] www.bakertilly.bg ADVISORY  ASSURANCE  TAX Baker Tilly Klitou and Partners EOOD trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. INDEPENDENT AUDITORS’ REPORT To the Shareholders of Sopharma AD REPORT ON THE AUDIT OF THE 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, 2023, 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 material 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, 2023, 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. 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 29 April 2024. 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 The Company has certain investments in subsidiaries, with carrying amount of BGN 25,015 thousand – included in the disclosure in Note 18 to the separate financial statements. The following specific features are observed with regard to these companies: specific and difficult economic and political environment in the countries where some of these companies operate; and/or very active investment policy related to fast expansion in foreign markets; and/or underutilized capacity and reporting of losses. These circumstances presume that certain risk exists for overstating the investments in the subsidiaries. The review of the indicators and the tests of the management for the necessity of impairment of the investments in these subsidiaries is a complex 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 periods, appropriate discount rate, other risks, etc. In this area our audit procedures performed are: 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; Analysеs and assessment of the relevance of Company’s budgets and projections as at 31 December 2023; 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. 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 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. 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 from related parties and loans granted to third parties As disclosed in Notes № 21, 22, 24, 25 and 26(A) to the separate financial statements, the Company has gross trade receivables, receivables from related parties and loans granted to third parties amounting to BGN 191,099 thousand and expected credit loss allowances amounting to BGN 10,447 thousand. In 2023 the Company has applied IFRS 9 “Financial instruments”, according to which credit losses are determined based on expected credit losses. The application of the model for determination of the allowance for credit losses for trade receivables, receivables from related parties and loans granted to third parties, result in significant complexity and the necessity of key estimates and judgements for the Managements final calculations related to identification of doubtful exposures as well as determination of the amount of credit losses. In this area our audit procedures performed are: We have obtained understanding of the process for the application of IFRS 9, with focus on implemented methodology in Companys model for determination of impairment allowance for credit losses, including the use of key assumptions and estimates. Inquiries, walkthroughs and obtaining of understanding of the process, related to determination of credit losses for trade receivables, receivables from related parties, and loans granted to third parties. Assessment and test of design and operating effectiveness of key controls in the process of monitoring and determination of the amount of impairment allowance for credit losses. Review and assessment of the adequacy of the methodology used by the Company for the purposes of identification of credit losses and calculation of impairment loss allowance in accordance with the concept and the requirements of IFRS 9. Key audit matter How our audit addressed the key audit matter To determine the amount of impairment loss allowance for expected credit losses, the Company applies model based on significant estimates and judgements: • Interpretation of the requirements for determination of impairment loss allowance in accordance with IFRS 9, on which the Company`s model for determination and calculation of the expected credit losses is based; • Calculation and interpretation of key indicators as “probability of default”, “loss given default” and “exposure at default”; • Assumptions and estimates in a number of scenarios for estimated future cash flows, based on past events, current conditions and future economic forecasts; • Assumptions, used by Management in the review of individually significant exposures, related to recent losses, number of probable scenarios for future cash flows and the results of these scenarios and future collectability. Because of the significance of the above stated circumstances: a) material amount of trade receivables, receivables from related parties and loans granted to third parties as captions in the 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. Analysis and assessment of the justification and appropriateness of calculations for the indicators of “probability of default” and “loss given default” through inspection of the assumptions used and the output data, as well as the approach for inclusion of prospective information in the models. Assessment of the completeness, appropriateness and adequacy of the disclosures in the 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. 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 separate annual report on activities, including the non-financial declaration, the corporate governance 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: • 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. • 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. 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 separate annual report on activities, including the non-financial declaration, the corporate governance statement, 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: • 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. • 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 45 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 2023, 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 2023, 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 2023, included in electronic file “097900BGGW0000048796-20231231-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 “ 097900BGGW0000048796-20231231-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 2023, included in the attached electronic file “ 097900BGGW0000048796-20231231-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. • 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, 2023 by the general meeting of shareholders held on June 2nd, 2023 for a period of one year. • The audit of the separate financial statements of the Company for the year ended December 31, 2023 represents seventh 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. • We hereby confirm that in conducting the audit we have remained independent of the Company. • We hereby confirm that for 2023 we have not provided services other that the audit services. Audit company № 129 Baker Tilly Klitou and Partners EOOD Ivaylo Yanchev Galina Lokmadjieva - Nedkova Registered auditor, responsible for the audit Managing Director March 29, 2024 Baker Tilly Klitou and Partners EOOD 5, Stara Planina Str., 5th floor 1000 Sofia, Bulgaria IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 17:18:09 +02'00' Galina Dimitrova Lokmadjieva- Nedkova Digitally signed by Galina Dimitrova Lokmadjieva-Nedkova Date: 2024.03.29 17:31:01 +02'00' 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 2023, 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 29, 2024. We hereby certify that as reported in our audit report on the English version of annual separate financial statements of Sopharma AD for 2023 issued on March 29, 2024: 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 2023 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 45 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 2023 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 2023, 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 2023, dated 29 March 2024. 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 29 March 2024 regarding the issues covered by Art. 100m, para. 4, item 3 of POSA. Baker Tilly Klitou and Partners EOOD: ____ 29 March 2024 Ivaylo Yanchev Sofia Registered auditor IVAYLO YANCHEV YANCHEV Digitally signed by IVAYLO YANCHEV YANCHEV Date: 2024.03.29 17:33:17 +02'00'

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